## 1braea2020002

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### Outlook and Risks
- Real GDP: projected to contract by 5.8 percent in 2020 followed by a partial recovery to 2.8 percent in 2021.
- GDP at constant prices (annual growth): -5.8 (2020), 2.8 (2021), 2.3 (2022), 2.2 (2023–2025).
- Inflation (IPCA, end of period): 2.0 (2020), 2.9 (2021), 3.2 (2022), 3.3 (2023–2025).
- Current account (percent of GDP): -0.3 (2020), -1.3 (2021), -1.9 (2022), -2.4 (2023), -2.9 (2024), -3.2 (2025).
- Trade balance (Billions of U.S. dollars): 51.9 (2020), 53.3 (2021), 56.7 (2022), 57.9 (2023), 57.7 (2024), 58.9 (2025).
- Exports and imports (Billions of U.S. dollars): Exports 210.3 (2020), 229.1 (2021); Imports 158.3 (2020), 175.8 (2021).
- International reserves: projected stable at US$357 billion (356.9 in tables).
- Unemployment rate: 13.4 (2020), 14.1 (2021), 13.3 (2022), 12.5 (2023), 11.6 (2024), 10.8 (2025).
- Key vulnerabilities: high public debt and confidence shocks; mitigating factors: high international reserves, resilient banking system, low share of public FX debt (Foreign currency linked NFPS gross debt: 4.7 in 2020, 4.7 in 2021, 4.6 in 2022, 4.5 in 2023, 4.4 in 2024–2025).

### COVID-19 health and socio-economic impact
- Reported health figures: more than 150,000 Brazilians have died and 5 million have been infected (as reported).
- Excess deaths relative to 2019 suggest COVID-related mortality may be underestimated by up to 22 percent.
- Labor market impact:
  - Over 12 million jobs lost between February and August, of which over 7 million were informal.
  - Unemployment rate rose by about 3 percentage points to 14.4 percent.
  - 11 million workers left the labor force; participation fell from 62 percent in February to 55 percent in August.
  - Sectoral employment losses (February–August 2020): Hospitality loss of 24 percent (1.9 million jobs); Paid domestic services 16 percent (1.6 million jobs); Other services 12 percent (1.2 million jobs); Construction 5 percent (1.2 million jobs); Commerce and trade 3 percent (2.7 million jobs).
  - Average hours worked fell from 39.6 to 27.4; decline in hours: women 36.2 percent, men 27 percent.
  - Lowest income decile monthly labor income decreased by 30 percent from R$462 to R$313.
- Poverty and inequality effects of Emergency Aid (EA):
  - EA lifted the income of 23 million individuals—10 percent of the total population—above the extreme poverty line (estimated).
  - EA beneficiaries: 67.7 million eligible; monthly cash payments of R$600 initially; extended with benefit reduced to R$300 for the last four months of the year.
  - Without EA, Gini would have increased from 0.53 to 0.58 and poverty headcount from about 6.7 percent to 14.6 percent (16 million individuals). With EA, poverty headcount fell to 5.4 percent and the Gini coefficient to 0.5.
  - EA prevented between 14 and 23 million people from falling below the poverty line at the peak, depending on poverty line used.

### Fiscal shock, outlook, and key projections
- NFPS primary fiscal deficit: rise from 1 percent of GDP in 2019 to 11.6 percent of GDP in 2020.
- Revenues: expected to drop by 3.1 percentage points of GDP in 2020.
- Primary expenditures: expected to increase by 7.6 percentage points of GDP in 2020.
- NFPS primary balance (percent of GDP): -11.6 (2020), -2.7 (2021), -1.7 (2022), -1.2 (2023), -0.7 (2024), -0.1 (2025).
- NFPS overall balance (percent of GDP): -16.3 (2020), -6.1 (2021), -5.1 (2022), -5.4 (2023), -5.8 (2024–2025).
- Gross public debt and net debt:
  - NFPS gross debt (percent of GDP): 101.1 (2020), 99.3 (2021), 100.3 (2022), 100.9 (2023), 101.8 (2024), 102.3 (2025).
  - General Government gross debt, Authorities’ definition: 96.6 (2020), 96.7 (2021), 97.4 (2022), 97.7 (2023), 98.3 (2024), 98.5 (2025).
  - Net public sector debt (percent of GDP): 66.8 (2020), 71.3 (2021), 74.4 (2022), 77.0 (2023), 79.4 (2024), 81.3 (2025).
- Gross financing needs: 28 percent of GDP in 2020; projected to average around 20 percent of GDP over 2021-2025 and breach the DSA-based high-risk threshold of 15 percent throughout the projection period.
- Required consolidation: fiscal consolidation of at least 3 percent of GDP after 2021 will be needed over the medium-term to close the primary deficit and stabilize public debt ratio at the current level.

### Fiscal policy findings and recommendations
- Immediate stance:
  - Preserve the constitutional expenditure ceiling in the 2021 budget as a fiscal anchor to support market confidence.
  - Be prepared to provide additional targeted fiscal support if economic conditions are significantly worse than expected and avoid abrupt withdrawal of support.
- Staff and Directors’ recommendations:
  - Maintain the expenditure ceiling in the 2021 budget but be prepared to provide additional fiscal support if economic conditions are weaker than expected.
  - Reallocate resources under the expenditure ceiling to strengthen the social safety net on a permanent basis.
  - Push for passage of reforms that lock in medium-term consolidation.
  - Swiftly implement structural fiscal reforms: reduce mandatory spending and budget rigidities, strengthen the social safety net, reform subnational pension schemes, strengthen the subnational fiscal framework, and revamp the tax system.
- Design options for gradual additional support (staff example):
  - Temporary cash transfers of R$300 per month to around 40 million vulnerable citizens (equivalent to 1.9 percent of GDP).
  - Plus 0.6 percent of GDP of employment subsidies and additional health spending; with 0.5 percent of GDP financed by the BF budget.

### Structural reforms and growth policies (priorities and estimated savings)
- Reform pillars and staff estimated savings:
  - Reducing mandatory spending and budget rigidities: 1.0 percent of GDP.
  - Reducing tax expenditures: 2.0 percent of GDP.
  - Reforming subnational fiscal framework: 0.5 percent of GDP.
  - Total potential savings: 3.5 percent of GDP for the NFPS while improving targeting of social assistance programs.
- Tax system revamp:
  - Remove distortionary fiscal incentives (noted at almost 5 percent of GDP); staff estimate fiscal savings of at least 2 percent of GDP from reducing fiscal incentives.
  - Support unifying PIS and COFINS into a single federal VAT; harmonize federal and subnational tax regimes; review personal income taxes including introducing dividend taxation.
- Social safety net rationalization:
  - Consolidate non-contributory cash benefit programs into a single program; potential savings roughly 0.7 percent of GDP under the expenditure ceiling to fund an expanded BF or a new program.
- Subnational reforms:
  - Reform subnational pensions in line with new federal provisions (private sector estimates indicate reform could save up to 5 percent of GDP over 10 years).
  - Adopt a new subnational fiscal framework with hard-budget constraints, enhanced transparency, and enforcement.

### Monetary and financial sector findings and recommendations
- Monetary stance:
  - SELIC policy rate cut to 2 percent (policy rate cut by 225 bps); current policy rate corresponds to a negative ex-ante real rate given real neutral rate estimated at around 3 percent.
  - Monetary policy should remain supportive amid substantial withdrawal of fiscal stimulus; there is scope to loosen policy further, including through forward guidance, if inflation and inflation expectations remain below target.
  - Room to cut further exists but with caution regarding capital flows and financial stability.
  - Continued use of forward guidance conditional on sound fiscal regime could be expansionary without financial stability risks.
  - Should downside risks materialize after conventional monetary policy exhausted, BCB has the option to purchase assets.
  - Approval of formal central bank independence would further strengthen the monetary framework.
- Financial stability and supervision:
  - Banking system remains resilient; stress tests indicate system-wide Tier 1 capital ratios remain above regulatory minimums under baseline.
  - Staff stress-test results: NPLs of non-earmarked credit likely to peak "at between 5 and 6 percent"; average T1 capital ratio could fall to "between 12.4 and 11.9 percent" and CET1 scaled could fall to "8.2 percent" under recalibration.
  - Extreme stress scenario (GDP contractions for two years -7.4% in 2020 and -3.0% in 2021) could lead to two banks falling below the "4.5%" minimum requirement.
  - Encourage use of regulatory flexibility to weather the pandemic without diluting prudential standards; continue regular stress tests and ensure regulatory action does not dilute prudential standards or accounting requirements.
  - Recommendation to maintain limits on dividend distributions and use capital buffers (CCoB lowered to 1.25 percent for 12 months; BCB suspended dividend distributions).
- Reserve requirements and liquidity:
  - RRR lowered from "32" to "25 percent in March", temporary reduction to "17 percent"; authorities plan to increase to "20 percent in April 2021"; staff recommendation: consider keeping RRR at "17 percent" permanently conditional on ELA facility.
  - Liquidity measures: banking sector liquidity increased by 4.3 percent of GDP and could potentially reach 16.2 percent of GDP; total potential credit impact (liquidity support measures): R$1,141 billion (16.1% of GDP); total potential capital relief measures: R$1,348.2 billion (19.1% of GDP).
  - Swap lines with the Federal Reserve: US$60 billion and US$30 billion.

