## 1braea2019001 ## Source details **Canonical URL:** [1braea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1braea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1braea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1braea2019001.pdf.json) --- ### Context and recent macro developments - Real GDP: dropped by almost 7 percent in 2015−16; grew by 1.1 percent in 2017 and 2018. - Output gap: estimated at - 3.7 percent of potential GDP. - Investment rate: declined from about 20 percent of GDP (pre-recession decade) to 15.4 percent in 2018. - Unemployment rate: fell below 12 percent (s.a.) in April 2019. - Payroll jobs (share of total): 48.2 percent in March 2019, down from over 52 percent in 2014. - Headline inflation: about 4 percent, close to the 4.25 mid-point of the inflation target range for 2019. - Policy rate: held at 6.5 percent since March 2018. - NFPS primary balance: ˗1.7 percent of GDP in 2018; a 1.1 percent surplus required to stabilize public debt. - Public debt: 88 percent of GDP (current); projected to peak at 96 percent of GDP in 2024 under the baseline. - Gross financing needs: above 15 percent of GDP throughout the projection period. - Credit: private bank lending grew around 8 percent over the past year; central bank estimates suggest a negative credit gap of about 6 percent of GDP. ### Fiscal risks, policy stance, and baseline assumptions - Fiscal consolidation approach: expenditure-based gradual consolidation starting in 2020 anchored by the constitutional expenditure ceiling. - Expenditure ceiling path: implies a reduction of government expenditures by about 0.5 percent of GDP per year for the next 8 years. - Staff baseline: assumes approval of pension reform this year; GDP growth projected to reach 2.4 percent in 2020 if reform is approved. - Structural primary balance: expected to deteriorate by 0.1 percent in 2019; staff recommends avoiding further deterioration in 2019. - Pension reform savings: would account for only a third of the fiscal adjustment needed to comply with the expenditure ceiling by 2024. - Mandatory expenditure: about 90 percent of federal spending and cannot be modified without legal changes. - Additional measures to comply with ceiling: further reductions in current expenditures (examples: limit minimum wage increases to cost of living adjustments; delink pensions and other benefits from the minimum wage) while protecting targeted social assistance programs such as Bolsa Familia. ### Box 1 — Pension system: current features, proposed changes, and projected impacts - Current public pension spending: 14 percent of GDP. - Average retirement age: 54 (Brazil) versus 64 in OECD economies. - Replacement rate for an average-wage worker: 70 percent (Brazil) versus 53 in OECD. - Imbalance between pension payments and contributions: reached 5.5 percent of GDP in 2018. - Projection without reforms: pension spending projected to increase to about 30 percent of GDP by 2050. - Distributional inequity: present discounted value of the difference between lifetime pension benefits and contributions substantially higher for high-skilled private sector workers and government workers than for low-skilled and rural workers. - Executive proposal (‘Nova Previdência’) main elements: - Minimum retirement age: 62 for women, and 65 for men; 60 for rural workers and teachers. - Minimum contribution time increased from 15 to 20 years. - Lowers replacement rates. - Reduces social pensions for those under age 70. - Limits generosity of survivor benefits. - Equalizes rules for public employees to those in the private sector. - Restricts the annual wage bonus to those earning the minimum wage. - Complementary bill with specific rules for containing military pension spending. - Projected savings from the proposed reform: around R$1.2 trillion over the next ten years (2.5−3.0 percentage points of GDP by 2030), higher than previous proposal of R$800 billion. - Expected macroeconomic impacts (simulation results): - Near term: reduces per capita consumption as it lowers lifetime pension transfers. - Medium/long term: increases private saving, lowers public debt trajectory, lowers cost of capital, induces higher investment, improves current account, raises labor force participation via higher retirement ages. - Income per capita relative to baseline: about 1 percent higher in 2025 and 6 percent higher in 2050. ### Box 2 — Pre-Salt: a game-changer in the Brazilian oil sector - Discovery and framework: - Petrobras found substantial pre-salt reserves in 2006. - Transfer of Rights (ToR) deal in 2010 granted Petrobras the right to explore and produce 5 billion barrels of pre-salt oil. - Estimated reserves increased by some 6 to 15 billion barrels since then; review of ToR agreement followed. - Since 2016 Petrobras no longer has to participate in all pre-salt exploration contracts, enabling more investment by other companies. - Production and investment: - Pre-salt production started to increase in 2013. - Pre-salt now accounts for about ½ of total oil output and is expected to reach 78 percent by 2027. - Estimated investment of US$144 billion over the next nine years, of which about 1/3 may come from FDI inflows. - Fiscal implications: - Nearly 2/3 of oil and gas royalties currently accrue to states and municipalities on top of ½ of special participation fees in concessions. - Recurrent oil and gas revenue (royalties, special participation, oil profit, and R&D fee) expected to jump from 0.8 percent of GDP today to 1.2 percent of GDP in 2027. - ToR deal will generate (net) one-off revenues of R$73 billion (1 percent of GDP) in 2019/20. ### Growth potential, diagnosis, and reform priorities - Historical growth: since 1980 average yearly growth has been 2.5 percent. - Current potential growth: about 2.2 percent. - Scenario without reforms: if productivity continues at 0.5 percent and investment rate remains at about 18 percent, potential GDP growth projected at 1.9 percent. - To lift potential growth towards 3 percent: productivity growth needs to rise to at least 1 percent and support higher investment rates. - Tax reform recommendations (revenue-neutral): - Move toward a single broad-based VAT (with full refund for VAT on intermediate goods). - Harmonize fragmented federal and state tax regimes. - Remove distortionary tax exemptions for small enterprises. - Fiscal savings from reducing tax exemptions could amount to 2 percent of GDP. - Trade and exchange-rate measures: - Brazil is one of the most closed major economies; tariffs broadly unchanged since early 1990s. - Government plans to lower import tariffs on IT and capital goods (from 14 to 4 percent) by August 2019. - Efforts to negotiate an EU-Mercosur trade agreement underway. - BCB’s plan to make the real fully convertible (¶30) will lower the cost of cross-border trade and investment. - Infrastructure and public investment: - Public capital stock: 39 percent of GDP in 2015 versus 88 and 112 percent of GDP in other EMs and BRICs. - Public investment: less than 2 percent of GDP on average over last two decades versus 5.4 and 6.2 percent in Latin America and other EMs. - Share of public investment devoted to infrastructure: 22 percent in 2015 versus 45 percent in other EMs. - Policy guidance: enhance public investment efficiency and mobilize private capital through concessions, identify efficiency savings in education and health care, consider formal spending reviews. ### Financial sector, bank intermediation, and FSAP recommendations - Bank intermediation findings: - "Firms and households face an unduly high cost of borrowing which holds back investment and consumption." - Proposed corporate bankruptcy law would reduce delinquency costs for banks. - Credit registry law (cadastro positivo) approved to improve access to positive credit information. - Need to reduce role of public banks and directed lending; facilitate client mobility and financial product cost transparency. - Policy recommendations for bank intermediation: - Implement proposed corporate bankruptcy law. - Operationalize the credit registry law. - Continue measures to reduce role of public banks and directed lending. - Facilitate client mobility across banks. - Increase transparency of financial product costs. - FSAP Appendix IV — selected implementation actions and timeframes: - Multi-agency high-level committee for macroprudential policy: draft “Financial Stability Coordination Law” under analysis. (Timeframe: ST) - Strengthen crisis management institutional arrangements: draft would create “Financial Stability National Committee.” (Timeframe: MT) - Strengthen legal protection and independence for supervisors; draft bills and amendments under examination. (Timeframe: ST) - Use Pillar 2 capital requirements and Structured Add-on implemented; guidance under discussion. (Timeframe: ST) - Upgrade supervisory approach to credit risk: CMN Resolution 4.677/2018 and CMN Resolution 4.693/2018; reporting Circulars and additional initiatives in progress. (Timeframe: MT) - Revise resolution law and ELA framework: draft bills under evaluation; discussions ongoing. (Timeframe: ST) - Financial integrity: complete national AML/CFT risk assessment; draft Bill to establish Strategic Committee under analysis. (Timeframe: ST) - Financial intermediation efficiency: CMN Resolution 4.639/2018 for salary account portability; Credit Registry Law amended to opt-out model. ### Anti-money laundering, anti-corruption, and AML/CFT priorities - Findings: - Effective implementation of anti-money laundering and anti-corruption measures remains critically important. - Government pursuing significant money laundering and corruption cases; proposals to improve legal framework submitted. - Recommendations: - Continue preventive measures, effective enforcement, and long-term legislative improvements. - Expedite completion of the national AML/CFT risk assessment. - Enhance collection of beneficial ownership information and share as needed; start collecting beneficial ownership information from domestic legal entities. ### Debt dynamics, stress tests, and fiscal scenarios - Gross NFPS debt: 84.1 (2017), 87.9 (2018), projected 92.2 (2019), 94.1 (2020), 94.9 (2021), 95.9 (2022), 96.1 (2023), 96.4 (2024). - Total external debt (percent of GDP): 32.5 (2017), 35.6 (2018), 37.1 (2019), 35.4 (2020), 33.5 (2021), 31.7 (2022), 29.9 (2023), 28.3 (2024). - Current account (percent of GDP): -0.4 (2017), -0.8 (2018), -1.5 (2019), -1.6 (2020), -1.6 (2021), -1.7 (2022), -1.8 (2023), -1.9 (2024). - Gross official reserves (eop, US$ billion): 374 (2017), 375 (2018), 375 (2019 proj), 375 (2020 proj), 375 (2021 proj), 375 (2022 proj), 375 (2023 proj), 375 (2024 proj). - Gross external