Questions in the News
Responses to Questions About IMF Policies and Country Operations
Brazil
Last Updated: September 6, 2007| Question: Brazil recently trimmed its interest rate again but by a smaller amount than we had seen in the last few months. What is the IMF's view on Brazil's monetary policy, and where do you see it going from here? |
| Answer:
MR. AHMED: Our view on Brazil, which we have previously articulated, is that its sound macroeconomic management provides a foundation for stability and sustainable growth, and, in turn, for a lasting improvement in social conditions. In fact, we think Brazil appears to have weathered relatively well the recent financial market turbulence which testifies to the prudent macroeconomic policies of the government and the efforts that have been taken in recent years to reduce vulnerabilities in the economy.
September 6, 2007 Transcript of a Press conference by Masood Ahmed, Director of the External Relations Department, IMF |
| Question: On the question of bio fuels, the WEO report says that an efficient solution would be to reduce tariffs on imports from developing countries like Brazil. I would like to ask you to expand on that. What are your projections on the prospects for the Brazilian economy and if you share the overall optimism on that. |
| Answer:
MR. COLLYNS: First, on the outlook for Brazilian economy, certainly we are optimistic that the Brazilian economy will continue to gain pace. The Brazilian economy has benefited and will continue to benefit from strong commodity prices. But, it has also gone through a period of relatively slow growth. The fact that inflation has now come down to low levels has provided space for the central bank to bring down interest rates very substantially over the past couple of years. And, the economy is already responding to that reduction in interest rates. As you know, there was a recent revision to the GDP national accounts going back a few years that shows that the performance of the Brazilian economy has been somewhat stronger than we previously thought. This, of course, is welcome, and we do expect further acceleration of the economy both this year and next year. On the issue of bio fuels, we are somewhat concerned that there is a tendency to see bio fuels in the advanced countries as a quick fix to reduce dependence on hydrocarbons in those countries. However, we see technological and trade limits to how far this can go to achieve the very ambitious objectives that have been set by the advanced countries. Based on the current trading system and current technology, it would require conversion of a very substantial amount of agricultural land to corn and other products that could be converted into ethanol. This is already putting pressure on agricultural prices around the world, which has costs. We think that there would be gains from liberalizing trade in bio fuels, reducing the tariffs that are imposed in the United States and in the European Union on imports of bio fuels, which would allow taking advantage of the comparative advantage that Brazil and other tropical countries have in the production of sugar and other products that can be converted into bio fuels. Over the longer term, we would also like to see technological improvements that would allow a wider range of agricultural production to be turned into bio fuels to provide a more sustainable way of helping to reduce hydrocarbon dependence. April 11, 2007 Transcript of the World Economic Outlook Press Conference |
| Question: Your economic forecast for Brazil is quite positive, yet it points out that the growth of the economy this year will be about 4.4 percent, while that of other neighboring countries in the region, for example, Venezuela and Argentina, will be considerably larger. Why is that the case? If the forecast concerning Brazil is so positive, why isn't its economy growing at the same pace of its neighbors? |
| Answer:
MR. COLLYNS: There are both cyclical and structural factors that are affecting the rate of growth in Brazil. As I said earlier, Brazil has gone through an adjustment period of bringing inflation down to low levels, which has provided scope for the central bank to lower interest rates progressively. We anticipate this process can continue, interest rates in Brazil remain relatively high to neighboring countries. Given the very substantial improvements in the macroeconomic framework and the continued record of fiscal discipline, we see no reason why Brazilian real interest rates should remain at high levels through the medium term. The central bank is following an appropriately prudent approach, lowering interest rates gradually, so that the economy will grow faster, while also maintaining a low rate of inflation. But at the same time, there are also structural factors that continue to impede growth in Brazil. Brazil has an extremely high level of public spending given its level of income. That high level of public spending is supported by a very high rate of taxation in Brazil. However, there is quite a well-known agenda for tax reform in Brazil that the government is pursuing, in particular in reforming the system of indirect taxes. This will help to reduce the tax burden on the economy. There are also issues in the financial sector that may impede growth—very high rates of directed credit, very high reserve requirements, and the need to develop capital markets in Brazil. There are also a number of issues in the areas of the business climate and infrastructure, which the government is dealing with—recently announcing a package of increased spending on infrastructure. So, we see that over time, Brazil will achieve much faster growth, based on continued efforts to improve the fundamentals that support that growth. April 11, 2007 Transcript of the World Economic Outlook Press Conference |