### Financial market developments and crisis lending
- Portfolio outflows of US$32 billion in March and April 2020; IBOVESPA dropped 45 percent between February 19 and March 23.
- BCB sold US$38 billion in the spot and derivatives market during March and April.
- Crisis lending and targeted programs (as of 18 September 2020, R$ bn):
  - Pronampe: 30
  - PEAC: 51
  - CGPE: 3.8
  - PESE: 5.3
- MSME support: as of mid-September, MSMEs received over R$80bn of targeted loans and credit guarantees (equivalent to 15 percent of pre-COVID outstanding credit to MSMEs); payroll credit line helped save 2½ million jobs between April and October.
- Employment retention schemes estimated to have saved up to 10 million jobs at a cost of around 0.4 percent of GDP between April and September.

### Debt sustainability, DSA, and stress-test scenarios
- Baseline DSA:
  - NFPS gross debt: 101.1 (2020), 99.3 (2021), 100.3 (2022), 100.9 (2023), 101.8 (2024), 102.3 (2025).
  - Net public sector debt: 66.8 (2020), 71.3 (2021), 74.4 (2022), 77.0 (2023), 79.4 (2024), 81.3 (2025).
  - Total external debt (percent of GDP baseline series): 48.7 (2020), 46.6 (2021), 43.0 (2022), 40.9 (2023), 39.0 (2024), 37.6 (2025).
- Key DSA findings:
  - Gross financing needs: 28 percent of GDP in 2020; projected around 20 percent over 2021-2025.
  - Debt stabilizing primary balance: around 0 (debt would stabilize in 2026 under compliance with expenditure ceiling).
  - Debt trajectory highly sensitive to shocks to real GDP growth, fiscal deficits and borrowing costs.
- Stress-test scenarios and highlighted outcomes:
  - Primary balance shock, growth shock, real interest rate shock, real exchange rate shock, and Combined Macro-Fiscal Shock analyzed.
  - Combined Macro-Fiscal Shock: gross debt exceeds 140 percent by 2025; public gross financing needs increase to about 30 percent of GDP for several years; shock assumes only 50 percent of primary balance adjustment in baseline in 2021 and 2022.
  - Other scenario results: a primary balance deterioration could push debt toward 115 percent by 2025; real interest rate shock (increase by 450bps) could push gross debt to roughly 110 percent by 2025.
- Fan-chart and long-run scenarios:
  - Negative combination of macro variables at 10th percentile yields debt at 120 percent of GDP in 2025; optimistic scenarios could lower debt to 90 percent of GDP.
  - Longer-term scenarios (2025–35): maintaining expenditure ceiling parameters could lower debt to 81 percent of GDP by 2035; abandoning the ceiling leads to continued high debt.

### External sector and vulnerabilities
- Current account (billions USD): -3.9 (2020), -18.1 (2021), -29.0 (2022), -40.2 (2023), -51.8 (2024), -61.1 (2025).
- Gross reserves (end of period, billions USD): 356.9 (2019), 356.9 (2020 proj) and stable through 2025.
- Gross external financing need (percent of GDP): around 9.8 in 2020 (table formatting preserved); sensitivity to real exchange rate shocks: a 30 percent real depreciation could raise external debt to 68.6 percent in first year, stabilizing at 55 percent by 2025.
- Policy implication: retain strong reserve buffers; limit FX intervention to addressing disorderly market conditions.

### Structural, institutional, and governance priorities
- Priority reforms to raise potential growth and reduce inequality:
  - Comprehensive tax reform, reduce fiscal incentives, unify VAT, lower payroll and corporate taxes contingent on revenue measures.
  - Accelerate concessions and privatizations; finalize trade agreements and WTO GPA accession efforts.
  - Improve public investment project selection and prioritization; enhance coordination across federal and subnational governments.
  - Renewed focus on education, up-skilling, and programs linking social safety net to labor market to limit hysteresis and improve mobility.
  - Continue anti-corruption, AML/CFT efforts and prepare for FATF/GAFILAT assessment; enhance beneficial ownership sharing and institutional capacity.
- Financial sector reforms and BC# Agenda:
  - Advance BC# Agenda including PIX (Brazilian Instant Payments System) and open banking (phase one launched November 2020) to expand inclusion and reduce costs.
  - Implement a permanent ELA and Bank Resolution Law; enact central bank independence legislation (bill approved by the Senate, with Lower House action pending).

### Authorities’ views and interaction with staff
- Authorities’ macro outlook: Central Bank and Ministry of Economy project a contraction of about 5 percent in 2020 followed by a recovery of about 4 percent in 2021 (authorities’ view).
- Authorities committed to maintain the expenditure ceiling and expect a reopening-driven rebound; they do not see need for more stimulus unless conditions are substantially worse.
- Authorities support a revenue-neutral tax reform and plan to use savings from reduction of tax expenditures to lower the tax rate of the unified VAT (authorities’ preference differs from staff).
- Authorities view current monetary stance as appropriate; BCB cautious on further cuts and links continued forward guidance to maintenance of fiscal regime.

*Source: IMF staff report for the 2020 Article IV consultation with Brazil (November 9, 2020).*

### 2.8 percent in 2021. The lingering effects of the health crisis and the expected withdrawal of

### BRAZIL: STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION

### Outlook and Risks
- Real GDP is projected to contract by 5.8 percent in 2020 followed by a partial recovery to 2.8 percent in 2021.
- Inflation (IPCA, end of period) projections: 2.0 (2020), 2.9 (2021), 3.2 (2022), 3.3 (2023–2025).
- Current account (in percent of GDP) projections: -0.3 (2020), -1.3 (2021), -1.9 (2022), -2.4 (2023), -2.9 (2024), -3.2 (2025).
- Gross public debt measures:
  - General Government gross debt, Authorities’ definition: 96.6 (2020), 96.7 (2021), 97.4 (2022), 97.7 (2023), 98.3 (2024), 98.5 (2025).
  - NFPS gross debt: 101.1 (2020), 99.3 (2021), 100.3 (2022), 100.9 (2023), 101.8 (2024), 102.3 (2025).
  - Net public sector debt: 66.8 (2020), 71.3 (2021), 74.4 (2022), 77.0 (2023), 79.4 (2024), 81.3 (2025).
- Public sector balances and deficits:
  - NFPS primary balance: -11.6 (2020), -2.7 (2021), -1.7 (2022), -1.2 (2023), -0.7 (2024), -0.1 (2025).
  - NFPS overall balance: -16.3 (2020), -6.1 (2021), -5.1 (2022), -5.4 (2023), -5.8 (2024–2025).
  - NFPS cyclically adjusted primary balance (in percent of potential GDP): -9.8 (2020), -1.8 (2021), -1.2 (2022), -1.0 (2023), -0.6 (2024), -0.1 (2025).
- External and financial indicators:
  - Total external debt (in percent of GDP): 48.7 (2020), 46.6 (2021), 43.0 (2022), 41.0 (2023), 39.0 (2024), 37.6 (2025).
  - Gross official reserves: 357 (2020–2025).
  - Unemployment rate: 13.4 (2020), 14.1 (2021), 13.3 (2022), 12.5 (2023), 11.6 (2024), 10.8 (2025).
- Key vulnerabilities and mitigating factors:
  - The high level of debt exposes Brazil to confidence shocks.
  - Mitigating factors include high international reserves, a resilient banking system, and a low share of public FX debt (Foreign currency linked NFPS gross debt: 4.7 in 2020, 4.7 in 2021, 4.6 in 2022, 4.5 in 2023, 4.4 in 2024–2025).
  - Record low SELIC (policy rate cut to a record low of 4.25 percent by early 2020) lowered government borrowing costs but local currency yield curve has steepened, reflecting market concerns over fiscal risks.
- COVID-19 health and economic impact:
  - More than 150,000 Brazilians have died and 5 million have been infected (as reported).
  - Excess deaths relative to 2019 suggest COVID-related mortality may be underestimated by up to 22 percent.
  - Government spent close to one percent of GDP to support the health system, mostly as transfers to subnational governments.

### Fiscal Policy Findings and Recommendations
- 2020 fiscal shock:
  - A 10.6 percentage point deterioration in the primary deficit in 2020 led to a jump in debt to about 100 percent of GDP.
- Directors’ assessment:
  - Welcomed authorities’ commitment to preserve the constitutional spending ceiling as a fiscal anchor to support market confidence.
  - Emphasized the need to be prepared to provide additional targeted support if economic conditions are significantly worse than expected and cautioned against abrupt withdrawal of fiscal support.
- Staff and Directors’ policy recommendations:
  - Maintain the expenditure ceiling in the 2021 budget but be prepared to provide additional fiscal support if economic conditions are weaker than the authorities expect.
  - Reallocate resources under the expenditure ceiling to strengthen the social safety net on a permanent basis.
  - Push for passage of reforms that lock in medium-term consolidation.
  - Swiftly implement structural fiscal reforms to mitigate undesirable debt dynamics: reduce mandatory spending and budget rigidities, strengthen the social safety net, reform subnational pension schemes, strengthen the subnational fiscal framework, and revamp the tax system.