financing need (US$ billions): 204.9 (2014), 209.4 (2015), 171.3 (2016), 144.6 (2017), 154.2 (2018), 165.3 (2019), 167.2 (2020), 173.3 (2021), 174.7 (2022), 177.8 (2023), 180.7 (2024). - External debt-to-exports (percent): 269.9 (2014), 296.8 (2015), 310.4 (2016), 265.0 (2017), 243.8 (2018), 238.1 (2019), 227.0 (2020), 213.6 (2021), 199.6 (2022), 187.6 (2023), 176.4 (2024). - Debt-stabilizing requirement: primary surplus of about 1 percent of GDP needed to stabilize gross debt-to-GDP at 96 percent in 2024 under baseline (2.2 percent growth and 9 percent nominal effective interest rate). - Stress-test outcomes (selected): - Abandonment of expenditure cap starting in 2020 (primary balance deteriorates cumulatively by 8 percentage points of GDP over 2020−24): gross debt-to-GDP increases to 104 percent in 2024; gross financing needs reach 36 percent of GDP. - Growth shock (real growth reduced by one standard deviation (3.3 percent) for two consecutive periods starting in 2020): gross debt-to-GDP reaches 103 percent in 2024; gross financing needs 34 percent of GDP. - Real interest rate shock (+400bps over 2020−24): gross debt and financing needs increase to 103 and 35 percent of GDP respectively in 2024. - Combined macro-fiscal shock: gross debt-to-GDP reaches almost 120 percent by 2024, 22 percentage points above baseline; gross financing needs increase to 43 percent of GDP. ### Baseline macro projections (selected series) - GDP growth at constant prices (percent): 1.1 (2017), 1.1 (2018), 0.8 (2019), 2.4 (2020), 2.4 (2021), 2.2 (2022), 2.2 (2023), 2.2 (2024). - Consumer prices (IPCA, end of period, percent): 2.9 (2017), 3.7 (2018), 4.1 (2019), 4.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (2024). - Gross domestic investment (percent of GDP): 15.0 (2017), 15.4 (2018), 15.8 (2019), 16.2 (2020), 16.7 (2021), 17.3 (2022), 17.8 (2023), 18.3 (2024). - Gross domestic savings (percent of GDP): 14.7 (2017), 14.6 (2018), 14.3 (2019), 14.7 (2020), 15.1 (2021), 15.6 (2022), 15.9 (2023), 16.3 (2024). - Unemployment rate (percent): 12.8 (2017), 12.3 (2018), 11.6 (2019), 10.4 (2020), 10.0 (2021), 9.7 (2022), 9.5 (2023), 9.4 (2024). - Balance of payments (billions of US$): Current Account: -7.2 (2017), -14.5 (2018), -27.4 (2019), -29.6 (2020), -32.4 (2021), -35.0 (2022), -39.5 (2023), -43.7 (2024). - Exports (fob, US$ billions): 217.2 (2017), 239.0 (2018), 250.9 (2019), 255.1 (2020), 268.6 (2021), 282.9 (2022), 296.3 (2023), 310.5 (2024). - Imports (fob, US$ billions): 153.2 (2017), 185.4 (2018), 198.5 (2019), 204.5 (2020), 215.0 (2021), 224.8 (2022), 236.2 (2023), 249.2 (2024). - NFPS primary balance (percent of GDP): -1.8 (2017), -1.7 (2018), -1.9 (2019), -1.3 (2020), -0.7 (2021), -0.1 (2022), 0.4 (2023), 0.8 (2024). - NFPS overall balance (percent of GDP): -7.9 (2017), -6.9 (2018), -7.6 (2019), -7.3 (2020), -7.3 (2021), -6.9 (2022), -6.5 (2023), -6.1 (2024). - Net public sector debt (percent of GDP): 51.6 (2017), 54.2 (2018), 57.8 (2019), 60.2 (2020), 61.4 (2021), 62.8 (2022), 63.4 (2023), 64.1 (2024). ### Risks, contingency measures, and policy responses - Main risks: - Failure to approve robust pension reform: Relative likelihood Medium; Time Horizon ST; Expected Impact High. Policy response: adopt alternative fiscal measures; central bank FX intervention only in disorderly conditions. - Economic growth remains anemic amid fiscal consolidation: Relative likelihood Medium; Time Horizon MT; Expected Impact Medium. Policy response: over-perform fiscal targets for 2019 and 2020; consider measures not requiring constitutional amendments (e.g., freeze minimum wage in nominal terms, address budget rigidities, reduce wage bill). - External risks: rising protectionism; sharp tightening of global financial conditions; weaker-than-expected global growth originating from a slowdown in China. Policy implications: maintain flexible exchange rate; monetary support where appropriate; preserve fiscal consolidation and structural reforms. - Buffers: - Limited trade integration, solidity of financial system, adequate FX reserves, low current account deficit, large FDI inflows. - Authorities’ planned measures: - Contain discretionary expenditures; use extraordinary revenue (including oil revenue windfalls and privatization proceeds) to lower primary deficits and reduce public debt. - Plan to limit autonomous growth of major mandatory expenditures and review tax expenditures; consider a revenue-neutral tax reform after pension reform approval. - Propose legislation to enhance administrative and coercive collection powers to improve tax arrears collection; provide short-term funding relief to subnational governments conditional on reforms. ### Staff appraisal and sequencing of priorities - Overarching assessment: historically low growth and high public debt call for bold reforms. Staff supports the government’s goals to unleash growth potential and achieve fiscal consolidation through an ambitious reform agenda. - Sequencing recommended: - Priority: preserve main features of pension reform (increase retirement ages; reduce relatively high benefits, particularly for public sector employees). - Follow-up: additional expenditure measures to comply with spending ceiling; tax reform and revenue administration strengthening; trade liberalization; improve bank intermediation; protect effective social programs including Bolsa Familia; support public investment. - Monetary/external policy guidance: - Monetary stance: remain accommodative given the large output gap and anchored inflation expectations. - FX policy: maintain flexible exchange rate; FX intervention limited to disorderly conditions; preserve international reserves. - Institutional: enshrine central bank independence into law would further improve inflation-targeting regime. - Financial sector priorities: - Enhance prudential, crisis management, safety net, and macroprudential frameworks; strengthen resolution framework; consider bringing deposit guarantee fund into public sector; complete creation of a multi-agency macroprudential committee. *International Monetary Fund — Brazil: 1. Reforming a Fiscally Unsustainable and Inequitable Pension System (excerpt).* ### 1. Reforming a Fiscally Unsustainable and Inequitable Pension System ____________________________7 ### 1. Reforming a Fiscally Unsustainable and Inequitable Pension System ### Context and recent macro developments - Real GDP dropped by almost 7 percent in 2015−16 and grew by 1.1 percent in 2017 and 2018. - Output gap is estimated at - 3.7 percent of potential GDP. - Investment rate declined from about 20 percent of GDP in the decade preceding the recession to 15.4 percent in 2018. - Unemployment rate fell below 12 percent (s.a.) in April 2019 but remains high compared to pre-crisis levels. - Payroll jobs were 48.2 percent in March 2019 (share of total), down from over 52 percent in 2014. - Headline inflation declined to about 4 percent, close to the 4.25 mid-point of the inflation target range for 2019. - Policy rate held at 6.5 percent since March 2018. - NFPS primary balance in 2018 was ˗1.7 percent of GDP; a 1.1 percent surplus is required to stabilize public debt. - Public debt was 88 percent of GDP (current); projected to peak at 96 percent of GDP in 2024 under the baseline. - Gross financing needs are above 15 percent of GDP throughout the projection period. - Lending trends: private bank lending (including households) grew at around 8 percent over the past year; central bank estimates suggest a negative credit gap of about 6 percent of GDP. ### Fiscal risks, policy stance, and baseline assumptions - Government aims for an expenditure-based gradual fiscal consolidation starting in 2020 anchored by the constitutional expenditure ceiling. - Expenditure ceiling implies a reduction of government expenditures by about 0.5 percent of GDP per year for the next 8 years. - Staff baseline assumes approval of pension reform this year and gradual strengthening of the recovery; GDP growth projected to reach 2.4 percent in 2020 if reform is approved. - Structural primary balance expected to deteriorate by 0.1 percent in 2019; staff recommends avoiding further deterioration in 2019. - Pension reform savings would account for only a third of the fiscal adjustment needed to comply with the expenditure ceiling by 2024. - To comply with the ceiling, further reductions in current expenditures are needed (examples: limit minimum wage increases to cost of living adjustments; delink pensions and other benefits from the minimum wage) while protecting targeted social assistance programs such as Bolsa Familia. - Mandatory expenditure is about 90 percent of federal spending and cannot be modified without legal changes. ### Box 1 — Pension system: current features, proposed changes, and projected impacts - Current public pension spending: 14 percent of GDP. - Average retirement age: 54 (Brazil) versus 64 in OECD economies. - Replacement rate for an average-wage worker: 70 percent (Brazil) versus 53 in OECD. - Imbalance between pension payments and contributions reached 5.5 percent of GDP in 2018. - Without reforms, pension spending projected to increase to about 30 percent of GDP by 2050. - Distributional inequity: present discounted value of the difference between lifetime pension benefits and contributions is substantially higher for high-skilled private sector workers and government workers than for low-skilled and rural workers. - Executive proposal (‘Nova Previdência’) main elements: - Minimum retirement age: 62 for women, and 65 for men; 60 for rural workers and teachers. - Minimum contribution time to access pensions increased from 15 to 20 years. - Lowers replacement rates. - Reduces social pensions for those under age 70. - Limits generosity of survivor benefits. - Equalizes rules for public employees to those in the private sector. - Restricts the annual wage bonus to those earning the minimum wage. - Complementary bill with specific rules for containing military pension spending. - Projected savings from the proposed reform: around R$1.2 trillion over the next ten years (2.5−3.0 percentage points of GDP by 2030), higher than previous proposal of R$800 billion. - Even with these savings, pension reform is expected to just stabilize pension expenditure as a share of GDP. - Macroeconomic impact (simulation results): - Near term: reform reduces per capita consumption as it lowers lifetime pension transfers. - Medium/long term: increases private saving, lowers public debt trajectory, lowers cost of capital, induces higher investment, improves current account, raises labor force participation via higher retirement ages. - Income per capita outcomes relative to baseline: about 1 percent higher