Pension reform in Brazil cleared a congressional hurdle late on Tuesday after a lengthy and tumultuous debate, a sign that the government was finally building support for its most important economic reform, but which may face a steep climb ahead.

The Constitutional and Legal Affairs Committee (CCJ) in the lower house of Congress approved the constitutionality of a reform bill by 48 votes to 18, paving the way for analysis and discussion by a special commission.

However, that optimism evaporated on Wednesday, with surprisingly weak jobs data adding to concerns, as investors focused on the difficulties ahead after the government had struggled to build a coalition for the bill’s first key vote.

“The problems the government encountered to get the favorable vote indicate the challenges it faces in getting the reform bill through the special commission in the coming weeks,” analysts at XP Investimentos wrote in a note on Wednesday.

Brazil’s real fell 1 percent to 3.9640 per dollar on Wednesday , its weakest in nearly a month, and the benchmark Bovespa stock market dropped 1.2 percent in early trading .

Lawmakers insisted that the bill’s targeted savings of just over 1 trillion reais ($255 billion) over the next decade had not been diluted by minor changes offered on Monday by the government and tweaks to the text agreed on Tuesday.

The bill now goes to a special commission before proceeding to the lower house plenary, where it will need at least 308 votes in two rounds of voting to advance to the Senate.

Economy Minister Paulo Guedes and other senior government officials insist their proposal will not be watered down, and that it will be voted on by the lower house around mid-year.

But its passage through congress will be anything but smooth, analysts say. Next week’s May Day holiday could delay the start of the special commission, making it less likely that proceedings will hew to the government timeline.

Brazil’s spending on social security is among the highest in the world, and a radical overhaul is central to President Jair Bolsonaro’s economic agenda. However, cuts to pension benefits are a tough sell in Congress, and economic data suggests the economy is flagging, perhaps even shrinking.

The government, economists and investors say pension reform is essential to get the fiscal deficit under control, attract foreign investment and accelerate an anemic recovery from a deep 2015-16 recession.

Source:  Nasdaq