### Monetary and Financial Sector Policy Findings and Recommendations
- Monetary stance:
  - Monetary policy should remain supportive amid substantial withdrawal of fiscal stimulus.
  - Some Directors noted scope to loosen monetary policy further, including through forward guidance, if inflation and inflation expectations remain below target.
  - Caution noted about potential tradeoffs from further interest rate cuts given the unprecedentedly low policy rate.
- Financial stability and supervision:
  - Brazilian banking system remains resilient but continued close surveillance is warranted.
  - Encourage use of regulatory flexibility to weather the pandemic without diluting prudential standards.
  - Continue regular stress tests and ensure regulatory action does not dilute prudential standards or accounting requirements.
  - Approval of formal central bank independence would further strengthen monetary framework integrity.
  - Flexible exchange rate and sizable foreign reserves remain important shock absorbers; FX intervention should be limited to addressing excess volatility.

### Structural Reforms and Growth Policies
- Importance and priorities:
  - Press ahead with structural reforms to raise potential growth and improve living standards.
  - Focus areas include: lowering financial intermediation costs, comprehensive tax reform, accelerating concessions and privatizations, finalizing trade agreements, labor market reforms, education and re-skilling to facilitate job reallocation.
  - Prevent legal and institutional setbacks to combating corruption and effectively implement anti-money laundering; ensure integrity of public procurement.
  - Several Directors highlighted the importance of policies for a green recovery.
- Pre-COVID reform progress noted:
  - Landmark pension reform passed in October 2019 projected to save the government around 11 percent of GDP over 10 years.
  - Legislation to give the Central Bank de jure independence was in final stages of Congressional approval prior to the pandemic.
  - Adoption of the constitutional expenditure ceiling in 2016 contributed to improved fiscal outlook.

### Key Projections and Sectoral Outcomes (selected figures from the macro framework)
- GDP at constant prices (annual growth): -5.8 (2020), 2.8 (2021), 2.3 (2022), 2.2 (2023–2025).
- Consumption (annual growth): -5.6 (2020), 2.7 (2021), 1.5 (2022), 1.5–1.6 (2023–2025).
- Investment (annual growth): -10.8 (2020), 6.6 (2021), 5.0 (2022), 5.6–6.2 (2023–2025).
- Gross domestic investment (percent of GDP) — Private sector: 12.7 (2020), 12.9 (2021), 13.1 (2022), 13.5 (2023), 14.0 (2024), 14.5 (2025); Public sector: 2.0 (2020–2025, with 2.1 in 2022–2023).
- Trade balance (Billions of U.S. dollars): 51.9 (2020), 53.3 (2021), 56.7 (2022), 57.9 (2023), 57.7 (2024), 58.9 (2025).
- Exports and imports (Billions of U.S. dollars): Exports 210.3 (2020), 229.1 (2021); Imports 158.3 (2020), 175.8 (2021).
- Financial sector credit to the private sector — Bank loans to the private sector (annual percentage change): 10.0 (2020), 12.0 (2021), 9.0 (2022), 9.0 (2023), 8.0 (2024–2025).

*Source: IMF staff report for the 2020 Article IV consultation with Brazil (November 9, 2020).*

### 4. Many Brazilians lost their jobs or saw their

### 1braea2020002 - 4. Many Brazilians lost their jobs or saw their 

### Labor market impact
- Over 12 million jobs were lost between February and August, of which over 7 million were from the informal sector (Box 1).
- The unemployment rate rose by about 3 percentage points to 14.4 percent.
- 11 million workers (over 10 percent of the workforce) left the labor force altogether.
- Labor force participation declined from 62 percent in February to 55 percent in August.
- Households in the lowest income deciles were most affected by the loss in labor income.
- Women suffered a bigger decline in hours worked than men.
- Box 1 specifics:
  - Fall in employment was more pronounced for informal workers: 7 million jobs lost (informal) vs 5.5 million in the formal private sector.
  - Public sector employment increased by 500,000.
  - Sectoral employment losses (February–August 2020):
    - Hospitality: loss of 24 percent of its employment share or 1.9 million jobs.
    - Paid domestic services: 16 percent; 1.6 million jobs.
    - Other services: 12 percent; 1.2 million jobs.
    - Construction: 5 percent and 1.2 million jobs.
    - Commerce and trade: 3 percent; 2.7 million jobs.
  - Average hours worked per week fell from 39.6 to 27.4.
  - Decline in hours worked: women 36.2 percent, men 27 percent.
  - Income per hour rose from 14.7 to 17.3 R$/h on average (15.5 to 19.5 R$/h for formal workers).
  - Women's income per hour rose by 28.6 percent; men's by 12.1 percent.
  - Lowest income decile monthly labor income decreased by 30 percent from R$462 to R$313, losing about 1.2 percentage points of their percentile share in total income.
  - Top decile labor income decreased by 17 percent, with an increase in their percentile share by approximately 2.5 percentage points.

### Corporate sector and financial conditions
- Non-financial corporate profitability fell and leverage surged amid reduced cash flows and high uncertainty.
- Bank loans were the main source of funding:
  - Credit to micro, small and medium-sized enterprises (MSMEs) surged to 20 percent year-on-year in August.
  - Credit to large companies grew by 15 percent year-on-year, reversing prior negative credit growth.
- Among listed companies, liquidity coverage remains strong and the implied probability of default remains low relative to past crises (data sources: Capital IQ; Moody’s CreditEdge).
- June survey data (IBGE’s Pulso Empresa) show around 70 percent of MSMEs reported lost sales vs 58 percent of large companies.

### Economic activity and inflation
- Economic activity contracted by 7 percent in H1 2020 — the largest contraction in 30 years.
- Retail sales, services, and industrial production all fell by at least 20 percent from February to April but recovered in May (rebound led by retail sales and manufacturing).
- Demand-side declines in 2020Q2:
  - Private consumption declined by 13 percent.
  - Investment declined by 15 percent.
- Q2 quarterly contraction was -9.7 percent q-o-q.
- Inflation developments:
  - Monthly CPI inflation was negative in April and May, then turned positive since June.
  - Inflation drivers since June: increase in the price of fuels, durable goods, and processed foods.
  - Exchange rate pass-through to inflation has steadily increased.
  - Inflation rose to 2.4 percent y-o-y in August, slightly below the lower band of the headline inflation target.
  - Core inflation measures remain at low levels and inflation expectations remain anchored.

### Financial market developments and external flows
- Non-resident investors sold equities and debt aggressively, leading to portfolio outflows of US$32 billion in March and April.
- Balance of payments deficit exceeded 2 percent of GDP at the peak.
- IBOVESPA dropped 45 percent between February 19 and March 23.
- The BCB sold US$38 billion in the spot and derivatives market during March and April.
- International reserves recovered to end-2019 levels, but the Real remains much weaker and non-resident portfolio outflows have not yet reversed.

### Policy response: fiscal measures
- Congress declared a state of public calamity through end-2020 to enable emergency measures amounting to 18.2 percent of GDP, raising the primary fiscal deficit to 11.6 percent of GDP.
- Direct impact of measures on the primary deficit (excluding automatic stabilizers and other cyclical factors) is estimated at 8.4 percent of GDP.
- NFPS: Deficit-impacting responses to the pandemic (Percent of GDP):
  - Expenditures 8.0
    - Emergency Aid 4.6
    - Subnational (non-health) spending 1.8
    - Health spending 0.8
    - Employment subsidies 0.7
    - Others 0.1
  - Revenues 0.4
    - Tax relief 0.4
  - Total Impact on Primary Balance 8.4
  - Memo: Auto stab—Revenues 2.8
  - Memo: Auto stab—Expenditures -0.5
  - Memo: Cyclical factors 0.9
  - 2020 Primary Balance 11.6
- Emergency Aid (Auxílio Emergencial, EA):
  - Estimated to lift the income of 23 million individuals—10 percent of the total population—above the extreme poverty line.
  - Average fiscal costs for nine months will reach around 4.6 percent of GDP when extended to 67.7 million individuals in the first phase.
  - EA beneficiaries: 67.7 million eligible; monthly cash payments of R$600 initially; extended with benefit reduced to R$300 for the last four months of the year.
  - For the first five months, transfers increased the average income of the bottom 40 percent by 19.8 percent relative to pre-COVID income.
  - EA corresponds to 150 percent of pre-COVID labor income in the bottom decile and 40 percent of pre-COVID median labor income.
  - Households headed by women received twice the amount of transfers.
  - Without EA, Gini would have increased from 0.53 to 0.58 and poverty headcount from about 6.7 percent to 14.6 percent (16 million individuals). With EA, poverty headcount fell to 5.4 percent and the Gini coefficient to 0.5.
  - EA prevented between 14 and 23 million people from falling below the poverty line at the peak, depending on poverty line used.
- Key crisis lending program disbursements (as of 18 September 2020, R$ bn):
  - The National Support Program for Micro and Small Enterprises (Pronampe): 30
  - Emergency Credit Support Program (PEAC): 51
  - Working Capital for Business Continuity (CGPE): 3.8
  - Payroll Credit Line (PESE): 5.3
  - Note: CGPE described as fiscal incentives for banks who lend under the program; PESE described as direct lending.
- MSME support:
  - As of mid-September, MSMEs received over R$80bn of targeted loans and credit guarantees (total support equivalent to 15 percent of the pre-COVID outstanding credit to MSMEs).
  - Government-backed payroll credit line to SMEs helped save 2½ million jobs between April and October.
- Employment retention schemes:
  - Estimated to have saved up to 10 million jobs at a cost of around 0.4 percent of GDP between April and September.
  - With extension through end-2020, program will continue to support employment through the first half of 2021.