in 2025 and 6 percent higher in 2050. ### Policy recommendations and structural priorities - Pension reform is necessary but not sufficient for fiscal sustainability; additional measures required to meet the expenditure ceiling. - Preserve targeted social assistance programs (e.g., Bolsa Familia) while reducing other current expenditures. - Strengthen fiscal framework: - Address budget rigidities including revenue earmarking, mandatory expenditures, and indexation of key spending items. - Move toward a medium-term fiscal framework with simple, flexible, enforceable rules consistent with debt sustainability. - Introduce rolling spending reviews for large and growing budgetary programs. - Continue revenue administration reforms: - Promote voluntary compliance (cooperative compliance arrangements supported). - Intensify efforts to collect arrears by granting revenue administration powers to enforce debt collections. - Restrict payment-in-installments to exceptional cases based on taxpayer financial situation. - Upgrade procurement and investment practices to address low public capital stock and high infrastructure gap: - Improve project appraisal and selection, remove barriers to foreign participation, enhance competitive outcomes, and balance price and quality in bidding. - Subnational fiscal risks: - Several states face severe fiscal challenges; seven states declared a “state of calamity.” - Federal temporary relief planned for some states conditional on state fiscal adjustment commitments. - Structural reforms needed (pension reform, tax reform, budget rigidity reforms, institutional framework for subnational borrowing) to address state fiscal imbalances. - Privatization: - Federal government direct investments amount to R$320 billion (nearly 5 percent of GDP), over half in strategic SOEs (Petrobras and public banks). - Divestments could generate revenue and have positive productivity effects, but amounts are uncertain and cannot substitute for fiscal consolidation. ### Authorities’ position - Authorities committed to fiscal consolidation guided by the expenditure ceiling. - Plan to contain discretionary expenditures and use extraordinary revenue (including oil revenue windfalls and privatization proceeds) to lower primary deficits and reduce public debt. - Pension reform is the priority; authorities recognize need for additional expenditure measures to comply with the expenditure ceiling. - Measures planned/considered: - Limit autonomous growth of major mandatory expenditures (social security benefits, abono salarial, government payroll). - Review tax expenditures and consider a revenue-neutral tax reform after pension reform approval. - Propose legislation to enhance administrative and coercive collection powers to improve collection of tax arrears (deny tax benefits to tax debtors; ease requirements to collect small debt amounts). - Provide short-term funding relief to subnational governments while seeking structural reforms. *International Monetary Fund — Brazil: 1. Reforming a Fiscally Unsustainable and Inequitable Pension System (excerpt).* ### Box 2. Pre-Salt: A Game-Changer in the Brazilian Oil Sector ### Box 2. Pre-Salt: A Game-Changer in the Brazilian Oil Sector ### From discovery to current sector framework - In 2006, Petrobras found substantial pre-salt oil reserves. - A Transfer of Rights (ToR) deal in 2010 granted Petrobras the right to explore and produce 5 billion barrels of pre-salt oil. - Since then, estimated reserves increased by some 6 to 15 billion barrels, leading to a review of the original ToR agreement. - Since 2016 Petrobras no longer has to participate in all pre-salt exploration contracts, unleashing more investment by other companies. ### Production trends and investment projections - Pre-salt production started to increase in 2013. - Pre-salt now accounts for about ½ of total oil output and is expected to reach 78 percent by 2027. - Estimated investment of US$144 billion over the next nine years, of which about 1/3 may come from FDI inflows. ### Fiscal implications and revenue sharing - Nearly 2/3 of oil and gas royalties currently accrue to states and municipalities on top of ½ of special participation fees in concessions. - Under the current framework, these subnational revenues are expected to stay broadly constant over time as a share of GDP. - Oil revenues accruing to the central government, which are closely linked to pre-salt profits, would increase in the future. - Recurrent oil and gas revenue (royalties, special participation, oil profit, and R&D fee) is expected to jump from 0.8 percent of GDP today to 1.2 percent of GDP in 2027. - The ToR deal will generate (net) one-off revenues of R$73 billion (1 percent of GDP) in 2019/20. *Source: IMF staff summary of Box 2, "Pre-Salt: A Game-Changer in the Brazilian Oil Sector."* ### 34. Reforms are necessary to raise ### 34. Reforms are necessary to raise ### Growth potential and diagnosis - Since 1980, Brazil’s average yearly growth has been 2.5 percent. - Large part of past growth was due to labor force growth, which is projected to diminish rapidly given the rapid demographic transition. - Current potential growth is about 2.2 percent. - To lift potential growth towards 3 percent, productivity growth and investment rates should increase well above the levels experienced in the past 20 years. - Structural reforms that boost productivity would also improve debt dynamics in the medium term (DSA, ¶13). ### Box 4 — Sensitivity of Potential GDP Growth (production function approach) - Production function: Cobb Douglas specified in the source text. - Capital evolution assumed: K_t = (1 − δ) K_{t−1} + s_t, where δ is depreciation and s_t is fixed investment. - Growth rate of potential GDP, g_t, expressed in terms of productivity growth (g_t^A), labor growth (g_t^L), investment-to-GDP ratio (i_t), and capital-to-GDP ratio (k_{t−1}). - Calibration details: - Capital depreciation rate (δ) set to 4.5. - Production share (α) set to 46 percent. - Capital ratio k_{t−1} calibrated at its 2018 level of 2.85. - Using demographic projections and average employment rates, the growth rate of the labor force is estimated to decline to about 1 percent during the next decade. - Scenario results and implications: - If productivity continues to grow at 0.5 percent and the investment rate remains at about 18 percent (2000−18 averages), potential GDP growth is projected to be 1.9 percent. - To boost potential growth significantly above 2 percent, structural reforms are needed to raise productivity growth to at least 1 percent and support higher investment rates. ### Tax reform recommendations - The tax system is complicated and distortive and should be reformed in a revenue-neutral manner. - Key reform actions: - Eliminate multiple indirect taxes by moving toward a single broad-based VAT (with full refund for VAT on intermediate goods). - Harmonize fragmented federal and state tax regimes. - Remove distortionary tax exemptions for small enterprises that encourage inefficient fragmentation of firms. - Fiscal impact and priorities: - Fiscal savings from reducing tax exemptions could amount to 2 percent of GDP and be used to either reduce public debt or lower the high level of payroll and corporate taxes. - Simplification aims to raise the same amount of revenues while reducing compliance costs and catalyzing private investment. ### Trade liberalization and exchange-rate measures - Brazil is one of the most closed major economies in the world; tariffs have been broadly unchanged since the early 1990s and remain higher than in comparable countries. - Non-tariff barriers—especially anti-dumping measures—impede international trade. - Planned measures and opportunities: - Government plans to lower import tariffs on IT and capital goods (from 14 to 4 percent) by August 2019. - Efforts to negotiate an EU-Mercosur trade agreement are underway. - Adherence to OECD codes (and eventual accession) would provide an opportunity to foster trade integration. - The BCB’s plan to make the real fully convertible (¶30) will lower the cost of cross-border trade and investment. ### Infrastructure gap and public investment - Public capital stock and investment metrics: - Brazil’s public capital stock was 39 percent of GDP in 2015, compared to 88 and 112 percent of GDP in other EMs and BRICs. - Quality of infrastructure is lower than comparator countries. - Low public investment over the last two decades: less than 2 percent of GDP on average compared to 5.4 and 6.2 percent of GDP in Latin America and other EMs. - Share of public investment devoted to infrastructure: 22 percent in 2015 versus 45 percent in other EMs. - Policy guidance: - Reducing the infrastructure gap will require significant investment going forward. - Given fiscal constraints, enhance public investment efficiency and mobilize private capital through concessions. - Identify efficiency savings in education and health care; consider formal spending reviews to contribute to fiscal adjustment while safeguarding service delivery. ### Business environment, labor market, and private investment - Reforms needed to attract private investment: - Simplify the tax system. - Ease procedures to start a business. - Reduce time and cost to obtain construction permits and register properties. - Open up the economy to foreign trade. - Recent administrative measures: - Provisional measures reduce red tape and support opening small businesses: removal of licensing requirements for starting low-risk activities, allowing flexible operation hours, granting price setting flexibility outside regulated sectors. - Ease of Doing Business (2019) indicators motivate these reforms. ### Authorities’ views (summarized) - Authorities agree on the need for structural reforms and reducing the role of the state; emphasize strategic prioritization. - Pension reform is the most immediate priority; fiscal decentralization, comprehensive tax reform, and an ambitious privatization program are next priorities. - Executive intends to devolve greater spending to states following reforms to address large-scale earmarking—this will require constitutional amendments. - On trade openness: import licenses granted with compliance; efforts ongoing to simplify and streamline import licensing processes, eliminate paper copies, reduce average time to obtain licenses. - New licensing system under development; pilot project launched in October 2018 for a restricted number of operations, expected to be mainstreamed by 2021. ### Risks and policy responses - Main risks: - Setbacks in fiscal consolidation, especially pension reform stalling or dilution, could undermine market confidence, affect sovereign yields and