IMF Executive Board Concludes 2008 Article IV Consultation with Brazil

Public Information Notice (PIN) No. 08/103
August 8, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 11, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


Brazil has achieved strong growth with low inflation in recent years, reflecting the continued implementation of sound macroeconomic policies in the context of favorable external conditions. Vulnerabilities have been reduced, including by lowering public net debt-to-GDP ratios, improving the composition of public debt and lengthening maturities, and building a comfortable cushion of international reserves. Consequently, Brazil is in a significantly stronger position than in the past to withstand shocks from the external environment, which has been recognized in the recent upgrades of Brazil's sovereign risk rating to investment grade. Poverty and inequality rates have declined, in part due to strong social policies. In addition, the authorities' emphasis on higher sustainable growth, including through their Growth Acceleration Program, has been a key pillar of Brazil's comprehensive policy framework.

Growth has been around 6 percent year-on-year in recent quarters, in the wake of robust domestic demand. Real GDP growth is projected at about 5 percent for 2008. Inflation has picked up, owing to rising food prices and strong domestic demand growth. In June 2008, 12-month inflation was 6.1 percent, above the midpoint of the central bank's target range, and the initial inflationary impulse from food prices has started spreading to a broader group of goods and services, with core inflation rising from 3.4 percent a year ago to 5.4 percent in June.

With the change in the inflation landscape, the Central Bank of Brazil started tightening monetary policy in April. Following a reduction of 850 basis points in the policy interest rate in the two-year period through October 2007, the Monetary Council (COPOM) raised the policy interest rate by 50 bps each in April and June, and by 75 bps in July to 13 percent. Front-loaded monetary policy action is aimed at helping contain the inflationary momentum and anchor inflation expectations.

The external current account balance has weakened in recent months, turning negative for the first time since 2002. Import volumes have continued to grow at double-digit rates, export volume growth has trended down, and remittances abroad have increased owing in part to a surge in foreign direct investment (FDI) inflows in recent years. Net capital inflows reached nearly 7 percent of GDP in 2007, including record-high FDI of US$35 billion (about 3 percent of GDP). The real appreciated by 16½ percent in real effective terms during 2007, largely reflecting Brazil's strong macroeconomic performance in the context of favorable terms of trade. Foreign reserves rose by US$95 billion in 2007 and reached US$201 billion at end-June 2008.

Strong revenue growth has resulted in primary fiscal surpluses somewhat above the primary targets, while current spending has also grown rapidly. Over the past three years, federal revenue rose by 2½ percentage points of GDP, and current spending increased by broadly the same proportion. In the 12-month period ending in June 2008, the public sector registered a primary surplus of 4.3 percent of GDP. To stem pressures on domestic demand, the authorities announced an increase of 0.5 percent of GDP in the primary surplus for 2008, from 3.8 percent of GDP to 4.3 percent.

Credit to the private sector has been growing rapidly, at annual rates of over 30 percent in recent months. Consumer credit has been growing at even higher rates. This partly reflects a welcome deepening in credit markets, but there are signs of weakening in lending standards in some segments, particularly for car loans and credit cards. Nonperforming loans are relatively low on average but remain elevated for consumer loans. Bank funding costs have risen in recent months, associated with the increase in the policy interest rate, regulatory changes closing loopholes in reserve requirements, and strong credit demand including a shift from foreign to domestic financing by Brazilian companies.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They praised the Brazilian authorities for their strong policy track record which, together with highly supportive external conditions in recent years, has boosted Brazil's economic performance and improved its resilience to adverse external shocks. Brazil is now in a significantly stronger position than in the past to withstand a deterioration in the external environment, as demonstrated by the limited impact that the global financial turmoil has had on Brazil. This has been recognized by the recent upgrade of Brazil's sovereign debt to investment grade status. Directors also praised Brazil's social policies, which have contributed to a significant decline in poverty rates in recent years.