### Monetary and financial policy measures by the BCB
- BCB cut the policy rate by 225 bps in quick succession to 2 percent.
- Reduced banks’ reserve requirements for time deposits.
- Announced extensive liquidity and capital relief measures (Annex V).
- Temporarily relieved banks from automatically increasing provisions on renegotiated loans.
- Lowered the capital requirement for credit to SMEs.
- Capital conservation buffer (CCoB) lowered to 1.25 percent for 12 months.
- Temporary ban on dividend distributions imposed for banks.
- Congress passed legislation allowing the BCB to purchase public and private assets for financial stability purposes while a state of public calamity is in force (option not yet used).

### Outlook and risks
- 2020 projection: economy projected to shrink by 5.8 percent in 2020.
- 2021 projection: partial recovery with 2.8 percent growth in 2021.
- Under the baseline:
  - Output gap widens to 4½ percent in 2020 and closes in 2024.
  - Real GDP returns to its end-2019 level in 2023Q2.
  - Inflation projected to stay below target until 2023 due to significant slack.
- Consumption and investment dynamics:
  - With EA cut by half in the last four months, private consumption expected to recover only modestly in H2 2020 and expand slowly through 2021.
  - Drawdown of household savings accumulated during 2020—household time deposits surged by over 60 percent y-o-y as of August—plus employment support will smooth consumption during Q1 2021.
  - Investment hampered by idle capacity and high uncertainty.
- External sector projections:
  - Current account projected to narrow to about -0.3 percent of GDP in 2020 from -2.8 percent in 2019, then gradually return to trend.
  - Trade surplus expected to rise to 3.8 percent of GDP.
  - Portfolio financial flows expected to contract by about 2.7 percent of GDP.
  - Net FDI have remained strong and will continue to finance the current account deficit.
  - Total external debt and gross financing needs expected to increase sharply in 2020 (mainly due to GDP contraction in dollar terms), before declining over the medium-term (Annex VII).
  - International reserves expected to remain stable at US$357 billion (158 percent of the IMF’s ARA metric or 184 percent including the US$60 billion swap line with the U.S. Fed).

### Risks related to labor market scarring (Box 3)
- Brazil’s labor market was still recovering from the previous recession; unemployment and share outside the labor force but wanting work increased by around 5 percentage points during the 2015-16 crisis.
- COVID shock is unprecedented in job losses; April 2020 saw the largest monthly loss of formal jobs on record and an unprecedented drop in labor force participation.
- Employment protection programs may reduce scarring by maintaining firm-worker relationships.
- Structural changes (technology-intensive work, remote work, automation) could complicate recovery and leave vulnerable groups behind.
- Sectors such as tourism may face long-lasting reduced demand, increasing risks of long spells of unemployment or underemployment.
- Empirical analysis: a simple bivariate VAR with two lags suggests increases in inactivity resolve relatively quickly while shocks to unemployment tend to be more persistent in Brazil; fall in labor force participation might reverse by early or mid-2021 but unemployment might remain elevated for a long time.

*International Monetary Fund (extracted chapter content).*

### 14. The non-financial public sector (NFPS) primary fiscal deficit is projected to rise from 1

### The non-financial public sector (NFPS) primary fiscal deficit is projected to rise from 1 percent of GDP in 2019 to 11.6 percent in 2020

### Fiscal outlook and key projections
- NFPS primary fiscal deficit: rise from 1 percent of GDP in 2019 to 11.6 percent of GDP in 2020.
- Revenues: expected to drop by 3.1 percentage points of GDP in 2020.
- Primary expenditures: expected to increase by 7.6 percentage points of GDP in 2020.
- Medium-term revenue path: revenues-to-GDP ratio will gradually catch up to pre-crisis levels.
- Required consolidation: fiscal consolidation of at least 3 percent of GDP after 2021 will be needed over the medium-term to close the primary deficit and stabilize the public debt ratio at the current level.

### Public debt and financing
- Gross public debt: projected to jump to around 100 percent of GDP in 2020 and remain high over the medium-term.
- Gross financing needs: 28 percent of GDP in 2020, being met through a combination of domestic issuances and the use of liquid assets (Treasury deposits at the BCB).
- Projected financing needs: remain at around 20 percent of GDP through the medium-term, above the DSA-based risk thresholds.
- Borrowing costs: “Borrowing costs today are 5 percent relative to a high of close to 15 percent in late 2016.”
- Market signal: Brazil faces a very steep local currency yield curve, highlighting market concerns over fiscal sustainability.

### Risks around the baseline
- Overall: risks are “exceptionally high and multifaceted.”
- Upside risks:
  - Recession could be less severe or recovery more robust.
  - Advances in medical treatments, workplace changes reducing transmission, or a safe, effective and affordable vaccine could allow activity to return more quickly to pre-pandemic levels.
- Downside risks:
  - Virus resurgence, slower-than-expected progress on treatments and vaccines, renewed social distancing.
  - Protracted recession increasing hysteresis in the labor market and negative feedback loops between financial sector and real economy.
  - Suspension/delays of structural reform agenda submitted or to be presented to Congress because of the pandemic; municipal elections delaying congressional discussions on the 2021 budget and underlying fiscal reforms.
  - Political risks could intensify if the economy turns for the worse; lack of agreement could undermine market confidence and exacerbate debt sustainability risks.
  - External shocks: accelerating de-globalization, oil market volatility, intensified geopolitical tensions.
  - Policy choice risks: withdrawing COVID-related policy support prematurely could weaken recovery; extending support too long could exacerbate debt sustainability risks.
- Mitigating factors:
  - High international reserves.
  - A resilient banking system.
  - A low share of public FX debt.

### Authorities’ views
- Authorities’ macro outlook: Central Bank and Ministry of Economy project a contraction of about 5 percent in 2020 followed by a recovery of about 4 percent in 2021.
- Authorities’ supporting points: high frequency indicators on retail sales and manufacturing activity; precautionary savings expected to sustain private consumption in 2021; low interest rates, retrenchment of large public banks, and regulatory changes expected to “crowd-in” private sector, attract FDI and PPP infrastructure investment.
- External position: authorities agree that the external position in 2019 was moderately weaker than fundamentals and expect a significant improvement in the current account balance in 2020 on the back of a subdued Real and low profitability.

### Near-term policy priorities: saving lives and livelihoods
- Preserve the constitutional expenditure ceiling as a fiscal anchor to mitigate risk of undesirable debt dynamics.
- Authorities should be prepared to provide additional fiscal support if economic conditions turn out worse than expected.
- Frontload structural reforms that lock in medium-term consolidation; such reforms could also open up some fiscal space in the near term.
- Monetary policy: should remain accommodative in 2021 if inflation and inflation expectations remain well anchored.

### A. Fiscal policy (near-term)
- Expenditure ceiling effects:
  - Budget proposal submitted in August does not envisage pandemic-related extraordinary spending in 2021.
  - Expiration of the War Budget by end-December 2020 implies a sharp decline of 8.4 of GDP in extraordinary primary expenditures in 2021.
  - Withdrawal magnitude: would place Brazil at more than twice the average discretionary fiscal tightening of close to 4 percent of GDP next year across the G-20.
- Market confidence:
  - Maintaining the expenditure ceiling in 2021 is critical to support market confidence; markets view it as the fiscal anchor to deliver medium-term consolidation.
  - Staff model simulations: a one-off spending of 2 percent of GDP in 2021 could increase the real GDP level by 1-2 percentage points in the short-term (relative to the baseline) and still preserve debt sustainability if fiscal credibility is maintained.
  - Conversely, backloading consolidation perceived as a slippery slope could cause loss of market confidence, a spike in interest rates, real GDP below baseline, and debt-to-GDP could rise by as much as 10 percentage points.

- Gradual withdrawal option:
  - A more gradual fiscal withdrawal in 2021 would be desirable if economic conditions deteriorate significantly relative to authorities’ expectations.
  - Brazil’s output gap is large and the economy is credit constrained; ending cash transfers while labor market is weak could increase income and gender inequality.
  - Staff example: if activity evolves in line with staff’s projections, fiscal support of about 2 percent of GDP could allow for some health spending, a better targeted and more affordable version of the Emergency Aid and a streamlined version of the employment protection program.
  - Conditional note: if such additional spending is implemented, securing medium-term consolidation through structural reforms becomes even more important to maintain market confidence.

- Example design of additional support (staff note and footnote):
  - Temporary cash transfers of R$300 per month to around 40 million vulnerable citizens (equivalent to 1.9 percent of GDP).
  - Plus 0.6 percent of GDP of employment subsidies and additional health spending.
  - With 0.5 percent of GDP of the cost financed by the BF budget.