the exchange rate, and deteriorate economic prospects with negative spillovers. - Even with robust pension reform, additional fiscal measures will be needed to comply with the constitutional expenditure ceiling. - Privatization revenue may be lower than expected. - Vulnerability to external shocks: sudden tightening in global financial conditions and a possible global slowdown. - Offsetting buffers: - Limited trade integration, solidity of the financial system, adequate FX reserves, low current account deficit, and large FDI inflows. - Contingent policy responses if pension reform setbacks occur: - Adopt alternative fiscal measures some of which do not require constitutional amendments. - Over-perform fiscal targets for 2019 and 2020 to bolster fiscal sustainability and market confidence. - Possible measures include freezing the minimum wage in nominal terms, addressing budget rigidities to allow discretionary spending reductions, and reducing the wage bill. - Central Bank should limit FX intervention to cases of disorderly conditions. ### Anti-corruption and AML/CFT framework - Continue and deepen enforcement and preventive measures against corruption and money laundering (ML). - Legislative developments: - New amendments include proposals to prevent abuse of appeal provisions and statutes of limitations; criminalize use of campaign slush funds. - Missing provisions: strengthen whistleblower mechanisms, seizure and confiscation measures. - FATF/GAFILAT and standards compliance: - Authorities enacting legal provisions to implement United Nations-based targeted financial sanctions requirements—the last remaining issue from the 2010 assessment. - New legislation should positively impact the next FATF/GAFILAT assessment, to be held in less than two years. - BCB issuing new risk-based supervisory regulations; supervision would be improved by legislating protection for supervisory employees acting in good faith and by applying AML/CFT risk matrixes independent of prudential risk classifications. - Areas needing priority action: - Finalize the National Risk Assessment (NRA) in a timely manner. - Enhance collection of beneficial ownership information: - Tax authorities have commenced collecting this information from foreign companies that do business in Brazil. - Recommendation to share such information as needed and to start collecting beneficial ownership information from domestic legal entities as well. ### Staff appraisal and policy priorities - Overarching assessment: - Historically low growth and high public debt call for bold reforms. - Staff supports the government’s goals of unleashing growth potential and achieving fiscal consolidation through an ambitious reform agenda. - Sequencing should prioritize pension reform and other expenditure measures needed to comply with the spending ceiling, followed by tax and other structural reforms, including trade liberalization and improvement of bank intermediation. - Specific priorities: - Pension reform is the crucial first step; main features of the government proposal (planned increase in retirement ages and reduction in relatively high benefits, particularly for public sector employees) should be preserved to deliver needed fiscal adjustment. - Additional measures to comply with the expenditure ceiling and stabilize debt: - Lower the public wage bill and reduce other current expenditures. - Protect effective social programs, including Bolsa Familia, and support public investment. - Reform the tax system and strengthen revenue administration. - Use windfall oil revenues—including proceeds from upcoming Transfer of Right transactions—exclusively to lower debt. - Enhance the fiscal framework by addressing budget rigidities and moving toward a medium-term budget framework. - Deep structural measures are essential to restore medium-term sustainability of subnational governments. - Monetary and external policy guidance: - Monetary stance should remain accommodative given the large output gap and anchored inflation expectations. - If fiscal consolidation is contractionary in the future, monetary policy could be loosened further provided inflation expectations remain anchored. - Recent bill on the relationship between the Treasury and the Central Bank enhances the institutional framework; enshrining central bank independence into law would further improve the inflation-targeting regime. - Flexible exchange rate remains important to absorb shocks; FX intervention only to address disruptive market volatility; preserve international reserves. - Financial sector oversight: - Enhance prudential, crisis management, safety net, and macroprudential frameworks. - Upgrade regulatory and supervisory approach to credit risk (related party exposures, country and transfer risk, restructured loans). - Strengthen financial resolution framework, consider bringing deposit guarantee fund into the public sector, and tighten process for providing ELA. - Complete creation of a multi-agency committee with explicit mandates for macroprudential policy and crisis management. - Structural reforms reiterated: - Reduce the footprint of the state via privatization, reduce state intervention in credit markets, lower trade barriers, tackle corruption, and simplify taxation. - Privatization expected to improve productivity in key sectors, including infrastructure and energy. - Trade liberalization is essential to improve competitiveness; current plans to lower import barriers are welcome; prospective OECD accession is an opportunity but trade liberalization should be pursued regardless. *Source: BRAZIL, INTERNATIONAL MONETARY FUND* ### 55. Bank intermediation efficiency should be improved. Firms and households face an ### Bank intermediation efficiency should be improved ### Bank intermediation: findings - "Firms and households face an unduly high cost of borrowing which holds back investment and consumption." - "A proposed corporate bankruptcy law would reduce delinquency costs for banks." - "The recent approval of a credit registry law (cadastro positivo) will improve banks’ access to positive credit information." - "Efforts to reduce the role of public banks and directed lending in credit markets should continue." - "Actions are needed to facilitate client mobility and financial product cost transparency." ### Bank intermediation: policy recommendations - Implement the proposed corporate bankruptcy law to reduce delinquency costs for banks. - Operationalize the credit registry law (cadastro positivo) to improve access to positive credit information. - Continue measures to reduce the role of public banks and directed lending in credit markets. - Facilitate client mobility across banks. - Increase transparency of financial product costs to lower borrowing costs for firms and households. ### Anti-money laundering and anti-corruption ### Findings - "The effective implementation of anti-money laundering and anti-corruption measures remains critically important." - "The government continues to pursue significant money laundering and corruption cases and has submitted proposals to improve the legal framework." ### Policy recommendations - Continue focusing on preventive measures, effective enforcement, and long-term legislative improvements. - Expedite the completion of the national anti-money laundering risk assessment. *https://www.imf.org/-/media/files/publications/cr/2019/1braea2019001.pdf* ### 57. It is recommended that the next Article IV consultation takes place on the standard ### It is recommended that the next Article IV consultation takes place on the standard 12-months cycle. ### Recent Economic Developments - The economic recovery has disappointed in 2017-2018, but is expected to strenghten. - Economic growth has been held back by low investment. - Retail sales are growing moderately and consumers' confidence is strenghtening. - Industrial production remains volatile, while capacity utilization is well below the historical average. - Business confidence has improved, but investment growth remains sluggish. - Key visuals and indicators (seasonally adjusted, annualized qoq percentage change; 3-month moving average annualized percentage change) show mixed contributions to GDP from: - Private consumption, Government consumption, Investment, Net Exports, Inventories (Demand Contribution to GDP Growth). - Industrial production and Manufacturing (Industrial Production and Capacity Utilization). - Retail sales incl. / excl. autos and construction materials and Consumer confidence (Retail Sales Volumes and Consumer Confidence). - Business Confidence Index (50+=Growth) and Real investment growth (Business Confidence and Investment). - Sectoral supply contributions: Agriculture, Industry, Services, Tax on Products (Supply Contribution to GDP Growth). - Real GDP growth and Output gap (Percent change and percent of potential output). ### Monetary Sector Developments - Inflation: - Inflation is hovering around the inflation target and inflation expectations are well anchored. - Medium-term inflation expectations are drifting upwards. - The inflation diffusion index has increased rapidly. - Regulated-price and free-price inflation are converging. - After a sharp drop of food prices in late 2017, inflation in the tradable sector has resumed. - Wages: - Real wages are growing moderately. - Indicators: Real average earnings; Real minimum wage (Year-on-year percent change). - Policy rates and FX: - The central bank has kept the policy rate at the historic low of 6.5 percent. - The central bank increased the stock of FX swaps in mid 2018 when exchange rate pressures materialized. - Monetary Policy Target Interest Rate (SELIC): Nominal and Real (ex-ante) (Monthly average, percent). - Central Bank Foreign Exchange Swaps (Notional value of non‐deliverable forwards settled in local currency; positive means Central Bank is shorting dollars) shown in Billion of U.S. dollars. ### Fiscal Policy - Gross debt and balances: - Gross debt has increased to 88 percent of GDP in 2018 and is projected to reach 90 percent of GDP in 2019. - The overall fiscal balance remains negative due to primary deficit and interest bill. - Excluding exceptional revenue, the primary deficit remains around 2 percent of GDP. - Expenditure and investment: - Capital expenditure has been reduced substantially and remains very low in percent of GDP. - After two years of consolidation, the fiscal stance loosened slightly in 2018 and is projected to loosen further in 2019. - Primary expenditure remains contained and revenue shows signs of recovery. - Key fiscal indicators: - Change in Structural Primary Balance (percent of GDP) charted for recent years. - NFPS (Non-Financial Public Sector) balances