Directors considered that Brazil should contain domestic demand growth, as inflationary pressures have mounted beyond the effects of the global commodity price shocks, and the external current account has shifted rapidly from a surplus to a deficit. Directors welcomed the authorities' strengthening of monetary and fiscal policies, and noted that containing domestic demand early on would enhance policy credibility and increase the degree of flexibility to respond to a possible further deterioration in the global environment.

Directors noted that inflationary developments reflect both the recent commodity price shocks and the strong domestic demand. They stressed that further entrenching the gains of low inflation remains a priority and commended the recent steps taken to raise the policy interest rate, as early and decisive action is critical to help reduce the inflationary momentum and avoid a stronger and more protracted tightening later on. Directors welcomed the authorities' intention to monitor domestic and external developments closely and stand ready to tighten monetary policy further as needed for preserving macroeconomic stability.

Directors noted that fiscal tightening would help alleviate the burden of adjustment on monetary policy. They, therefore, commended the authorities for targeting a higher primary surplus in 2008. Directors considered that containing public spending growth while protecting priority areas would be key to rebalancing the macroeconomic policy mix. In the context of heightened uncertainty about revenue buoyancy, a cautious approach to revenue and expenditure projections for 2009 would also minimize risks to the fiscal outlook.

Directors considered that Brazil's flexible exchange rate regime has served the country well. They observed that the significant appreciation of the real has also contributed to containing inflation. Directors commended the Central Bank for building a comfortable buffer of foreign reserves.

Directors urged the authorities to consider carefully the design and purpose of the Brazilian Sovereign Fund (FSB). They recommended that FSB resources not be used to add directly or indirectly to domestic demand pressures. Directors also considered that the transparency of the operations of the fund would be critical to maintaining confidence in macroeconomic policy, including in the area of foreign exchange operations that need to be closely coordinated with the Central Bank. A number of Directors considered that the surplus resources available would be more appropriately utilized for reducing Brazil's still high level of debt.

With regard to the financial sector, Directors noted that the prudential framework is generally sound. They recognized, however, that it is important to review the framework, and strengthen it where necessary, to limit risk-taking practices usually associated with rapid credit growth, particularly consumer credit. Directors welcomed the measures being taken, as well as those under development by the authorities, to reinforce the prudential framework. In the context of adopting the International Financial Reporting Standards, Directors considered that the existing prudential framework for credit risks should be maintained. Directors noted the staff's finding that the current global financial turmoil has highlighted the need to improve liquidity oversight and lender of-last-resort facilities, and that work is under way to strengthen the legal foundations of the Central Bank's lender of last resort facilities. In this general context, Directors recommended an FSAP update.

Directors welcomed the authorities' tax reform plan and called for an acceleration and deepening of the structural reform agenda, which would enhance competitiveness and further boost private investment. Some Directors highlighted the importance of measures aimed at reforming the social security system to enhance the long-term fiscal position; improving the business environment; and raising the quality and efficiency of fiscal policy, while a few Directors stressed measures to further liberalize trade and increase the flexibility of labor markets. In this context, they welcomed the authorities' commitment to improve infrastructure and remove bottlenecks in their Growth Acceleration Program. Directors also recommended developing a comprehensive medium-term budgetary framework to guide fiscal policy, limit its current pro-cyclical bias, and protect priority spending during economic downturns.

It is expected that the next Article IV consultation with Brazil will be held on the standard twelve-month cycle.

Brazil: Selected Economic Indicators 2002-2008
            Prel. Proj.
  2002 2003 2004 2005 2006 2007 2008
(Annual percentage changes, unless otherwise indicated)

Real GDP

2.7 1.1 5.7 3.2 3.8 5.4 4.9

Domestic demand (contribution to growth, percent)

1.1 0.1 5.1 2.8 4.6 6.4 6.5

Private consumption (growth rate)

1.9 -0.8 3.8 4.5 4.6 6.5 5.6

Public consumption (growth rate)

4.7 1.2 4.1 2.3 2.8 3.1 4.3

Gross investment (growth rate)