### Structural reforms to lock in medium-term consolidation
- Importance: With public debt rising above 100 percent of GDP over the medium-term, addressing structural expenditure pressures is crucial to preserve the constitutional expenditure ceiling; revenue measures to widen the tax base would facilitate a faster reduction of debt.
- Reform pillars and estimated savings (Staff estimates):
  - Reducing mandatory spending and budget rigidities: 1.0 percent of GDP.
  - Reducing tax expenditures: 2.0 percent of GDP.
  - Reforming subnational fiscal framework: 0.5 percent of GDP (savings mainly from subnational pension reforms and outside the Federal budget).
  - Total potential savings: 3.5 percent of GDP for the NFPS while also improving targeting of social assistance programs.
- Reducing mandatory spending and rigidities:
  - Discretionary spending is less than 7 percent (1.5 percent of GDP) of federal expenditures.
  - Priority actions and potential savings:
    - Reducing personnel costs: measures (wage, hiring, and promotion freeze; hard cap on total remuneration per employee; allowing wage cuts proportionate to cuts in working hours) could yield savings of up to one percent of GDP per year.
    - Overhauling civil service career structures and aligning public compensation with private sector; address public wage “markup” of up to 50 percent versus private sector.
    - Severing link between pensions and benefits from minimum wage indexation while allowing cost-of-living adjustments with consideration of inequality impacts.
    - Removing minimum requirements for state-level spending on education and health or creating a joint minimum requirement per the Federative Pact to increase state flexibility.
    - Releasing unused earmarked resources locked in public funds to free up, on a one-off basis, 3 percent of GDP for public debt amortization.

### Social safety net and program rationalization
- Current footprint:
  - Brazil’s overall spending on social assistance programs: 1.5 percent of GDP.
  - BF (Bolsa Família) is well targeted and cost effective, but 70 percent of BPC benefits accrue to the richest 60 percent of the population.
  - Labor market wage subsidy programs (Abono Salarial and Salário Família) show almost complete overlap of recipients (“double dipping”), mostly richer households.
- Recommendation:
  - Consolidate all current non-contributory cash benefit programs into one single program (World Bank recommendation supported by staff).
  - Rationalization could save roughly 0.7 percent of GDP under the expenditure ceiling to fund an expanded BF or a new social assistance program modeled after BF and OECD best practices.

### Subnational fiscal framework reforms
- Problem: States and municipalities face high debt and severe liquidity pressures; some large states have already defaulted on part of their debt and are running payment arrears (wages and suppliers).
- Federal support: substantial support through debt service relief has been provided and, in the 2020 War Budget, helped offset revenue shortfalls and extraordinary spending; expectations of future federal bailouts are entrenched.
- Priority actions:
  - Reform subnational pensions in line with new federal provisions; private sector estimates indicate reform of subnational pension schemes could save up to 5 percent of GDP over 10 years.
  - Adopt a new subnational fiscal framework imposing credible hard-budget constraints and reducing expectation of future federal bailouts.
  - Recommended elements (per IMF technical assistance):
    - Lower safe debt limits consistent with debt service capacity.
    - Enhanced fiscal transparency.
    - Simplification of rules to facilitate enforcement.
    - Greater reliance on market discipline.
    - Introduce subnational spending caps on growth of total primary expenditures at the state level, a balanced budget rule, and rainy-day funds for municipalities.

### Revamping the tax system
- Objectives: reduce misallocation of resources, improve business climate, strengthen revenue administration.
- Priorities and estimates:
  - Remove distortionary fiscal incentives that are high at almost 5 percent of GDP relative to G20 EMs; fiscal incentives are inefficient, inequitable, and add to complexity.
  - Fiscal savings from reducing fiscal incentives could amount to at least 2 percent of GDP and could be used to lower high payroll and corporate taxes.
  - Streamline tax system; support for unifying PIS and COFINS into a single federal VAT.
  - Harmonize fragmented federal and subnational tax regimes to lower cost of tax compliance; review personal income taxes to make them more progressive, including introducing dividend taxation.
  - Focus revenue administration reforms to support unified VAT, enhance taxpayer compliance framework, and simplify tax arrears collection.
  - Grant tax authorities powers to enforce collection of tax arrears without prior court approval.
- Comparative numbers:
  - Latest available data show average tax benefits for G20 EMs (excluding Brazil) is 3 percent of GDP compared with 4.2 percent in Brazil.

### Medium-term fiscal and budget frameworks
- Problem: existing framework is fragmented, excessively focused on intra-year implementation, lacks a clear medium-term anchor, and contributes to a deficit bias.
- Staff recommendations:
  - Develop a fully-fledged medium-term fiscal framework to enhance top-down strategic decision making and guidance for the budget process.
  - Set clear fiscal policy objectives and targets (including medium-term debt targets) in a multi-year budget plan and rolling spending reviews for large and fast-growing expenditures.
  - Include macro-fiscal forecasts and ensure strong coordination between planning, budgeting and execution of key policy objectives.
  - Make existing rules simpler, more flexible, and internally consistent.
  - Introduce an economic escape clause to the expenditure ceiling to allow temporary deviations from the rule to respond to large shocks while preserving credibility of the fiscal anchor.

*International Monetary Fund — Brazil staff report content (excerpts).*

### 27. The authorities are fully committed to maintain the expenditure ceiling. They expect a

### 1braea2020002 - 27. The authorities are fully committed to maintain the expenditure ceiling. They expect a

### Fiscal stance, tax arrears, and authorities' intentions
- Authorities are fully committed to maintain the expenditure ceiling and expect a continued reopening of the economy and a strong rebound in activity next year; they do not see the need for more stimulus unless conditions turn out substantially weaker.
- Authorities warned non-compliance with the ceiling would be negatively perceived by markets, increasing risk premia and steepening the yield curve, potentially contaminating the short end, de-anchoring inflation expectations, forcing the Central Bank to tighten policy, compromising recovery and putting Brazil’s debt sustainability at risk.
- Tax arrears and collection:
  - Tax arrears are high: "At 304 percent of total tax collection, tax arrears are high."
  - About "57.8 percent of the stock of tax arrears was more than 12 months past due."
  - To increase collection, authorities are pursuing agreements with taxpayers via administrative and legal channels.

### Structural fiscal reforms and authorities' reform stance
- Authorities agree that structural reforms are critical for medium-term consolidation and concur with staff on addressing widespread budget rigidities, including at subnational levels.
- Federative Pact draft bill: authorities indicate it will address many issues identified by staff.
- Tax reform:
  - Authorities are committed to a comprehensive tax reform.
  - Unlike staff, authorities support a revenue-neutral tax reform and plan to use savings from reduction of tax expenditures to lower the tax rate of the unified VAT.
- Administrative reform:
  - Authorities view administrative reform as delivering long-term gains and do not intend to apply the reform to current employees.

### Monetary policy stance and outlook
- Current stance:
  - "Monetary policy is appropriately supportive."
  - "Inflation expectations are well anchored and both core and headline inflation are below target."
  - The BCB cut policy rate by "225bps" and has taken a cautious stance on further cuts.
  - Current policy rate is "2 percent" which corresponds to a negative ex-ante real rate given real neutral rate "estimated at around 3 percent."
  - "Markets expect the policy rate to rise again in 2021, returning to pre-COVID levels by October 2021."
- Transmission and corporate sector:
  - "Lending rates remain high," but pass-through to corporate segment has improved as a lower share of public bank lending has strengthened pass-through.
  - "80 percent of corporate securities debt is linked to the overnight interbank rate," lowering corporate debt service burden with lower interest rates.
- Room to cut further:
  - There is room to cut the policy rate further if inflation and inflation-expectations remain below target.
  - Staff see no constraint to test lower rates while monitoring implications for capital flows and financial stability.
  - Simple Taylor rule analysis suggests further cuts, especially if the weight on the output gap is non-zero.
  - Continued use of forward guidance could have expansionary effects without financial stability risks.
  - Noted risk: recent uptick in market-implied inflation expectations for 2021-23, with 2023 expectations now above target, should be monitored.
  - Authorities’ continued commitment to fiscal discipline is important to keep inflation expectations stable.
- Authorities’ view on monetary stance:
  - Authorities view the current stance as appropriate and stress the importance of the fiscal regime for the monetary outlook.
  - The Central Bank noted trade-offs related to further cuts and favors a cautious stance to allow the financial system to adapt.
  - The Central Bank introduced forward guidance but reiterated it could only be maintained if the current fiscal regime remained unchanged.
  - At present, the Central Bank is not envisaging the use of asset purchases.

### Reserve requirements, liquidity measures, and exchange rate policy
- Reserve requirement ratio (RRR) changes:
  - RRR was lowered from "32" to "25 percent in March", and an additional temporary reduction to "17 percent" was adopted to provide liquidity.
  - Authorities currently plan to increase it to "20 percent in April 2021."
  - Recommendation: making the reduction permanent (keeping RRR at "17 percent") could reduce banks’ liquidity costs permanently and contribute to lower borrowing spreads, conditional on implementation of a new Emergency Liquidity Assistance (ELA) facility.
- Liquidity and FX:
  - Flexible exchange rate and sizable FX reserves remain important shock absorbers.
  - Authorities allowed exchange rate to absorb COVID-19 shock, resulting in a "BRL/USD depreciation of 40 percent in the year to October."
  - Stress tests suggest banking sector sensitivity to large depreciations given banks’ open FX positions ("3 percent of assets"), but existing capital buffers are sufficient; "95 percent of public debt is denominated in reais" and firms with dollar debt are mostly hedged.
  - FX intervention should remain limited to addressing excess volatility; vigilance to emerging financial sector vulnerabilities is necessary.