| Question: Regarding National Treasury Notes (NTNs), the report shows the NTN-B series and what happened to these notes during last year's turmoil. So, in Brazil, what and where would be the pockets of vulnerabilities? |
| Answer:
MR. TRAN: The analysis that we have done in this GFSR, as well as in the September 2006 edition, suggests why sovereign borrowers have reduced their borrowing in international foreign currency-denominated loans. They have increased their reliance on domestic local currency markets for funding. And also from the international investors' perspective in the continued search for yield, many investors have also entered into the local currency markets in many emerging market countries. Overall, we think that is a very positive development because it tends to reduce the foreign exchange risk of the sovereign, and it therefore helps with overall financial stability. However, the pocket of vulnerability is concentrated in the few instances where you have a local market that is still small in size, not very liquid and doesn't have heft. If there are a lot of international investors moving into such a market, it could cause so-called indigestion by boosting prices too much. And when the international investors, because of adjustment to their overall risk appetite or market sentiment, decide to move out all together it might cause volatility in the local market. That was the experience of May-June 2006 and, to some lesser extent, in the correction of February-March 2007. So, the risk is that if you open up the domestic market, you attract international investors' flow of capital, then you also will have take steps to improve and strengthen the infrastructure of your markets to enhance the local institutional investor base as well, so as to minimize the risk of volatile flow costs. April 10, 2007 Transcript of a Press Conference on the Global Financial Stability Report by Jaime Caruana, Director of the IMF's Monetary and Capital Markets Department, and Hung Tran, Deputy Director of the Monetary and Capital Markets Department, IMF |
| Question: Several emerging markets, for example, Brazil, have been trying to reduce their exposure to foreign debt. They have been reducing their foreign debt exposure, but at the same time the foreign investor participation in local markets has been increasing. What are the risks? |
| Answer:
MR. CARUANA: I think that these developments are positive. They have helped to improve the fundamentals of these emerging markets. It is true that, on the one hand, actions taken to reduce exposure to foreign debt reduce the volatility or vulnerability of your budgetary process in the sense that the size of your debt is less sensitive to foreign exchange changes. But some of these risks are now there because of the presence of foreign investors and, therefore, may add some volatility in the flows to the local capital markets. There is no free lunch here, but we think that this is a positive development. The fact that local markets and the local currency are developed has contributed to reducing the vulnerabilities of emerging markets, and Brazil is a very good example of that. And in many occasions—as it is in this case—it has been accompanied by improved fundamentals in terms of managing the budget, managing debt, and developing local capital markets. It tends to improve fundamentals of these countries. But at the same time, as I mentioned, you have to be aware of how risk profiles have moved and how foreign investors are subject to additional risk. They may react in a different manner. So, you have to be conscious of what is changing. April 10, 2007 Transcript of a Press Conference on the Global Financial Stability Report by Jaime Caruana, Director of the IMF's Monetary and Capital Markets Department, and Hung Tran, Deputy Director of the Monetary and Capital Markets Department, IMF |
| Question: With Brazil having a flexible exchange rate and inflation targeting, how would Brazil react to a higher U.S. slowdown? |
| Answer:
MR. COLLYNS: The WEO chapter on spillovers does have some interesting results showing how the impact of spillovers from the U.S. and from other economies do vary depending upon region. And certainly we find that spillovers from the U.S. to Latin America are larger, relatively higher than the impact more generally. The size of the spillovers depends on the trade share and on financial linkages. Probably Mexico would be the most affected, having the closest connection with the U.S. economy. Brazil certainly has substantial exports to the U.S. But I would emphasize that Brazil has a very diversified export base. It exports just as much to Europe and also to Asian economies. It also has a very diversified set of products that it exports, not just commodities, but also manufactured products. So we do not see Brazil as being particularly susceptible to a U.S. slowdown.
April 5, 2007 Transcript of a Press Briefing on the Analytic Chapters of the World Economic Outlook (WEO) by Simon Johnson, Economic Counselor and Director of the IMF's Research Department; Charles Collyns, Deputy Director of the Research Department; and Timothy Callen, Chief of the World Economic Studies Division, IMF |
| Question: Can you comment on performance of the Brazilian economy? |
| Answer:
In Brazil, we have seen a very strong performance of Brazil in terms of macroeconomic stability and the reduction of inflationary pressures. I think we all share the view that the agenda of Brazil is to increase its growth and maintain macroeconomic stability, so as to allow the country to reach the long-term growth prospect of sustained growth with macroeconomic stability. Structural reform should play a very important role, as should, not only the fiscal adjustment that Brazil has done but also the quality of fiscal policy in terms of social expenditure and infrastructure expenditure. It is a challenge, and we are, of course, working with the authorities through our Article IV consultations to address and look into all those issues.
