Car dealership in Rio de Janeiro, Brazil, where household credit has been growing
rapidly (photo: Andre Vieira/Newscom)
Economic Health Check
The IMF is expecting a gradual recovery starting later this year as policies have
been eased. Growth for the whole year is now expected at about 2.5 percent. But
economic momentum is expected to pick up in the next months, with growth in the
fourth quarter projected at about 4 percent compared with the same period in 2011.
Brazil, a member of the Group of Twenty leading advanced and emerging economies,
has undergone a remarkable social and economic transformation over the past decade.
Income inequality has decreased and the government has adopted a strong policy framework—most
notably, fiscal responsibility laws, inflation targeting, and a flexible exchange
rate.
But building on these gains will require higher investment and savings. Rebalancing
demand from consumption to investment and net exports will help to secure strong,
balanced growth going forward and support overall competitiveness.
In an interview with the IMF Survey online, to coincide with the publication
of the IMF’s regular annual health check of Latin America’s largest
economy, IMF mission chief for Brazil Vikram Haksar discusses the outlook for the
country’s economy and goes over the findings of his team’s analysis.
IMF Survey: Why has growth slowed, and is the economy losing steam?
Haksar: Growth in Brazil had been expected to slow last year as
policies were tightened to contain inflationary pressures, which had been a concern
since the beginning of 2011. The combination of several economic policy levers—including
fiscal, monetary, and credit—being tightened at the same time had larger than
anticipated effects. Also, during the second half of last year the worsening external
environment added to the drag on growth, including on confidence and investment.
Investment has been particularly weak in Brazil during this cycle.
But policies have been eased since then and we expect growth to pick up in the second
half of this year.
IMF Survey: Brazil’s policymakers have responded to slower growth with
a range of measures, including lower interest rates. Will this work?
Haksar: We support the policy mix that the authorities have put
in place—easy monetary policy and fiscal policy focused on the primary surplus
target to bring debt down.
Monetary policy is powerful in Brazil, as has been shown by various studies. There
has already been a substantial 450 basis point reduction in the policy rate since
last August. But there are lags with which monetary policy affects the economy.
These lags are normally from 9 to 12 months.
We therefore expect the policy easing that started in 2011 to start having more
significant effects by the second half of this year. Also, the exchange rate has
weakened quite a bit since last year, which should gradually be more supportive
of growth.
IMF Survey: The IMF has said that the risks to the global outlook have risen.
What are the key risks for Brazil, and what is the best way to address them?
Haksar: Our analysis shows that the main risks for Brazil arise
from the prospect of lower commodity prices, the possibility of tighter external
financial conditions, and a potential drop in demand from Europe, which is a major
trading partner for Brazil.
As has been documented in the IMF’s recent World Economic Outlook and Global Financial Stability Report updates, global
risks have increased. That said, we believe that the authorities have substantial
room for maneuver. Brazil has built strong policy frameworks and increased its policy
buffers. International reserves are at record high levels and liquidity buffers
at commercial banks are very large. Both of these buffers can be used to support
orderly liquidity assistance in the event of unexpected shocks that might hit.
Furthermore, if the global crisis were to intensify, there is substantial scope
for further monetary policy easing, especially now that the implicit floor on the
policy rate has been removed with the important recent reform of savings accounts.
IMF Survey: Capital flows to and from emerging markets have been extremely volatile
recently. What has been the impact of such flows on Brazil?
Haksar: We believe that Brazil has appropriately used all available
policy tools to manage volatile capital flows. In 2010 and 2011 when Brazil was
receiving very large capital inflows, the exchange rate appreciated quite substantially,
the authorities increased their reserves, and fiscal policy began to be tightened.
Additionally, when capital inflow pressures have been very strong, capital flow
management measures (CFMs) have been deployed to offset this pressure. By the same
token, when capital outflow pressures have arisen because of, for example, increased
global risk perceptions, CFMs were eased in order to smooth the effects of this
volatility.
The CFM framework in Brazil has been used in a countercyclical manner, which we
believe has been appropriate.
IMF Survey: Bank credit has grown very fast in the past decade, particularly
in the housing sector. Are you concerned about the impact this may have on the stability
of the banking system?
Haksar: The expansion of credit that Brazil has seen in the last
decade—both in terms of the rate of growth of credit and the duration of time
for which credit has been expanding—has been quite high by international standards.
Naturally, we looked at this quite carefully in our report and it was also an important
focus of the Financial Sector
Assessment Program analysis that was conducted at the same time as our review.
The financial system in Brazil has many strengths that mitigate risks—banks
have high levels of good quality capital and large liquidity buffers. The supervisory
and prudential framework is also strong and proactive.
However, consumer credit has risen to high levels. With interest rates in Brazil
quite high, the debt service burden on households has gone up. This is a concern.
Close monitoring will be needed to ensure that households have a manageable debt
burden going forward.
Another area of concern is the rapid expansion of lending in the housing sector.
But here it is important to note that, while overall credit has grown rapidly, including
in housing, both have grown from low levels. The Brazilian financial system is small
relative to the financial systems in many other emerging markets and certainly relative
to advanced economies. Moreover, a large part of the lending has been to priority
areas, especially in low-income housing through public sector banks. Again, this
is an area that will require close monitoring, particularly as house price increases
have been quite sizeable.
IMF Survey: How can Brazil build on the substantial progress made in terms of
inclusive growth over the last decade?
Haksar: Brazil has had an impressive growth performance in the
last decade, in part reflecting its gains on macroeconomic stabilization as well
as higher commodity prices. This has supported the government’s social agenda
for more inclusive growth, which has resulted in sizeable reductions in poverty,
inequality, and greater formalization of the economy, all of which have improved
the standard of living and human development in Brazil.
Going forward, however, we believe that additional measures will be needed to ensure
that stable, balanced growth can continue in Brazil. In this regard, it will be
important to raise the level of aggregate savings and investment in the economy,
both of which are low by comparison with emerging market peers. Beyond this, strengthening
the business environment will also be crucial. This will not only create greater
incentives for private investment, but also support gains on productivity and competitiveness,
which are needed to ensure sustained growth.
IMF Survey: Brazil is embarking on two important projects, hosting the 2014
soccer World Cup and the 2016 Olympics. How can the country ensure a lasting and
positive economic legacy from these events?
Haksar: These are two very important events and they do provide
the country with a unique opportunity to support development in important areas.
There is a need for increased investment by the public sector, which is low compared
to emerging market peers, especially in infrastructure.
But public investment increases should also be matched by increased public savings
to pay for this higher level of investment. One way to achieve this would be to
find increased space within the budget to fund and prioritize investment as opposed
to consumption spending. In this context, steps could be taken to increase the flexibility
of the budget, which would make it easier to increase investment within the established
fiscal targets. By leveraging these important international events, Brazil can provide
a lasting economic legacy that will support productivity and growth.