### Macro-financial resilience and regulatory flexibility
- Banking system resilience:
  - Solvency stress tests indicate the banking system will remain resilient to the COVID-19 shock despite pockets of vulnerabilities.
  - Banks should draw down on their CCoB to absorb losses if needed; if temporary reduction in the CCoB is extended, limits to dividend distributions should be extended accordingly.
  - Banks should be encouraged to use High-Quality Liquid Assets during stress by allowing Liquidity Coverage Ratio to fall below 100 percent.
  - In system-wide liquidity pressure, BCB should provide additional liquidity, e.g., by expanding collateral base of lending facilities.
- Regulatory flexibility:
  - Authorities are encouraged to use existing flexibility without diluting prudential standards or accounting requirements.
  - Example: the measure to reduce risk-weights for SME lending runs counter to this objective.
  - Consider extending temporary relief from automatically increasing provisions on renegotiated loans and encourage banks to use capital buffers.
  - Supervisory expectations and regulatory approach should be clearly communicated and transparent.

### Financial sector reforms and institutional measures
- Progress on FSAP recommendations and BC# Agenda:
  - Several draft bills submitted to Congress address FSAP recommendation to strengthen legal protection of supervisors.
  - A bill addressing BCB autonomy was approved by the Senate and is with the Lower House.
  - A Bank Resolution Law bill including legal protection of public agents and legal defense of BCB expenses has been submitted to the Lower House.
  - BCB finalized a draft bill for a "Financial Stability Coordination Law" being evaluated by the Office of the President’s Chief of Staff.
  - A temporary ELA was deployed in April 2020; implementation of a new permanent ELA is ongoing as part of the BC# Agenda and is expected to be completed by "November 2021."
- BC# Agenda and market efficiency:
  - Continued progress with the BC# Agenda will decrease credit spreads and improve financial inclusion.
  - Authorities advancing reforms: allowing credit cooperatives to issue Real Estate Credit Bills (LCI), advancing rural credit framework, facilitating microcredit, digitalizing financial instruments.
  - Two initiatives scheduled to be launched in November 2020:
    - Brazilian Instant Payments System (PIX) to expand access and lower digital transaction costs.
    - Phase one of open banking to increase competition and reduce costs of financial services.
  - A fifth "sustainability" pillar introduced focusing on socio-environmental sustainability and sustainable finance.

### Banking sector stress tests — key results and scenarios
- Overview:
  - Staff conducted stress tests including a recalibration of the 2018 FSAP stress test; tests do not account for recent BCB policy measures (suspension of dividend payments, exemption from increasing provisions on restructured loans, lowering of capital conservation buffer), thus likely overstate stress results.
- Baseline results:
  - The "[5.8] percent" fall in GDP is expected to increase nonperforming loans (NPLs).
  - Regression models suggest NPLs of non-earmarked credit are likely to peak "at between 5 and 6 percent."
  - Resulting fall in average Tier 1 (T1) capital ratio to "between 12.4 and 11.9 percent," which is above the regulatory minimum "9.5 percent" (including D-SIB surcharge and full CCoB).
  - None of the 16 largest banks would experience T1 capital shortfalls from the NPL shock.
- CET1 scaling:
  - Scaling the 2018 FSAP stress test using staff’s latest GDP forecast suggests average Common Equity Tier 1 (CET1) capital for banks would fall to "8.2 percent."
  - The relatively narrow distribution implies any capital shortfall would be relatively small if banks can use the CCoB.
  - The FSAP stress test assumes dividend payouts lower capital ratio by around two percentage points, while BCB has temporarily suspended dividend payments.
  - Factors other than NPLs (e.g., exchange rate, asset prices) could negatively affect solvency.
- Extreme scenario:
  - An extreme scenario with GDP contractions "for two years (-7.4% in 2020 and -3.0% in 2021)" and assumption of identical credit portfolio composition across banks leads to two banks falling below the "4.5%" minimum requirement.

### Productivity, public investment, and structural priorities
- Growth and productivity challenge:
  - Brazil’s average GDP growth since the early 1990s is about "2 ½ percent per year," below other major emerging markets.
  - Total factor productivity is close to 1980s levels and investment has lagged peers for decades; Brazil is one of the most closed major economies in the World.
- Priority structural reforms:
  - Reform the complicated and distortive tax system to improve business environment.
  - Close infrastructure gaps.
  - Trade liberalization.
  - Foster greater competition in the financial sector, including reducing state banks’ footprint in credit markets.
  - Cut red tape to reduce cost of doing business and promote private investment.
  - Urgency increased to offset possible scarring from the pandemic.
- Public investment role and recommendations:
  - Public investment can be catalytic for post-pandemic recovery but requires strategic prioritization and rigorous project selection and appraisal.
  - IMF Technical Assistance (PIMA) found weaknesses in strategic prioritization and project selection/appraisal.
  - Staff urge development of a prioritized portfolio of high quality projects and a more rigorous process for project selection, appraisal, and approval.
  - Improve coordination between federal and subnational governments in investment planning and review funding mechanisms.
- Ongoing measures:
  - Newly approved sanitation and sewage bill and lists of privatization and infrastructure concession projects to spur pipeline.
  - Temporary elimination of import tariffs on IT and capital goods (from "14 to 0 percent") is welcome and should be made permanent.
  - Continued efforts recommended to finalize trade agreement with the EU and finalize technical agreements/protocols to remove tariff and non-tariff barriers with other trading partners.
  - Authorities should submit an ambitious market access proposal to join the WTO Government Procurement Agreement (GPA) to open procurement to foreign competition and enhance transparency and governance.

*International Monetary Fund — Brazil chapter excerpts*

### 45. A renewed focus on education and measures to reduce inequality is warranted post-

### 45. A renewed focus on education and measures to reduce inequality is warranted post-

### Education, labor market, and social policies
- Increasing enrollment rates for primary and secondary education and improving PISA scores, both of which are well below OECD levels, will be key to improving the human capital of Brazil’s labor force.
- Staff analysis (WP/19/236) suggests that education outcomes could be improved by recalibrating the mix of salaries and personnel more in line with the ratios observed in high performing countries.
- To limit labor market hysteresis and reduce job mismatch, the move towards more automation, technology intensive and remote work should be accompanied by job re-training and up-skilling programs that facilitate the reactivation of laid-off workers and avoid leaving unskilled workers behind.
- To improve social mobility and reduce social exclusion, the social safety net should be linked to the labor market through graduation programs that incentivize vulnerable groups to lift themselves out of poverty through access to financial inclusion, training and job search assistance.

### Authorities’ views and reform agenda (selected measures and status)
- The authorities agree on the importance of structural reforms and noted that, despite the crisis, the government accelerated measures to cut red tape, improve regulations and develop infrastructure concessions.
- Simplifying the tax system is one of their highest priorities; they view it as having a large positive payoff for private sector investment and as a pre-condition for trade liberalization.
- Administrative reform is seen as important to improve the long-term fiscal outlook and increase productivity by reducing the misallocation of resources between the public and private sector.
- Sanitation and sewage bill: approved in July 2020; seen as an important step to attract private sector infrastructure investment. Plans for similar laws to facilitate private sector participation in the gas and electricity sectors are intended.
- Further changes in labor market regulation are being considered to reduce labor costs for the private sector and improve the ease of doing business, with a focus on including informal workers into the formal market by streamlining rules and assuring judicial security.
- On trade liberalization, technical details of several agreements (EU, EFTA, Canada, USA, South Korea) have been finalized or are close to be finalized and are expected to be ratified during 2020-21; further steps in trade liberalization will be taken once tax reform is approved.
- The Central Bank anticipates that digitalization of payment methods (PIX) and Open Banking regulation will reduce costs and improve the efficiency of financial intermediation. The BC# agenda gained a new Sustainability pillar.

Selected legislative and reform items (as presented)
- Emergency adjustment bill (allows temporary reduction of some mandatory spending – including civil servants’ wage/hours cuts of up to 25% - during fiscal stress periods): Submitted to Congress? Yes. Needs Constitutional Amendment? Yes.
- New Federal Pact bill (revenue decentralization, less subnational spending rigidities, new institutions to strengthen subnational fiscal discipline): Submitted to Congress? Yes. Needs Constitutional Amendment? Yes.
- Public Funds bill (allow use of earmarked funds of the government to amortize public debt): Submitted to Congress? Yes. Needs Constitutional Amendment? Yes.
- Tax Reform – revenue neutral: Create a uniform VAT (or dual system): Submitted to Congress? Yes 2. Needs Constitutional Amendment? Yes (except for federal taxes).
- Tax Reform – revenue neutral: Lower CIT and raise dividend taxes: Submitted to Congress? No. Needs Constitutional Amendment? No.
- Tax Reform – revenue neutral: Lower payroll taxes and compensate with new sources of revenue: Submitted to Congress? No. Needs Constitutional Amendment? No.
- Administrative Reform (overhaul of civil service career structures): Submitted to Congress? Yes 2. Needs Constitutional Amendment? Yes.
- Pension Reform for Subnational Governments: Submitted to Congress? Yes. Needs Constitutional Amendment? Yes.
- Concessions and Privatizations (including overhaul of regulatory framework for sanitation – approved in July 2020 - and energy sectors): Submitted to Congress? Yes, for the cited sectors. Needs Constitutional Amendment? No.
- Central Bank Independence: Submitted to Congress? Yes. Needs Constitutional Amendment? No.
- Labor Market Reform (‘Green-Yellow Program”, encouraging employment of young people): Submitted to Congress? Yes. Needs Constitutional Amendment? No.
- Financial Sector Reform (‘BC#’ agenda on competitiveness, inclusiveness, education, and transparency): Submitted to Congress? Yes, partially. Needs Constitutional Amendment? No.
- New FX Market Regulation (modernize the system, enabling use of foreign currency bank accounts): Submitted to Congress? Yes. Needs Constitutional Amendment? No.