and policy lending contributions to overall balance. - Federal Government Revenue and Expenditure: Revenue growth and Primary expenditure (12-month cumulative, real y/y growth). - Federal Government Expenditure: Primary expenditure excl. transfers to S&M; Discretionary spending (current and capital, right axis); Capital spending (right axis). ### External Sector - Terms of trade and current account: - ... amidst a modest expected rebound in terms of trade in 2019. - After a deterioration in terms of trade in 2018, the current account is expected to continue deteriorating in 2019. - Net international investment position: - The net international investment position appears to be gradually improving. - Capital flows: - FDI inflows remain fairly large, with a modest increase in 2018. - Composition of Financial Account: Direct investment, Portfolio investment, Other investment, Financial account balance (In percent of GDP, net). - Composition of the Current Account: Trade Balance, Current Income, net, Services, Balance on current account (In percent of GDP, net). ### Financial Sector - Credit and provisioning: - Credit growth has picked up, driven by lending from private banks. - Non-performing loans declined further in 2018. - Profitability and spreads: - Bank profits before taxes rose in 2018, boosted by non-interest income. - Credit spreads narrowed around the October elections and have remained relatively low since then. - Corporate bond issuance picked up in 2017-18. - Capital and liquidity: - Capital and liquidity ratios remain above the regulatory minima, with private banks having more ample buffers. - Tier 1 Capital Adequacy Ratio: public banks and private banks, Financial system liquidity ratio (RHS). - Key charts and series: - Credit Growth Rate (Percent, year-on-year) by Total, Public banks, Private banks, BNDES funding. - NPL Ratios (Percent) by Total, Public banks, Private banks. - Income Statement of Banking Sector (Billions of BRL): Provisions, Noninterest income, Noninterest expense, Net interest income, Net other income, Net income before taxes. - Corporate Bond Issuance (Billions of BRL) and Spreads on USD-Denominated Sovereign Bonds (Basis points). ### External Debt Sustainability and Vulnerabilities - External debt dynamics and stress tests: - External debt depicted in percent of GDP with baseline and shock scenarios: Interest rate shock, Historical, Baseline and historical scenarios, CA shock, Combined shock, Real depreciation shock. - Notes: Individual shocks are permanent one-half standard deviation shocks. Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. One-time real depreciation of 30 percent occurs in 2010. - Key projections and indicators (Table 1, Table 2, Table 8 excerpts): - Gross debt: NFPS gross debt 84.1 (2017), 87.9 (2018), 92.2 (2019 proj), 94.1 (2020 proj), 94.9 (2021 proj), 95.9 (2022 proj), 96.1 (2023 proj), 96.4 (2024 proj). - Total external debt (in percent of GDP): 32.5 (2017), 35.6 (2018), 37.1 (2019), 35.4 (2020), 33.5 (2021), 31.7 (2022), 29.9 (2023), 28.3 (2024). - Current account (in percent of GDP): -0.4 (2017), -0.8 (2018), -1.5 (2019), -1.6 (2020), -1.6 (2021), -1.7 (2022), -1.8 (2023), -1.9 (2024). - Gross official reserves (eop): 374 (2017), 375 (2018), 375 (2019 proj), 375 (2020 proj), 375 (2021 proj), 375 (2022 proj), 375 (2023 proj), 375 (2024 proj). - Net international reserves and gross reserves (eop) shown as 374.0, 374.7, 374.7, 374.7, 374.7, 374.7, 374.7, 374.7 in Table 2. - Gross external financing need (in billions of US dollars) from Table 8: 204.9 (2014), 209.4 (2015), 171.3 (2016), 144.6 (2017), 154.2 (2018), 165.3 (2019), 167.2 (2020), 173.3 (2021), 174.7 (2022), 177.8 (2023), 180.7 (2024). - External debt-to-exports ratio (in percent) from Table 8: 269.9 (2014), 296.8 (2015), 310.4 (2016), 265.0 (2017), 243.8 (2018), 238.1 (2019), 227.0 (2020), 213.6 (2021), 199.6 (2022), 187.6 (2023), 176.4 (2024). ### Key Macroeconomic Projections and Indicators (Selected) - GDP and prices: - GDP growth at constant prices (percent): 1.1 (2017), 1.1 (2018), 0.8 (2019), 2.4 (2020), 2.4 (2021), 2.2 (2022), 2.2 (2023), 2.2 (2024). - Consumer prices (IPCA, end of period, percent): 2.9 (2017), 3.7 (2018), 4.1 (2019), 4.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (2024). - Investment and savings (percent of GDP): - Gross domestic investment: 15.0 (2017), 15.4 (2018), 15.8 (2019), 16.2 (2020), 16.7 (2021), 17.3 (2022), 17.8 (2023), 18.3 (2024). - Gross domestic savings: 14.7 (2017), 14.6 (2018), 14.3 (2019), 14.7 (2020), 15.1 (2021), 15.6 (2022), 15.9 (2023), 16.3 (2024). - Labor market: - Unemployment rate: 12.8 (2017), 12.3 (2018), 11.6 (2019), 10.4 (2020), 10.0 (2021), 9.7 (2022), 9.5 (2023), 9.4 (2024). - Balance of payments (billions of U.S. dollars): - Current Account: -7.2 (2017), -14.5 (2018), -27.4 (2019), -29.6 (2020), -32.4 (2021), -35.0 (2022), -39.5 (2023), -43.7 (2024). - Exports (fob): 217.2 (2017), 239.0 (2018), 250.9 (2019), 255.1 (2020), 268.6 (2021), 282.9 (2022), 296.3 (2023), 310.5 (2024). - Imports (fob): 153.2 (2017), 185.4 (2018), 198.5 (2019), 204.5 (2020), 215.0 (2021), 224.8 (2022), 236.2 (2023), 249.2 (2024). ### Fiscal Framework (Selected numbers from Table 3) - NFPS primary balance: -1.8 (2017), -1.7 (2018), -1.9 (2019), -1.3 (2020), -0.7 (2021), -0.1 (2022), 0.4 (2023), 0.8 (2024). - NFPS overall balance: -7.9 (2017), -6.9 (2018), -7.6 (2019), -7.3 (2020), -7.3 (2021), -6.9 (2022), -6.5 (2023), -6.1 (2024). - Net public sector debt: 51.6 (2017), 54.2 (2018), 57.8 (2019), 60.2 (2020), 61.4 (2021), 62.8 (2022), 63.4 (2023), 64.1 (2024). - Gross NFPS debt: 84.1 (2017), 87.9 (2018), 92.2 (2019), 94.1 (2020), 94.9 (2021), 95.9 (2022), 96.1 (2023), 96.4 (2024). - Central government primary balance (authorities’ and staff series): -1.9 (2017), -1.7 (2018), -1.9 (2019), -1.4 (2020), -0.8 (2021), -0.3 (2022), 0.3 (2023), 0.7 (2024). ### Risk Assessment Matrix (Selected domestic risks and policy responses) - Risk: Failure to approve robust pension reform (Congress rejects or waters down the government proposal). - Relative likelihood: Medium. - Time Horizon: ST (short term). - Expected Impact: High. Financial markets may react abruptly, losing confidence in debt sustainability. Investment does not pick up and economic growth slows down. - Policy responses: The government should reinvigorate its commitment to fiscal consolidation by adopting alternative fiscal measures. The central bank should intervene in the FX market only in case of disorderly conditions. - Risk: Economic growth remains anemic (despite boosting confidence in debt sustainability, fiscal consolidation acts as a strong drag on economic growth undermining public support for the government). - Relative likelihood: Medium. - Time Horizon: MT (medium term). - Expected Impact: Medium. - Policy responses: (text truncated in source). *Source: IMF staff estimates and figures extracted from the Brazil country documentation provided in the source content.* ### 2.5 percent in 2020, economic growth stagnates around 1 percent. ### 1braea2019001 - 2.5 percent in 2020, economic growth stagnates around 1 percent. ### Baseline outlook and policy stance - Growth projection: "2.5 percent in 2020, economic growth stagnates around 1 percent." - Structural reforms are needed to lift potential growth and reassure markets. - If inflation remains anchored, the central bank could provide additional stimulus. - The exchange rate should be allowed to depreciate. ### External risks (Risk Assessment Matrix highlights) - Rising protectionism and retreat from multilateralism - Impact: Additional trade barriers and the threat of new actions reduce growth both directly and through adverse confidence effects (increasing financial market volatility). - Likelihood and horizon: High; Short term (ST), Medium term (MT) noted as "Low" in staff subjective assessment (probability below 10 percent). - Policy implications: Given adverse debt dynamics, fiscal policy cannot provide stimulus. Monetary support could be appropriate, while the exchange rate should remain flexible. Structural reforms and trade liberalization would boost growth. - Sharp tightening of global financial conditions due to market expectations of tighter U.S. monetary policy - Trigger: Strong wage growth and higher-than-expected inflation in the U.S. - Impact: Higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; broad-based downturn. - Likelihood and horizon: Low; Short term (ST) and Medium term (MT) assessed as "Medium". - Policy implications: Exchange rate could depreciate considerably (raising domestic inflation) while capital outflows materialize. Monetary policy may have to tighten to offset secondary effects of exchange rate depreciation on inflation. FX intervention appropriate only in case of disorderly conditions. Fiscal policy may also have to tighten to strengthen confidence in debt sustainability. - Weaker-than-expected global growth originating from a slowdown in China - Drivers: Intensification of trade tensions and/or a housing market downturn in China; financial stresses including capital outflow and exchange rate pressures. - Spillovers: Negative effects on global trade volumes, commodity prices, and financial markets; possible synchronized global slowdown. - Likelihood and horizon: Medium; Short term (ST), Medium term (MT) assessed as "Low". - Policy implications: Lower demand from China would reduce economic growth in Brazil and worsen the current account. The exchange rate should remain flexible. The central bank should provide stimulus, while fiscal consolidation stays on track. The government should pursue structural reforms and trade openness to boost growth. ### External position and vulnerabilities - NIIP (2018): -32.1 percent of GDP at end-2018, slightly weaker than the 2011−17 average (around ˗29 percent of GDP). - Medium-term projection: NIIP projected to strengthen gradually to around -30 percent of GDP as GDP growth and valuation effects from Brazil’s long-dollar position offset current account deficits (of around 2 percent of GDP). - External debt: Rise in external debt since the global financial crisis to about 33 percent of GDP and 265 percent of exports is a source of risk. - Assessment: Short-term gross external financing needs are moderate, at around 6 percent of GDP, but capital flows and the exchange rate are particularly sensitive to global financing conditions. - Stabilizing CA requirement: The current account deficit required to stabilize the NIIP at -35 percent is 1.5 percent of GDP. - Overall assessment: "Brazil’s external position in 2018 was broadly in line with the level implied by medium-term fundamentals and desirable policies." ### Current