January 16, 2007 Press Conference by Managing Director Rodrigo de Rato, IMF |
| Question: The Brazilian Finance Minister yesterday said that the Fund is in the process of sclerosis. He used this word to characterize the way the Fund is taking the process of quota reforms in light of the fact that Brazil and other countries have different views on the reform process. Do you think that this reform can lead to a loss of representativeness of the Fund, not with respect to quotas, but rather in the way that members express themselves during this reform? |
| Answer:
As you know, the reform required if at least 85 percent of the voting power. Eighty-five percent is a very substantial position in any institution. At the same time, I understand perfectly that there are different analyses. But the Minister from Brazil, Mr. Mantega, agrees with the ad hoc increase for four countries. He agrees with the need to enhance and ring-fence voting power for low-income countries. He agrees on the importance of the quota reform. He has some very understandable positions regarding how the quotas should be defined, which positions may coincide with others or not with everybody, and I think that is going to be the question of discussion. I want to thank Minister Mantega for his words this morning at the IMFC in which he clearly said that, as the discussions will evolve upon the vote of tomorrow, of course, he will be very willing to change his position if his actual views are satisfied.
Some people say we have been moving too fast and some people say we have been moving too slowly. I suppose sclerosis means you are not moving at all. The one thing you cannot say is that there is no change. Change is happening. Reforms have been put in place. The purpose of the IMF is changing. It is about crisis prevention as much as crisis resolution. The vehicle it is using—multilateral surveillance, which is absolutely central to the work of the IMF—is changing. The structure of governance is changing. I think when people look back on the history of the International Monetary Fund, they will say that the biggest reforms in 60 years are being brought in now and we are at the start of a process of change that will continue over the next few years.
September 17, 2006 Press Briefing by Rodrigo de Rato, IMF Managing Director, and Gordon Brown, Chairman of the International Monetary and Financial Committee |
| Question: I would like to have your assessments on the fact that Brazil and other countries are complaining about the way the IMF intends to conduct their quota reform. |
| Answer:
I believe it is not only in the specific interest of Brazil but in the interest of all of Latin America, to make the Fund more responsive to emerging economies and low-income countries. I don't have any doubt about that.
And my very frequent interchanges of views with Latin American representatives and members of governments, and Brazilian ones in particular, make me believe that this is a shared view. I think that we are moving toward giving more dynamic economies a more important role to play in the institution, and many of those more dynamic economies are emerging economies.
September 15, 2006 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: The IMF says Paris Club spending in Brazil is growing rapidly and not necessarily targeting infrastructure or social spending. Could you comment on that. |
| Answer:
Brazil has made very important steps in making social spending more effective, and poverty reduction in Brazil in recent years has been moving forward. It is a good example in Latin America, not the only one, but a good example of changes of targeting social spending for the better.
At the same time, I think that the effort that Brazil has made in reducing public debt is increasingly important, and there are challenges there, for example, challenges of keeping a high level of primary surplus and at the same time addressing social needs and infrastructural needs. As I have said on occasion, in Brazil one of the big challenges in Brazil's budgetary policy is rigidity. We believe Brazil needs a more flexible budgetary framework in which fewer expenditures are predetermined in terms of already assigning the revenue. That is a key element in the modernization of the budgetary framework in Brazil.
I also want to thank the Brazilian authorities for the work we have done together in exploring the role of private capital in contributing to infrastructure, and I think that some of the experiences in Brazil, but also in Chile and in South Africa can be very useful for many emerging economies.
Our basic outlook for the Brazilian economy is a positive one. We're looking for somewhat faster growth next year, about 4 percent growth in Brazil; so the context for these policy opportunities is going to be a positive and benign one, and our hope is that in this relatively benign environment that the authorities will be able to continue the progress in regard to spending.
September 15, 2006 Press Briefing by IMF Managing Director, Rodrigo de Rato, and Deputy Managing Director, John Lipsky |
| Question: Everybody keeps talking about the BRIC countries, but Brazil so far is the weak side of the potential of the BRIC countries. Many people think that even your prediction of 3.6 percent growth this year is overoptimistic. What is the problem with growth in Brazil? What does the country need to do to pick up like China or Russia? |
| Answer:
I think Brazil has already done a lot in recent years to put in place the macroeconomic underpinnings for sustained growth, both in terms of putting in place a fiscal responsibility framework that is delivering high and sustained primary surpluses, and also establishing a very credible framework for inflation targeting. The fruits of these achievements are already being seen in terms of Brazil's resilience in the face of shifting financial market conditions. I would agree that so far the growth response has been somewhat disappointing. I think patience is going to be required. I think at this point the central bank is in a very good position; it has been lowering interest rates progressively over the past year. With inflation expectations coming down to within the lower part of the inflation targeting band, there is room for further reductions in interest rates, so that over time there will be increasing investment in the country.