Note:
- 1/ Excludes already approved measures, such as social security reform and the Economic Freedom Act.
- 2/ Draft legislation submitted by the government in the course of 2020, post-Covid19 outbreak.

### Anti-corruption, AML/CFT, and institutional capacity
- The authorities should continue to prioritize the fight against corruption and money laundering (ML) and prevent legal and institutional setbacks.
- Ensuring the capacity of competent authorities to independently and effectively investigate and prosecute corruption and financial crimes is fundamental to international standards and effective anticorruption and AML/CFT frameworks.
- The pandemic has negatively impacted corruption and ML risks, notably those associated with procurement. The authorities have commenced investigations and taken prevention and transparency efforts, such as enhancing availability of procurement data at the federal level and reporting mechanisms.
- Additional useful measures include enhancing the sharing of beneficial ownership information among relevant competent authorities, and continuing to strengthen frameworks for asset disclosures, lobbying and whistleblower protection.
- Preparations for the upcoming FATF/GAFILAT AML/CFT assessment are underway; coordinating and building capacity among competent authorities has been a top priority of the ENCCLA task force and should continue to be prioritized.
- The Financial Intelligence Unit (FIU) has resumed its work after multiple institutional relocations and the reversal of a Supreme Court Judge’s provisional injunction that limited the FIU’s ability to share information with law enforcement without prior judicial authorization.
- It is important to finalize and ensure timely dissemination of the results of the ML/TF National Risk Assessment and the implementation of mitigation measures.
- New AML/CFT customer due diligence regulations on politically exposed persons and beneficial owners have recently been issued, and a sectoral risk-assessment and new technology to enhance risk-based AML/CFT bank supervision have been introduced, allowing for remote supervision to continue despite the pandemic.
- The legislature has launched a special commission to propose amendments to the AML/CFT law, with a focus on redefining the scope of the ML criminalization; it is recommended that any legislative efforts involve all relevant authorities and stakeholders to ensure FATF compliance.

### Article VIII and IOF
- The tax on financial transactions (Imposto sobre Operações Financeiras, IOF) on exchange transactions carried out by companies to fulfill payment obligations for purchases of goods and services abroad by their customers gives rise to a multiple currency practice (MCP) subject to Fund jurisdiction under Article VIII, Sections 2(a) and 3.
- The IOF for these exchange transactions was increased to 6.38 percent in March 2011 and the scope of operations was expanded to other foreign exchange transactions in addition to credit cards in December 2013.
- These measures need to be gradually relaxed in coordination with the IMF. The authorities expressed their intention to gradually remove the IOF as the fiscal situation allows.

### Staff appraisal — fiscal, monetary, banking, and structural priorities
- Fiscal anchor and debt:
  - The authorities’ steadfast commitment to the expenditure ceiling is welcome.
  - Public debt rising to 100 percent of GDP makes preserving the constitutional expenditure ceiling essential to support market confidence and keep the sovereign risk premium contained.
  - Substantial fiscal consolidation is required to close the primary deficit and stabilize public debt over the medium-term.
- Contingent fiscal support:
  - If economic conditions turn out worse than the authorities expect, they should be prepared to provide additional fiscal support.
  - The expiry of fiscal support at the end of the year will add pressure on the already-wide output gap.
- Structural fiscal reforms to lock in medium-term consolidation should focus on urgently:
  - (i) reducing mandatory spending and budget rigidities to free up fiscal space for discretionary spending,
  - (ii) strengthening the social safety net by rationalizing programs that are inefficient and regressive while preserving efficient targeting,
  - (iii) reforming the subnational pension schemes in line with the new provisions for federal government employees and strengthening the subnational fiscal framework, and
  - (iv) revamping the tax system to improve the business environment, reduce resource misallocation, and tackle income inequality.
- Monetary policy and financial conditions:
  - With the substantial withdrawal of fiscal stimulus in 2021, monetary policy carries the burden of supporting the economy.
  - The current 2 percent policy rate corresponds to a negative real rate, which is strongly expansionary.
  - There is room to cut the policy rate further if inflation and inflation expectations remain below target, while carefully monitoring possible implications for capital outflows and financial stability risks.
  - Continued use of forward guidance conditional on maintaining a sound fiscal regime could have an expansionary effect without risks to financial stability.
  - The temporary reduction in the RRR could be made permanent to reduce banks’ liquidity costs, narrow borrowing spreads and increase the flow of credit to firms and households.
  - Should downside risks materialize after conventional monetary policy has been exhausted, the BCB has the option to purchase assets.
  - Approval of formal Central Bank independence would further strengthen the integrity of the monetary framework.
- Banking system resilience:
  - The Brazilian banking system remains resilient but continued close surveillance and bank-by-bank monitoring is warranted.
  - Results from solvency stress tests suggest that the banking system will remain resilient to the COVID-19 shock, and banks have been conservative and forward looking in increasing provisions.
  - The existing flexibility of the regulatory framework should be used to weather the short-term impact of COVID-19 without diluting prudential standards or accounting requirements.
- Structural reforms to raise potential growth:
  - The authorities must move ahead with structural reforms to raise potential growth and improve the standard of living for all Brazilians.
  - To create jobs and lift the poor above the poverty line, reforms to make the economy more competitive, open to business and trade, and attractive to investment are essential.
  - The BCB’s BC# Agenda aims to improve market efficiency and reduce the cost of credit to raise productivity growth.
  - A renewed push is needed to pass legislation for a comprehensive tax reform, finalize high standard trade agreements with the EU and other trading partners, conclude negotiations to join the WTO GPA, and accelerate the pace of new concessions and privatizations.
  - The newly approved sanitation and sewage bill is welcomed and should spur a pipeline of critical infrastructure projects and investments going forward.
- Anti-corruption and AML/CFT emphasis:
  - Continue prioritizing the fight against corruption and money laundering and prevent legal and institutional setbacks.
  - Coordinate efforts to enhance the AML/CFT framework and prepare for the upcoming FATF/GAFILAT AML/CFT assessment with involvement of all stakeholders.
  - Continue prevention and transparency efforts, including further strengthening the frameworks for asset disclosures, lobbying and whistleblower protection.
  - Ensure the capacity, resources and independence of relevant institutions to preserve past gains and effectively combat corruption and financial crimes.

*Source: 1braea2020002 - 45. A renewed focus on education and measures to reduce inequality is warranted post-*

### 58. It is recommended that the next Article IV consultation takes place on the standard

### 1braea2020002 - 58. It is recommended that the next Article IV consultation takes place on the standard

### Consultation timing
- It is recommended that the next Article IV consultation takes place on the standard 12-months cycle.

### COVID-19 health indicators and mobility
- Brazil recorded the second largest number of COVID-19 cases in the world through August 2020, with the number of new cases running just below peak levels.
- Relative to other countries, Brazil has a high number of confirmed infections but a comparable case fatality rate despite less prevalent testing.
- COVID-related fatalities may be underestimated; deaths by respiratory problems and unspecified sources grew by 22% in 2020.
- Lockdown measures were most relaxed in August 2020, and overall mobility had picked up substantially since May 2020.

### Real sector developments and outlook
- GDP is headed for a sharp contraction in 2020, followed by a gradual recovery in 2021.
- The contraction in 2020H1 was driven by private consumption and services affected by containment measures and social distancing.
- Both headline and core retail sales dipped in April 2020 but rebounded in May and June 2020.
- Investment held up in Q1 2020 but contracted sharply in Q2 2020 as business confidence plummeted.
- Industrial production, driven by manufacturing, rebounded strongly in May and June 2020, while services output lagged.

Key projections (from macroeconomic framework and selected indicators):
- GDP at current prices: 2019 = 5.3; 2020 = -2.6; 2021 = 6.3; 2022 = 6.5; 2023 = 6.3; 2024 = 6.2; 2025 = 6.2.
- GDP at constant prices (annual growth): 2019 = 1.1; 2020 = -5.8; 2021 = 2.8; 2022 = 2.3; 2023 = 2.2; 2024 = 2.2; 2025 = 2.2.
- Consumption (annual growth): 2019 = 1.3; 2020 = -5.6; 2021 = 2.7; 2022 = 1.5; 2023 = 1.5; 2024 = 1.6; 2025 = 1.4.
- Investment (annual growth): 2019 = 3.6; 2020 = -10.8; 2021 = 6.6; 2022 = 5.0; 2023 = 5.6; 2024 = 6.1; 2025 = 6.2.

### Monetary sector developments
- Both headline and core inflation are comfortably below target; an uptick in tradable inflation since June 2020 points to some exchange rate pass-through.
- Regulated prices (utilities, public transport, health goods and services, and oil derivatives) increased recently after the drag from plummeting international oil prices.
- Real average earnings spiked because of diminished working hours and employment support measures.
- The SELIC is at historic lows, with negative ex-ante real rate despite low inflation expectations.
- Lending rates remain high despite some passthrough from the most recent cuts.
- The central bank increased the stock of FX swaps in March 2020 when exchange rate pressures materialized.