account (CA) - Actual CA (2018): -0.8 percent of GDP. - Cyclically-adjusted CA (2018): -2.1 percent of GDP (reflecting a still large negative output gap). - EBA CA norm (2018): -2.9 percent of GDP. - EBA CA gap: 0.8. - Staff Adj.: -0.5. - Staff CA gap: 0.3. - Projection/background: CA deficit widened from 0.5 percent of GDP in 2017 to 0.8 percent in 2018 and is expected to gradually widen to about 2 percent of GDP in the medium term as the recovery continues. - Staff assessment: Considering vulnerabilities (sizable negative IIP, financial risks from large and increasing public debt, sensitivity to global financial conditions), staff assesses a CA norm between -1.9 and -2.9 percent of GDP. Thus, the CA is assessed to have been broadly in line with fundamentals and desirable policies. ### Real exchange rate (REER) - 2018 movement: After appreciating in 2016−17, the REER depreciated by about 10 percent in 2018, partly reflecting political uncertainty ahead of the presidential elections. - As of May 2019: The real has depreciated by 1.4 percent relative to the 2018 average. - Assessment: EBA REER index and level methodologies indicate a 9.5 percent undervaluation and 2.1 percent overvaluation, respectively, for 2018. - Staff REER gap assessment: range of -3 to 6 percent. - Policy guidance: The exchange rate should remain flexible; foreign exchange intervention, including through the use of derivatives, can be appropriate to alleviate disorderly market conditions. ### Capital and financial accounts; reserves and FX intervention - Net FDI role: Net FDI has fully financed the CA deficits since 2015 (averaging 3.3 percent of GDP during 2015−18, while CA deficits averaged 1.5 percent). - Portfolio flows: Partially offset by net portfolio outflows (0.8 percent of GDP on average during 2016−18). - Risks to capital flows: Weaker-than-expected global growth, tightening of global financial conditions, and weak implementation of envisaged reforms. - Exchange rate regime and reserves (end-2018): Floating exchange rate; gross reserves at US$375 billion at end-2018, some 20 percent of GDP and around 163 percent of the IMF’s composite reserve adequacy metric. - Assessment: Flexible exchange rate is an important shock absorber. Reserves are adequate relative to various criteria including the IMF’s reserve adequacy metric. Authorities should retain strong buffers, with intervention limited to addressing disorderly market conditions. ### Implementation of past IMF advice (high-level) - Fiscal policy: - Strengthen primary balance faster than planned to achieve decline in public debt by 2023. Implementation: Primary deficit in 2018 was lower than expected due to revenue overperformance. - Reform social security: A robust pension reform proposal submitted to Congress, affecting state civil servants. - Address revenue and expenditure rigidities: Part of new government plans, but no concrete proposal advanced thus far. - Control wage bill in states and limit civil servant wage increases: Authorities implemented previously approved wage increases; 2020 Budget Guidance Law proposes no salary increases for civil servants in the executive branch. - Increase spending efficiency and protect social programs: Federal government investment increased slightly in 2018; number of ministries cut from 28 to 21, but efficiency gains unclear. - Reduce tariffs and nontariff barriers and pursue free-trade negotiations outside Mercosur: Government plans to lower import fees on IT and capital goods (from 14% to 4%) by August 2019; efforts to negotiate a EU-Mercorsur trade agreement underway. - Monetary and financial sector: - Legislate BCB’s independence: A draft bill submitted to congress but not yet put to a vote. - Maintain an accommodative policy stance to offset contractionary effects from anticipated fiscal tightening: Monetary policy supportive in face of negative shocks. - Use Pillar 2 capital requirements for bank-specific risk: No banks asked to hold additional capital under Pillar 2 so far; reviews underway. - Phase out BNDES subsidized interest rate: TLP interest rate being phased in as scheduled; BNDES funding and lending being scaled back. - Limit FX intervention to disorderly market conditions and preserve reserve buffers: Interventions limited to episodes of market distress; reserve buffers preserved. - Structural and governance reforms: - Address budget rigidities and improve fiscal framework: Efforts focus on transparency of subnational accounts; review of fiscal framework on hold. - Strengthen governance, AML, and anti-corruption measures: Progress on some shortcomings; new measures proposed to Parliament but not adopted. - Improve loan collateral enforcement, foster bank competition, and expand credit registries: Expansion of positive credit registry law recently approved; draft bankruptcy law pending. - Enhance central bank’s emergency liquidity and resolution framework: No progress on ELA; new resolution law awaiting a vote in congress. ### Key statistics (as reported) - NIIP: -32.1 - Gross Assets: 47.9 - Res. Assets: 20.1 - Gross Liab.: 80.0 - Debt Liab.: 22.9 - Actual CA: -0.8 - Cycl. Adj. CA: -2.1 - EBA CA norm: -2.9 - EBA CA gap: 0.8 - Staff Adj.: -0.5 - Staff CA gap: 0.3 - REER: 9.5 percent undervaluation (index methodology); 2.1 percent overvaluation (level methodology) - Gross reserves at end-2018: US$375 billion (some 20 percent of GDP; around 163 percent of IMF composite reserve adequacy metric) - Net FDI (2015−18 average): 3.3 percent of GDP - CA deficits (2015−18 average): 1.5 percent of GDP - Net portfolio outflows (2016−18 average): 0.8 percent of GDP - Short-term gross external financing needs: around 6 percent of GDP - Current account deficit required to stabilize NIIP at -35 percent: 1.5 percent of GDP *Source: 1braea2019001 - 2.5 percent in 2020, economic growth stagnates around 1 percent.* ### Appendix IV. Implementation of Key FSAP Recommendations ### Appendix IV. Implementation of Key FSAP Recommendations ### Microprudential and macroprudential institutional arrangements - Recommendation: Establish a multi-agency high-level committee, with explicit mandate for macroprudential policy and the power to issue policy recommendations on a comply-or-explain basis. Timeframe: ST (Short Term). - Authorities’ actions: The BCB has finalized a draft bill named “Financial Stability Coordination Law.” The draft bill is being analyzed by the Office of the President’s Chief of Staff (Casa Civil). The BCB, CVM, Previc and SUSEP are in agreement as to the current draft of the bill. Successful completion depends on other participants’ efforts outside of the BCB. - Recommendation: Strengthen the crisis management institutional arrangements for inter-agency cooperation and exchange of information, including for contingency planning. Timeframe: MT (Medium Term). - Authorities’ actions: Proposal linked to the “Financial Stability Coordination Law” draft bill. The draft bill would create the “Financial Stability National Committee” with authority over macroprudential policy and crisis management (including contingency plans/crisis management). BCB’s Contingency Plan has already been implemented. - Recommendation: Strengthen legal protection of all supervisors (BCB, SUSEP) by clear rules, including fixed term, condition of dismissal, public disclosure of reasons for dismissal and qualification criteria for appointments. Strengthen the independence to the BCB. Timeframe: ST. - Authorities’ actions (multiple initiatives underway): - Draft bill of BCB Autonomy addressing subordination of the BCB to the Ministry of Finance, fixed-term mandates for the Governor and Deputy Governors, and rules for early dismissal. Under National Congress examination. - Bank Resolution draft bill providing protection of public agents (BCB, SUSEP) in performance of duties against legal actions, except in case of fraud or bad faith. Draft bill under evaluation by Casa Civil for submission to National Congress. - Financial Stability Coordination Law draft bill. - Amendment to Article 102, I, “b” of the Constitution to include the BCB Governor and Deputy Governors among authorities judged by the Supreme Court (STF). - Review of BCB’s Board Decisions (Votos BCB-88/2012 and BCB-67/2015) regulating legal defense of BCB officials while on duty by the BCB’s Legal Department (PGBC). - Additional: SUSEP Board drafting a bill to merge SUSEP with Previc, addressing the structure of the new authority. - Recommendation: Increase resources of CVM and SUSEP. Timeframe: ST. - Authorities’ actions: In April 2019 the Ministry of Finance informed about a substantial decrease on CVM resources (around 30 percent of discretionary expenses as compared to 2018, representing about 8 percent of CVM’s overall budget). The reduction is applicable until December 2019. Budget constraints across the Federal Government impose limits to proposals regarding SUSEP and PREVIC merger/restructuring. ### Systemic risks - Recommendation: Use Pillar 2 capital requirements to handle bank-specific risk profiles to boost their resilience as needed and to mitigate risks. Timeframe: ST. - Authorities’ actions: The Structured Add-on was implemented and is in its second cycle of application. Technical guidelines for the application of Add-on by Reference are being discussed. The Add-on by Reference will be applied to banks that mandatorily perform an Internal Capital Adequacy Assessment Process (ICAAP). To date, there is no schedule for application to other categories. The metrics for concentration risk and Interest Rate Risk in the Banking Book (IRRBB) have already been defined. ### Financial sector oversight - Recommendation: Upgrade banking sector’s regulatory and supervisory approach to credit risk—including identification and definitions, limits, and reporting requirements—for related party exposures and transactions, large exposures, country and transfer risk and restructured loans. Timeframe: MT. - Authorities’ actions (completed and in progress): - CMN Resolution 4.677/2018 (Basel III reform on Large Exposure Limits) establishing limits and report requirements for single client and large exposures. Applied for Prudential Segments S1 and S2 since January 2019 and scheduled for Segments S3, S4 and S5 from January 2020. Report on Operational Limits—DLO (Circular Letter 3,926) adapted to include information on large exposure limits. - CMN Resolution 4.693/2018 addressing credit operations between related parties. - BCB Circular Letters 3.819/2017 and 3,857/2017 on reporting requirements of restructuring of financial instruments, applicable to all financial institutions since May 2018. - Additional initiatives under analysis or drafting: (i) regulation on