Nevertheless, of course, there is still quite a large agenda of reforms to pursue in Brazil, and we in the Fund have emphasized a number of areas. I think public spending would be one of them, and indeed public spending has been growing rapidly in Brazil over the past couple of years. Tax revenues have been growing fast and has provided some space for public spending to grow rapidly, but we think it is important for public spending to be more focused. As you know, Brazil has a very extensive system of restrictions on the way in which public expenditures are allocated and we think it is important to try to find some ways to focus public spending more on targeted social programs to help poor people. The government has achieved success in this area, but there is more that can be done, and also to provide more public resources for infrastructure, as well as to advance the possibilities of public-private partnerships.
One other area I would emphasize is the financial area. Interest rate spreads are very wide in Brazil and reflect a whole range of factors. In part, it is the residual from the macroeconomic instability in the past and that will be reduced in the future, but I think there are still a number of other concerns, for example, very high unremunerated reserve requirements and extensive directed credit. Some progress has been made at improving credit information systems and improving bankruptcy laws, but further consolidation of these reforms will also be required. So, over time, I think continued perseverance in financial sector reforms will be very helpful and the combination of a stable macroeconomic environment and a more efficient financial system with lower interest rates will, I think, deliver higher growth in Brazil.
September 14, 2006 Press Conference on the World Economic Outlook Report, Charles Collyns, Deputy Director, Research Department |
| Question: What does Brazil need to do to address the structural dilemmas in its economy? |
| Answer:
In many ways, Latin America, and Brazil specifically, have made major strides on the macro-policy front. In Brazil, inflation is well contained; inflationary expectations are pretty well set and low; and the fiscal policy is very reasonable. The issue now is to undertake the structural reforms that are needed to make Brazil more competitive. Clearly, a variety of reforms suggest themselves, including financial sector reforms in order to reduce the enormous spread on interest rates in Brazil, but also reforms in improving the ability of people to open businesses. Reducing the bureaucratic costs—e.g. various components of reducing barriers to entry in enterprises— is very important in Brazil. Brazil has many successes; it has, for instance, been enormously productive in agriculture. These successes need to spread to other areas as well.
April 19, 2006 Press Briefing by Raghuram Rajan, Economic Counselor and Director of Research |
| Question: Please comment on the fact that the IMF's forecast of GDP growth for Brazil is at least 30 percent less optimistic than the one that the government of Brazil is putting out. |
| Answer:
I cannot comment precisely on the forecast of the government of Brazil. What I can say about growth in Brazil is that clearly it was somewhat weak in 2005; around 2.3 percent. There are a number of specific reasons for that: There was an inventory correction, a drought, and perhaps political uncertainties contributed to some degree. We are projecting a fairly solid pickup to 3.5 percent in 2006 as the effects of those factors drop and reflecting some fairly solid and well-managed macroeconomic policies. I think the fundamental questions in Brazil are how to get medium-term growth going rather than perhaps the timing and extent of the cyclical pickup. It is the structural factors that are really going to be important in Brazil.
April 19, 2006 Press briefing by David J. Robinson, Deputy Director, Research Department |
| Question: Are you afraid that the current political crisis in Brazil could derail the economic performance and the economic policies there? |
| Answer:
I think Brazil has proved in the last few years that through different administrations, from different political colors, macroeconomic stability and the reform of the economy have become, not a political option, but a national option.
Of course, you have different political alternatives, which is healthy and democratic. But economic reform—like reducing inflation, reducing vulnerabilities, enhancing the flexibility of the markets, opening the economy, having a broader tax base, and implementing a more efficient fiscal policy—were done by the previous government, and have been done very successfully by the current government. They were from different political environments.
We follow the discussion about political issues in Brazil very closely, and we see a clear commitment by the authorities to both fiscal prudence and efficient monetary policy to reduce inflationary expectations, and also structural reform. And I want to emphasize once again that we all have seen an impressive turnaround of the Brazilian situation in only a few years. And we are convinced that that path will be continued in the future.
December 14, 2005 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Brazil: archived questions and answers |