IMF Executive Board Concludes Article IV Consultation with Brazil

Public Information Notice (PIN) No. 09/92
July 28, 2009

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 16, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


Brazil has built a strong macroeconomic framework over the past decade, which has served to increase its resilience to the global economic crisis. Sustained fiscal discipline and implementation of the inflation targeting regime have reduced fiscal and external vulnerabilities, and the flexible exchange rate regime has played a key role, allowing the economy to adjust quickly to external shocks. Public debt has been lowered in relation to GDP, and substantial international reserves have been accumulated. While the economy has been sharply affected by the global crisis—GDP shrank by 4½ percent in the two quarters to March 2009—the high credibility of the policy framework has allowed the authorities to adopt countercyclical measures. There are signs that the economy began to improve in the second quarter of this year, supported by private consumption and a healthy financial system.

The global downturn affected Brazil through a sudden curtailment in external credit, as well as a decline in commodity prices and export demand. The disruption in global financial markets also led to a liquidity squeeze for Brazilian corporates and financial firms. Access to credit became limited, especially for small- and medium-sized firms. The weakening of external conditions also led to pressures on the currency, which depreciated by about 23 percent against the U.S. dollar between mid-September and end-December 2008.

The creation of lending facilities in foreign currencies and intervention in the foreign exchange market through futures helped stabilize domestic financial conditions relatively rapidly, while making parsimonious use of cash reserves. Exchange rate depreciation and equity market price declines reduced the stock of nonresidents’ claims on the economy, without generating a large outflow of reserves. Since the beginning of this year, the real has appreciated by 17 percent against the U.S. dollar, and the stock market has been among the best performers globally.

Brazilian financial institutions, which were not exposed to impaired assets abroad, have built strong capital buffers in recent years, albeit at levels varying across institutions. Bank liquidity ratios have recovered after some dipping in the fourth quarter of 2008. Nonperforming loan ratios (NPLs) have risen with the weakening in economic activity. In recent months, the extension of credit by private banks has slowed, reflecting greater caution as economic activity weakens and NPLs rise, while the share of public banks in total credit has risen. The external financing needs of the corporate sector appear manageable.

Monetary policy has been eased substantially. With inflation trending downward since July 2008, the policy rate has been cut by 450 basis points since January 2009, and the equivalent of 3½ percent of GDP in liquidity has been released through reductions in reserve requirements. Inflationary expectations have remained well anchored, despite the significant depreciation of the currency and the fact that inflation was still close to the top of the target range in late 2008.

Federal government revenues declined by close to 7 percent in real terms during January−May 2009 compared with the same period in 2008. The government has announced some stimulative tax and spending initiatives. It is also providing additional resources to the development bank BNDES (equivalent to 3½ percent of GDP over two years). The primary surplus is targeted to decline by 1½ percent of GDP in 2009. The adjustor for public investment, and resources from the sovereign wealth fund, provide additional flexibility to maintain spending should staff’s less optimistic revenue projections materialize. While the net debt ratio is expected to increase this year and public financing needs remain large, at approximately 19½ percent of GDP, long-term interest rates have remained below the levels prevailing a year ago.

Executive Board Assessment

After suffering a sharp contraction in the last quarter of 2008 and first quarter of 2009, Directors welcomed signs that the Brazilian economy has began to improve and considered Brazil to be in a favorable position to weather well the global crisis. They praised the Brazilian authorities’ robust policy framework and sound prudential supervision, which has allowed an appropriate and timely countercyclical policy response. If the growth outlook were to deteriorate significantly from the authorities’ current projections, Directors saw room for additional fiscal and monetary easing, subject to careful monitoring of market reaction.

Directors considered that the flexible exchange rate regime has served Brazil well. They generally commended the authorities for accumulating a comfortable foreign reserves cushion, which has helped limit the adverse effects of the global financial turmoil. Directors agreed that intervention to address disorderly market conditions remains appropriate. They noted that under the most recent and globally-consistent application of the Consultative Group on Exchange Rate Issues (CGER) methodology, based on exchange rates prevailing during the reference period February 25–March 25, Brazil’s real exchange rate was assessed to be broadly in equilibrium, but had appreciated slightly since the reference period.

Directors endorsed the authorities’ planned fiscal stimulus and reduction in the primary fiscal surplus target in 2009. If revenues are less buoyant than projected, Directors saw scope for further flexibility in the fiscal target through the use of the adjustor for public investment and resources from the sovereign wealth fund. They encouraged the authorities to contain other current expenditure, including wages, which will be difficult to reverse as the economy recovers.

Directors stressed the importance of keeping public debt on a declining path over the medium term, and welcomed the authorities’ plans to return to a higher primary surplus in 2010 as the economy recovers. Directors underscored the importance of instituting a sound medium-term fiscal framework and encouraged efforts to reinvigorate the reform process, including with respect to tax and pension reform. A gradual reduction of revenue earmarking and expenditure rigidities would also be desirable.

Directors praised the authorities’ adroit management of liquidity in domestic and foreign exchange markets. Intervention in the foreign exchange market has allowed participants to hedge exposures rapidly. Significant cuts in reserve requirements, expansion in the range of collateral accepted in discount operations, liquidity provision to smaller banks by the Deposit Insurance Fund, and the temporary extension of deposit guarantees have also eased tensions in domestic money markets and helped redistribute liquidity to smaller banks. Directors welcomed recent proposals to change the taxation of savings accounts, noting that further changes may be needed to facilitate monetary easing. They also encouraged efforts to lower the high interest rate spreads.