prudential treatment for transactions with related parties; (ii) amendment on regulation for country and transfer risks with specific treatment of indirect risks; (iii) requirement to produce concentration risks data regularly; (iv) structured assessment of country, transfer and indirect risk. - Recommendation: Strengthen enforcement function of CVM by raising the level of sanctions and ensuring adequate resources for prosecution; strengthen cooperation allowing CVM proper oversight of ANBIMA’s SRO activities in the investment fund sector. Timeframe: ST. - Authorities’ actions: A draft CVM Instruction regulating strengthened CVM enforcement functions established by Law 13.655/18 will be exposed for public comment in the next few weeks. CVM & ANBIMA agreement signed in August 2018 defines cooperation rules in the investment fund sector covering: ANBIMA assisting the CVM in licensing portfolio managers; joint supervision of mark to market valuation performed by 555-fund administrators; joint supervision of fund share distributions performed by securities intermediaries. - Recommendation: Implement (BCB, ANS and SUSEP) consistent group-wide supervision of insurance groups and conglomerates with joint rule-making, implementation, and on-site inspections and granular data sharing. Timeframe: MT. - Authorities’ actions: Granular data sharing depends on legal provisions and establishment of partnerships among supervisors. BCB views creation of the “Financial Stability National Committee” as partially bridging this gap. ### Crisis management and bank resolution, safety nets - Recommendation: Revise the draft resolution law in line with FSAP team’s recommendations and promptly enact it. Timeframe: ST. - Authorities’ actions: The draft bill is under evaluation by Casa Civil, which will decide on submission to the National Congress. - Recommendation: Revise the ELA framework to provide for a solvency test tied to enhanced supervision, remedial plans, and possibly restructuring measures, and allow for ELA in systemic circumstances upon a MoF indemnity. Timeframe: ST. - Authorities’ actions: Discussions on this recommendation are ongoing. - Recommendation: Put in place mechanisms to ensure lending from the deposit insurance fund is not used to maintain weak or insolvent banks in operation; and transform FGC into a fully owned public institution. Timeframe: ST; MT. - Authorities’ actions: The FGC amended its by-laws to establish communication to the BCB prior to each assistance operation. The process to establish the “Financial Stability National Committee” is ongoing. The BCB has signed a MoU with the FGC to grant access to detailed information on financial institutions that are members of the FGC, to facilitate the Fund’s assessment and avoid use of lending to maintain weak or insolvent banks in operation. The recommendation to transform the FGC into a fully public-owned institution will not be implemented. ### Financial integrity - Recommendation: Complete the national AML/CFT risk assessment and introduce a risk-based approach specific to AML/CFT supervision. Timeframe: ST. - Authorities’ actions: Coordination of activities related to the National AML/CFT Risk Assessment is attributed to the Ministry of Justice (MJSP). The draft Bill to establish the Strategic Committee for the National AML/CFT Risk Assessment is under analysis at the MJSP. ### Financial intermediation efficiency - Recommendation: Foster competition through client mobility and financial product cost transparency and comparability. Timeframe: ST. - Authorities’ actions: CMN Resolution 4.639/2018 issued to enhance portability of salary accounts. BCB project “Lift” (first phase concluded December, 2018) selected 18 projects; 12 attained prototype stage. The Credit Registry Law (Lei do Cadastro Positivo), in effect since 2011, was amended to adopt the opt-out model instead of the opt-in model. ### Reform of public banks - Recommendation: Change product offering of BNDES under new strategy with focus on catalyzing private sector finance and developing the financial sector. Timeframe: ST. - Authorities’ actions: BNDES priorities include support to federal, states and municipal governments to model project structuring for privatization, concessions or public-private partnerships. Recent initiatives: - Provisional Act 882/2019: BNDES will assume assignments belonging to the Support Fund for Structuring Partnerships (FAEP), being hired to provide technical services in structuring partnership contracts and privatization measures. - Discussion of significant change in the water and sanitation regulatory framework (Provisional Act 868/2018) to attract private investments; BNDES providing technical support since 2016. - BNDES is reviewing internal instruments and policies, re-thinking risk analysis to focus on effectiveness, reducing participation level where private financiers are willing to be exposed, and developing other instruments such as guarantees. Initiatives to increase liquidity of infra bonds and foster participation of institutional investors via capital markets include: - RFP process for the Infrastructure Bonds Special Purpose Vehicle (FDIC Debêntures de Infraestrutura) launched in second semester of 2018. The fund will manage assets of R$500 million; BNDES will not be a quota holder. Part of assets will be bonds of sound performing projects transferred from BNDESPar to attract private investors. - Sustainable Energy Fund launched in 2016 and implemented in 2018, with assets under management of R$500 million in infrastructure projects private bonds related to low-carbon economy. It is managed by a private manager and BNDESPar holds 43 percent of its quotas. - Recommendation: Focus Caixa on core activities, improve governance, and invite a strategic investor. Timeframe: ST. - Authorities’ actions — Focus Caixa on core activities: - CAIXA is repositioning credit operations prioritizing loans to microenterprises, promotion of housing loans, maintaining operations in “Minha Casa Minha Vida” and expanding operations to the middle class through savings resources and increasing the payroll loans portfolio. - Authorities’ actions — Improve governance: - CAIXA is improving corporate governance practices, updating governance model, decision-making forums and bodies, and their policies and decision-making processes. Emphasis on transparency, equal treatment, accountability, corporate social responsibility, compliance, strategic risk management and sustainability. - Authorities’ actions — Invite a strategic investor: - CAIXA's investment banking group strengthened via internal reallocation to expand fixed income capital markets operations and create a complete investment bank product structure. The team will lead potential strategic and capital market operations of CAIXA and its subsidiaries and advise the Government when necessary. Studies in progress include potential transactions (ECM, M&A, DCM, Asset Securitization) totaling potential transactions that "may exceed R$100 billion." Approximately 40 transactions are under analysis. *Compiled from the authorities’ description of actions in Appendix IV. Implementation of Key FSAP Recommendations.* ### 3.8 percentage points of GDP in 2018, reaching 87.9 percent of GDP. Under the ### 1braea2019001 - 3.8 percentage points of GDP in 2018, reaching 87.9 percent of GDP. Under the ### Background and definitions - Gross debt statistics cover the NFPS, excluding the state-owned enterprises (SOEs) Petrobras and Electrobras, and consolidate the Sovereign Wealth Fund. - Following the GFSM 2014 manual, the NFPS debt includes all Treasury securities on the Central Bank’s (BCB) balance sheet. - At end-2018, gross debt amounted to 88 percent of GDP. - Consolidated public sector net debt amounted to 54 percent of GDP at end-2018, reflecting a large stock of assets equal to 36 of GDP, which included international reserves amounting to 21 percent of GDP. - Brazil’s debt is reported at nominal value. ### Debt developments and profile - At the end-2018, Brazil’s NFPS gross debt amounted to 88 percent of GDP, 3.8 percentage points higher than a year before. - Public sector net debt amounted to 54 percent of GDP. - A primary deficit of 1.7 percent of GDP and net interest payments of 5.6 percent of GDP contributed to the increase in gross debt. - Net interest payments were 6.5 and 6.1 percent of GDP in 2016 and 2017 respectively. - SELIC reached its historical low in April 2018. - Average maturity of federal government (FG) securities edged up to 4.8 from 4.3 years in 2017. - In 2018, BNDES repaid R$130 billion (close to 2 percent of GDP) in outstanding government securities to the Treasury; additional repayments of at least R$40 billion (about 0.6 percent of GDP) are expected in 2019. - FG domestic tradable securities account for 92 percent of total NFPS gross debt; close to 2/3 of these holdings are with the public and the rest with the BCB. - Composition of FG domestic tradable securities: 37 percent SELIC-linked, 34 percent fixed income, 29 percent linked to inflation. - About 17 percent of FG domestic tradable securities will mature in 2019. - Foreign currency denominated NFPS debt accounted for 4.4 percent of GDP at end-2018. - Gross financing needs have been consistently above 15 percent of GDP per year and are projected to rise to over 30 percent of GDP by 2024. - About 30 percent of total NFPS debt is held by the BCB and automatically rolled over. ### Baseline assumptions, projections, and realism - Real GDP growth assumptions: 0.8 percent in 2019, 2.4 percent in 2020 and 2021, and return to potential growth of 2.2 percent starting in 2022 onwards. - Primary balance projected to move into positive territory in 2023 (0.4 percent of GDP), with a cumulative adjustment of about 3 percentage points of GDP during 2019−24. - Nominal interest rates on new borrowing are between 6.5 and 10 percent over the projection horizon, bringing the effective interest rate to about 9 percent on average. - Under the baseline scenario (assumes compliance with the constitutional expenditure ceiling), gross debt is projected to peak at 96 percent of GDP in 2024. - If the expenditure ceiling remains in place until 2027 and the primary balance follows the same consolidation path, debt is projected to start falling in 2025. - The debt stabilizing primary balance (excluding interest revenue) in the baseline scenario is 1 percent of GDP. - Debt trajectory is highly sensitive to shocks to real GDP growth, fiscal performance, and borrowing costs. - Forecast errors for GDP growth were larger during 2014−16 due to Brazil’s recession in 2015−16. - The projected fiscal adjustment (improvement of about one