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Fitch: Brazilian economic headwinds will persist, even after pension reform

While progress in passing long-awaiting pension reform is a key step for Brazil, the country's economy will continue to face headwinds, Fitch Ratings said.

The pension reform bill, which aims save around 900 billion Brazilian reais over a decade, will help address economic policy uncertainty in the country, the rating agency noted. But it emphasized that additional reforms are needed, as the pension reform on its own will not be enough to alleviate the government's debt burden and lift growth prospects.

"The pension reform is a necessary but insufficient condition for significantly lowering fiscal deficits in the near term and stabilizing public debt," Fitch said.

The comments come as the reform bill recently passed a second vote in Brazil's lower house. It still requires approval from the Senate.

Fitch does not expect the country's primary fiscal deficit, which was 1.6% of the GDP in 2018, to stabilize in the next two years. It also asserted that savings from the pension reform will not accelerate the gradual fiscal consolidation path as vowed by the authorities.

"The government's intention to move on tax simplification, privatizations, infrastructure development through private concessions, and trade liberalization are positive signals, although the pace of implementation is uncertain and a positive effect on growth would likely take time to materialize", the rating agency added.

As of Aug. 7, US$1 was equivalent to 3.98 Brazilian reais.