Directors considered that the financial system has proven resilient during the global crisis but that some risks may persist at the individual bank level. Therefore, they encouraged the authorities to further strengthen the financial safety net and the assessment of contagion risks across financial intermediaries. Directors emphasized the importance of ensuring that banks, including public banks, do not take on excessive risk. They encouraged reviewing the limits on financial funds’ exposures to single counterparties and the regulations on asset sales between banks and affiliated funds. Directors suggested clarifying the role of the central bank and other institutions to ensure that adequate resources would be available in the event of systemic crisis scenarios. Directors supported the authorities’ efforts to ensure greater availability of information on nonfinancial firms’ foreign exchange exposures. Some Directors encouraged the authorities to undertake a Financial Sector Assessment Program (FSAP) update in the near future.

Table. Brazil: Selected Economic Indicators

  2004 2005 2006 2007 2008 Proj.
(Annual percentage changes, unless otherwise indicated)

Real GDP

5.7 3.2 4.0 5.7 5.1 -1.3 2.5

Domestic demand (contribution to growth)

5.1 2.8 4.8 6.7 6.9 -2.0 2.5

Private consumption

3.8 4.5 5.2 6.3 5.4 0.0 4.5

Public consumption

4.1 2.3 2.6 4.7 5.6 2.3 -3.8

Gross investment

9.4 -0.3 6.1 9.6 11.8 -8.8 2.3

Gross fixed capital formation

9.1 3.6 9.8 13.5 13.8 -12.8 3.5

Foreign balance (contribution to growth)

0.6 0.4 -0.8 -1.0 -1.9 0.7 0.0

Exports of GNFS (contribution to growth)

1.5 1.0 0.6 0.8 -0.1 -0.4 0.4

Imports of GNFS (contribution to growth)

0.9 0.6 1.4 1.8 1.8 -1.1 0.4



Consumer price index (IPCA, period average)

6.6 6.9 4.2 3.6 5.7 4.8 4.0

Consumer price index (IPCA, end of period)

7.6 5.7 3.1 4.5 5.9 4.2 4.0

GDP deflator

8.0 7.2 6.2 3.7 5.9 2.2 4.5

Terms of trade

0.5 0.9 5.1 3.5 3.5 -8.1 -1.7
(In percent of GDP)

Public finances


Federal government 1/ 2/


Total revenues

21.8 22.8 23.0 23.9 24.8 23.8 24.2

Total expenditures

23.2 26.2 26.1 26.1 25.7 26.3 24.9

Of which: interest

4.1 6.0 5.3 4.6 3.8 3.0 2.8

Primary balance

2.7 2.6 2.2 2.3 3.0 0.6 2.2

Consolidated public sector 2/


Primary balance

4.2 3.9 3.3 3.6 4.1 1.5 3.3

Overall balance

-2.4 -3.4 -3.5 -2.5 -2.0 -3.2 -1.3

Public sector net debt 3/

49.3 46.7 45.0 44.3 36.5 41.6 40.3
(12-month percentage changes, unless otherwise indicated)

Money and credit


Base money 4/

4.7 7.7 12.6 21.8 -17.6 20.6 5.8

Broad money (M2) 5/

16.6 19.2 18.6 18.4 18.0 11.5 11.9

Credit to the public sector (net)

10.1 9.5 13.9 6.1 11.3 3.1 7.1

Credit to the private sector

17.2 22.5 21.8 28.9 28.3 14.3 21.2
(In billions of U.S. dollars, unless otherwise indicated)

Balance of payments


Current account

11.7 14.0 13.6 1.6 -28.5 -18.0 -21.8

Merchandise trade balance

33.6 44.7 46.5 40.0 24.7 17.8 15.4


96.5 118.3 137.8 160.6 197.9 158.0 166.8


-62.8 -73.6 -91.4 -120.6 -173.2 -140.3 -151.4

Services, income, and transfers (net)

-22.0 -30.7 -32.8 -38.5 -53.2 -35.8 -37.3

Capital and financial account

-7.5 -9.5 16.3 89.1 29.2 28.2 30.3

Foreign direct investment (gross)

18.1 15.1 18.8 34.6 45.1 25.0 27.6

Portfolio investment

-5.2 4.6 4.3 37.9 3.5 -4.1 0.4

Other capital (net)

-20.5 -29.1 -6.8 16.6 -19.4 7.3 2.4

Errors and omissions

-1.9 -0.2 0.6 -3.2 2.3 -0.1 0.0

Change in net international reserves

8.0 28.5 32.0 94.5 13.4 7.8 8.5

Current account (in percent of GDP)

1.8 1.6 1.3 0.1 -1.8 -1.4 -1.6

Outstanding external debt (in percent of GDP)

30.3 19.1 15.8 14.4 12.4 14.7 14.2

Debt service ratio (in percent of exports of goods and services)

66.6 68.9 58.2 65.9 40.7 48.3 47.5

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

68.9 73.0 100.0 231.3 259.2 284.4 272.4

Sources: Central Bank of Brazil; Ministry of Finance; and Fund staff estimates.
1/ Includes the central government, central bank, and social security system.
2/ Transfers to the sovereign wealth fund are excluded from expenditure in 2008 (0.5 percent of GDP). The 2009 projection assumes use of resources from the sovereign wealth fund (0.5 percent of GDP) and use of the Public Investment Pilot Program adjustor (0.5 percent of GDP). Prior to 2005, primary and overall balance data include Petrobras.
3/ Includes Petrobras.
4/ End of period. Currency issued plus required and free reserves on demand deposits held at the central bank.
5/ 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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