percentage point in the cyclically-adjusted primary balance-to-GDP over 3 years) is based on the constitutional expenditure rule and is in line with other surveillance countries’ experience. ### Contingent risks from SOEs - Government holds about 50 percent of Petrobras’ and Electrobras’ shares; both are excluded from the debt definition. - Petrobras’s financial position improved substantially in 2018 compared to 2017; its net debt declined by 1/3 compared to 2015. - A legal probe against Electrobras could cost the government about R$8 billion (0.1 percent of GDP in 2019). - Government plans to privatize Electrobras in the medium term; fiscal risks from Petrobras and Electrobras are deemed limited. ### Debt-stabilizing requirements (Box 1) - A primary surplus of about 1 percent of GDP is needed to stabilize the gross debt-to-GDP at 96 percent in 2024 under the baseline scenario of 2.2 percent growth and 9 percent nominal effective interest rate. - If real growth falls below 2 percent and real interest rates increase above 5 percent, the primary surplus required to stabilize the debt-to-GDP level becomes above 2 percent of GDP. - The debt stabilizing primary balance is calculated using the formula reported in the source. ### Shocks and stress-test outcomes - Primary balance shock: abandonment of expenditure cap starting in 2020; primary balance deteriorates cumulatively by 8 percentage points of GDP over 2020−24 compared to baseline. - Result: gross debt-to-GDP increases to 104 percent in 2024; gross financing needs reach 36 percent of GDP. - Growth shock: real output growth reduced by one standard deviation (3.3 percent) for two consecutive periods starting in 2020; over 2020−21, real GDP contracts cumulatively by 1.7 percent. - Result: gross debt-to-GDP reaches 103 percent in 2024; gross financing needs at 34 percent of GDP. - Real interest rate shock: real interest rate increases by 400bps over 2020−24. - Result: gross debt and financing needs increase to 103 and 35 percent of GDP respectively in 2024. - Real exchange rate shock: real exchange rate depreciates by 26 percent in 2020 and remains at that level. - Result: modest impact, pushing debt-to-GDP up by less than 1 percentage point above the baseline in 2024. - Combined macro-fiscal shock (real growth, interest rate, exchange rate and primary balance shocks combined): - Result: gross debt-to-GDP reaches almost 120 percent by 2024, 22 percentage points above the baseline, with gross financing needs increasing to 43 percent of GDP. ### Key risks and policy implications - Large stock of debt and high, volatile gross financing needs indicate significant debt sustainability risks if reforms are not implemented. - Automatic rollover of BCB-held bonds and the distinction between reported accrued interest and cash interest reduce measured rollover risk and overstate early-year borrowing needs. - Sustained primary surpluses (about 1 percent of GDP excluding interest revenue) are required to stabilize gross debt beyond the projection horizon; larger surpluses would be needed under adverse shocks. - Maintaining the constitutional expenditure ceiling and implementing structural reforms are critical to avoid scenarios where public debt could reach 120 percent of GDP by 2024 (90th percentile of forecast distribution). *Prepared by the Staff of the International Monetary Fund; Approved by Aasim M. Husain (WHD) and Vitaliy Kramarenko (SPR); June 25, 2019.* ### 13. Stronger growth. In this scenario, the output gap closes faster as growth is on average ### 13. Stronger growth. ### Scenario description and assumptions - Output gap closes faster as growth is on average one percentage point higher in each projection year compared to the baseline. - Stronger primary surpluses in this scenario are a consequence of higher revenues, and lower shares of expenditures to GDP under the constitutional spending ceiling (which applies to nominal expenditure). - Gross debt-to-GDP declines by 13 percentage points of GDP by 2024. - Underlying assumption: the authorities comply with the expenditure ceiling using high-quality measures and implement growth-enhancing structural reforms. ### Key fiscal and macro projections (selected figures) - Nominal gross public debt (percent of GDP), 2015–2024: - 2015: 66.1 - 2016: 72.6 - 2017: 78.3 - 2018: 84.1 - 2019: 87.9 - 2020: 92.2 - 2021: 94.1 - 2022: 94.9 - 2023: 95.9 - 2024: 96.1 - (final tabulated 96.4 appears in adjacent column) - Public gross financing needs (percent of GDP), 2015–2024: - 2015: 16.4 - 2016: 18.9 - 2017: 20.6 - 2018: 19.4 - 2019: 15.5 - 2020: 17.2 - 2021: 20.9 - 2022: 24.1 - 2023: 27.2 - 2024: 29.5 - (final tabulated 31.6 appears in adjacent column) - Real GDP growth (in percent), 2015–2024: - 2015: 0.4 - 2016: -3.6 - 2017: -3.3 - 2018: 1.1 - 2019: 1.1 - 2020: 0.8 - 2021: 2.4 - 2022: 2.4 - 2023: 2.2 - 2024: 2.2 - Inflation (GDP deflator, in percent), 2015–2024: 7.9, 7.6, 8.0, 3.5, 3.0, 4.4, 4.3, 4.4, 4.4, 4.4, 4.4 (as tabulated) - Effective interest rate (in percent), 2015–2024: 11.9, 13.7, 12.6, 10.3, 9.1, 10.3, 9.0, 8.2, 8.9, 8.5, 9.0 (tabulated) - Primary (noninterest) revenue and grants (percent of GDP), 2015–2024: 31.5, 28.6, 28.6, 29.2, 29.5, 29.4, 29.6, 29.7, 29.8, 29.8, 29.8 (cumulative 178.0) - Primary (noninterest) expenditure (percent of GDP), 2015–2024: 31.1, 30.4, 31.1, 30.9, 31.2, 31.4, 30.8, 30.4, 29.9, 29.4, 28.9 (cumulative 180.7) - Identified debt-creating flows (cumulative through projections): 14.3 - Residual, including asset changes (cumulative through projections): -5.8 ### Findings from stress tests and alternative scenarios - Strong Potential Growth scenario path (selected underlying assumptions): - Real GDP growth: 0.8, 3.4, 3.4, 3.2, 3.2, 3.2 (2019–2024) - Primary balance: -1.9, -0.8, 0.3, 1.4, 2.5, 3.6 (2019–2024) - Stress tests considered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock; Combined Macro-Fiscal Shock; Strong Potential Growth. - Charts show gross nominal public debt and public gross financing needs under baseline and stress scenarios (percent of GDP and percent of revenue). ### Policy analysis and recommendations (from Executive Director statement) - Pension reform - The social security reform is the main structural adjustment required to reestablish fiscal sustainability. - Proposal estimated to yield savings of above R$1 trillion over a period of ten years and stabilize social security spending relative to GDP. - In 2018, the social security deficit amounted to 5.5 percent of GDP. - In 2019, 73 percent of the federal primary spending budget is committed to social security and social assistance. - Social security spending rose from less than R$600 billion in 2014 to about R$1 trillion in 2019. - Public investment fell from R$77 billion to R$36 billion in the same period. - Main changes in the proposal include: - (i) the establishment of minimum retirement ages of 65 years (men) and 62 years (women); - (ii) the increase in required contribution periods; - (iii) the change in the calculation of benefits; - (iv) the establishment of progressive contributions for both private sector workers and civil servants; and - (v) changes in the rules for survivors’ pensions. - Lower House took the first-round approval; proposal expected to be sent to the Senate shortly after the legislative recess in August. - Complementary fiscal measures - Fiscal adjustment to be based on expenditure restraint, including containing real increases in the wage bill, reducing tax expenditures, subsidies, mandatory expenditures and the scope of earmarked revenues. - Constitutional spending ceiling requires additional cuts to create room for needed investment. - Extraordinary federal revenues, including oil windfalls and privatization proceeds, will be used to reduce public debt and deficits. - Government envisions decentralization toward states and municipalities. - Structural reforms to boost growth and productivity - Trade liberalization (including progress on Mercosur-EU agreement). - Privatization program (BNDES divestments, Eletrobras recapitalization, divestment of Petrobras subsidiaries, airport/road/infrastructure concessions). - Measures to improve business climate: provisional measure to trim bureaucracy, reduce barriers to entry, enhance legal certainty, reduce and simplify regulations, and incentivize innovation. - Adhesion to the Madrid Protocol on trademarks and patents; program to reduce backlog in patent requests and timeframe for patent concession. - Financial sector reforms - Modernize savings instruments, enhance reach, reduce cost of credit from supply side. - Law approved to regulate and reduce financial flows between the Central Bank (BCB) and the Treasury; bill submitted to establish formal operational autonomy of the BCB. - Joint initiative by BCB, CVM, and Susep to enhance capital market ecosystem (private equity, housing, derivatives, hedge, insurance). - Anti-corruption and institutional strengthening - Finalization of national risk assessment (NRA) to strengthen money laundering controls. - Tax authorities improving collection of beneficial ownership information of foreign companies. - Brazil is an active partner of the OECD and has presented its application to full membership. ### External and financial sector resilience (selected metrics) - Current account deficit has hovered around 0.8 percent of GDP. - 12-month accumulated ratio of FDI to GDP is currently above 5 percent. - International reserves have remained at a comfortable level (around US$380 billion). - Banking and credit dynamics: - Outstanding non-earmarked credit to households and business is projected to increase by 13 and 10 percent respectively. - Growth rates contrast: non-earmarked vs. earmarked credit at 11.6 vs. 0.4 percent. - 12-month volume raised in the domestic capital market was nearly four times larger than the credit provided by BNDES. ### Concluding assessment (from Executive Director statement) - Pension reform is necessary to restore fiscal sustainability and is expected to be a game changer by removing major fiscal risk and boosting confidence. - Ongoing reforms and macroeconomic policies are set to ensure sustainability, support the recovery and unleash higher potential growth. - Other macroeconomic fundamentals are described as sound: inflation and inflation expectations well-anchored around the target; the exchange rate broadly in line with fundamentals and desirable policies; a balanced current account and strong reserve position; and a robust financial system. *Source: IMF staff and Statement by Alexandre Tombini, Executive Director for Brazil (as contained in the provided content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1braea2019001.pdf_