-3.2 1.4 9.5 -0.3 6.5 9.2 10.3

Gross fixed capital formation

-5.2 -4.6 9.1 3.6 10.0 13.4 15.2

Foreign balance (contribution to growth, percent)

1.6 1.0 0.6 0.4 -0.8 -1.0 -1.6

Exports of GNFS (contribution to growth, percent)

0.6 0.9 1.5 1.0 0.5 0.8 0.2

Imports of GNFS (contribution to growth, percent)

-0.9 -0.1 0.9 0.6 1.4 1.8 1.8



Consumer price index (IPCA, period average)

8.4 14.8 6.6 6.9 4.2 3.6 5.3

Consumer price index (IPCA, end of period)

12.5 9.3 7.6 5.7 3.1 4.5 5.5

GDP deflator

10.6 13.7 8.0 7.2 4.7 4.0 7.4

Terms of trade

-1.4 -1.4 0.5 0.9 5.1 3.5 -1.9
(In percent of GDP)

Public finances


Federal government 1/


Total revenues

21.8 21.2 21.8 22.8 23.3 24.2 23.9

Total expenditures

22.7 24.8 23.4 26.3 26.5 26.6 25.5

Of which: interest

2.8 5.9 4.1 6.0 5.4 4.7 3.7

Primary balance

2.2 2.3 2.7 2.6 2.2 2.3 2.1

Consolidated public sector


Primary balance

3.5 3.9 4.2 4.4 3.9 4.0 3.8

Overall balance

-4.2 -4.6 -2.4 -3.0 -3.0 -2.3 -2.1

Public sector net debt

59.6 53.7 49.3 46.7 45.8 45.0 42.6
(12-month percentage changes, unless otherwise indicated)

Money and credit


Base money 2/

-1.2 -17.8 4.7 7.7 12.6 21.8 ...

Broad money (M2) 3/

9.9 20.5 16.6 19.2 18.6 18.4 ...

Credit to the public sector (net)

20.8 19.8 10.1 9.5 13.9 6.1 ...

Credit to the private sector

14.6 8.7 17.2 22.5 21.8 28.9 ...
(In billions of U.S. dollars, unless otherwise indicated)

Balance of payments


Current account

-7.6 4.2 11.7 14.2 13.6 1.5 -28.9

Merchandise trade balance

13.1 24.8 33.6 44.7 46.5 40.0 19.9


60.4 73.1 96.5 118.3 137.8 160.6 188.0


-47.2 -48.3 -62.8 -73.6 -91.3 -120.6 -168.1

Services, income, and transfers (net)

-20.8 -20.6 -22.0 -30.6 -32.8 -38.6 -48.7

Capital and financial account

8.0 5.1 -7.5 -9.6 16.0 89.2 59.6

Foreign direct investment

16.6 10.1 18.1 15.1 18.8 34.6 31.8

Portfolio investment

-4.3 4.9 -5.2 4.6 4.8 37.9 21.9

Other capital (net)

-4.3 -9.9 -20.5 -29.3 -7.6 16.7 6.0

Errors and omissions

-0.1 -0.8 -1.9 -0.3 1.0 -3.1 -2.6

Change in net international reserves

-13.6 3.1 8.0 28.5 32.0 94.5 35.3

Current account (in percent of GDP)

-1.5 0.7 1.8 1.6 1.3 0.1 -1.7

Outstanding external debt (in percent of GDP)

40.8 38.6 30.3 19.1 16.1 15.0 14.4

Total debt service ratio (in percent of exports of goods & services)

107.5 91.1 66.6 68.9 58.2 67.8 70.1

Gross reserves/short-term external debt (residual maturity, in percent)

59.1 83.8 68.9 73.0 100.1 160.2 161.1

Sources: Central Bank of Brazil; Ministry of Finance; and IMF staff estimates.
1/Includes the central government, central bank, and social security system.
2/End of period. Currency issued plus required and free reserves on demand deposits held at the central bank.
3/End of period. Currency in circulation plus demand, time and savings deposits.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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