Monetary projections and indicators:
- Consumer prices (IPCA, end of period): 2019 = 4.3 percent; 2020 = 2.0 percent; 2021 = 2.9 percent; 2022 = 3.2 percent; 2023 = 3.3 percent; 2024 = 3.3 percent; 2025 = 3.3 percent.
- Monetary Policy Target Interest Rate (SELIC) (monthly average, percent) shown declining to historic lows (figures in figures section).

### External sector developments and projections
- The current account balance is projected to improve in 2020 on the back of a higher trade surplus and lower service and income deficits.
- The terms of trade are expected to improve slightly as oil prices collapsed.
- Net FDI are expected to remain strong in 2020, but portfolio debt and equity investment will decline sharply.
- In 2020H1, the negative NIIP contracted moderately due to valuation and volume contraction in portfolio investment.
- Financial outflows were particularly severe in March–April 2020 and subsided afterwards.
- Central Bank interventions helped dampen excess exchange rate volatility and reserves accumulation recovered in recent months.

Selected external figures (Table 2, Balance of Payments):
- Current Account (billions USD): 2019 = -50.9; 2020 = -3.9; 2021 = -18.1; 2022 = -29.0; 2023 = -40.2; 2024 = -51.8; 2025 = -61.1.
- Trade balance (billions USD): 2019 = 40.5; 2020 = 51.9; 2021 = 53.3; 2022 = 56.7; 2023 = 57.9; 2024 = 57.7; 2025 = 58.9.
- Exports (fob, billions USD): 2019 = 225.8; 2020 = 210.3; 2021 = 229.1; 2022 = 236.5; 2023 = 240.2; 2024 = 249.6; 2025 = 260.5.
- Imports (fob, billions USD): 2019 = 185.3; 2020 = 158.3; 2021 = 175.8; 2022 = 179.7; 2023 = 182.3; 2024 = 191.9; 2025 = 201.7.
- Gross reserves (end of period, billions USD): 2019 = 356.9; 2020 = 356.9 (proj); and projected stable at 356.9 through 2025 (Table 2 memorandum).

External debt and vulnerability (Table 5 and Table 6):
- Total external debt (in percent of GDP): 2019 = 37.0; 2020 = 48.9; 2021 = 46.8; 2022 = 43.2; 2023 = 41.1; 2024 = 39.1; 2025 = 37.6.
- Current account (in percent of GDP): 2019 = -2.8; 2020 = -0.3; 2021 = -1.3; 2022 = -1.9; 2023 = -2.4; 2024 = -2.9; 2025 = -3.2.
- Nominal exchange rate (R$/US$, annual average): 2019 = 3.9; 2020 = 5.2; 2021 = 5.2; 2022 = 5.1; 2023 = 5.1; 2024 = 5.1; 2025 = 5.1.

### Fiscal sector developments and outlook
- Structurally high tax expenditures have hindered Brazil’s revenue performance and constrained fiscal space, in an environment of ultra-high budget rigidity, rising spending pressures, and binding expenditure ceiling.
- Pre-COVID consolidation was gradual, supported by lower interest payments and policy lending refunds, with milder fiscal impulses since the constitutional expenditure rule enacted in 2017.
- Despite lower policy interest rates, the authorities shortened further the maturity of new debt issuances to avoid steeper yields reflecting emerging fiscal risks, very high debt level, and rising gross financing needs.

Key fiscal aggregates (Table 3 and summary):
- NFPS primary balance (percent of GDP): 2019 = -1.0; 2020 = -11.6; 2021 = -2.7; 2022 = -1.7; 2023 = -1.2; 2024 = -0.7; 2025 = -0.1.
- NFPS overall balance (percent of GDP): 2019 = -6.0; 2020 = -16.3; 2021 = -6.1; 2022 = -5.1; 2023 = -5.4; 2024 = -5.8; 2025 = -5.8.
- Net public sector debt (percent of GDP): 2019 = 55.7; 2020 = 66.8; 2021 = 71.3; 2022 = 74.4; 2023 = 77.0; 2024 = 79.4; 2025 = 81.3.
- NFPS gross debt (percent of GDP): 2019 = 89.5; 2020 = 101.1; 2021 = 99.3; 2022 = 100.3; 2023 = 100.9; 2024 = 101.8; 2025 = 102.3.
- Central government primary balance (percent of GDP): 2019 = -1.3; 2020 = -11.3; 2021 = -2.7; 2022 = -1.7; 2023 = -1.2; 2024 = -0.7; 2025 = -0.1.
- Nominal GDP (billions of reais): 2019 = 7,257; 2020 = 7,067; 2021 = 7,510; 2022 = 7,997; 2023 = 8,504; 2024 = 9,033; 2025 = 9,595.

Revenue and expenditure composition (2003–2019 historical context):
- Tax revenues and fiscal benefits trends highlighted: Fiscal benefits and tax revenues are shown in percent of GDP with values for multiple years (e.g., tax revenues series: 22.4, 23.0, 23.8, ... through 20.8; fiscal benefits series: 4.7, 4.8, 5.0, ... through 5.7).
- Primary expenditures composition (in percent of GDP) shows wages and salaries, social security benefits, goods and services, capital expenditures across 2003–2019 with values such as pensions and social security benefits at 8.5, 8.5, 8.6, ... through 9.4.

### Financial sector developments
- Weekly non-earmarked credit supplied to the private sector was stronger in 2020 than in 2019 despite COVID-19.
- Private bank-lending continued to drive credit growth, with public banks stepping in around May/June 2020.
- Non-performing loans have been broadly stable.
- A long period of high net income allowed banks to build buffers; capital buffers fell somewhat since the beginning of 2020 but remain well above regulatory minimums while liquidity buffers remained relatively stable.
- Sovereign spreads recovered since the initial scare following the outbreak of the pandemic.

Selected financial indicators:
- Weekly non-earmarked credits new transactions (billions BRL) show higher flows in 2020 for Corporations and Households vs 2019 (chart series).
- NPL ratios (percent) by bank type remain low (series shown in Figure 6).
- Tier 1 Capital Adequacy Ratio: public banks and private banks remain well above regulatory minimums (charts provided).
- Spreads on USD-denominated sovereign bonds (basis points) indicate recovery from initial March–April 2020 volatility.

Financial soundness indicators (Table 7 highlights):
- Total banking system: Regulatory capital to risk-weighted assets around 17.3 (2015), 17.6 (2016), 18.0 (2017), 17.8 (2018), 16.3 (2019).
- Nonperforming loans to total gross loans (systemic): 2015 = 4.2; 2016 = 4.9; 2017 = 4.3; 2018 = 3.7; 2019 = 3.6; 2020M6 = 3.4.
- Return on assets and return on equity series shown across bank groups, with system-level ROA and ROE in charts and tables.

### Key socio-demographic and macro aggregates (selected)
- Area (thousands of sq. km): 8,510.
- Population total (million, est., 2019): 210.1.
- Physician per 1000 people (2018): 2.2.
- Hospital beds per 1000 people (2018): 2.2.
- Access to safe water (2018): 83.6.
- Adult illiteracy rate (2019): 6.6.
- Unemployment rate (2019): 11.9.
- GDP, local currency (2019): R$7,257 billion.
- GDP, dollars (2019): US$1,839 billion.
- GDP per capita (2019): US$8,751.
- Poverty rate (in percent, 2018) (IBGE using World Bank threshold U$5.5/day): 25.3.

### Projections summary (selected from medium-term framework)
- GDP growth at constant prices (percent): 2020 = -5.8; 2021 = 2.8; 2022 = 2.3; 2023 = 2.2; 2024 = 2.2; 2025 = 2.2.
- Consumer prices (IPCA, end of period, percent): 2020 = 2.0; 2021 = 2.9; 2022 = 3.2; 2023 = 3.3; 2024 = 3.3; 2025 = 3.3.
- Public sector net debt (percent of GDP): 2020 = 66.8; 2021 = 71.3; 2022 = 74.4; 2023 = 77.0; 2024 = 79.4; 2025 = 81.3.
- Total external debt (percent of GDP): 2020 = 48.9; 2021 = 46.8; 2022 = 43.2; 2023 = 41.1; 2024 = 39.1; 2025 = 37.6.

*Source: IMF staff compilation from Central Bank of Brazil; Ministry of Finance; IBGE; IPEA; John Hopkins University; Brazilian Ministry of Health and Civil Registry; Blavatnik School's Oxford COVID-19 Government Response Tracker; Worlometers; and Fund staff estimates and projections as presented in the chapter.*

### Annex I. Implementation of Past Fund Advice

### Annex I. Implementation of Past Fund Advice

### Fiscal Policy and Structural Policies — Implementation Status and Findings
- Reform the social security system: increase retirement ages and reduce relatively high benefits, particularly for public sector employees — Rationale: Ensure fiscal sustainability and fairness.
  - A pension reform for private sector workers and federal civil servants was approved in October 2019, which will stabilize pension spending as a share of GDP.
- Implement social security reform at the subnational level — Rationale: Ensure fiscal sustainability and fairness.
  - A bill is under discussion in Congress to extend the new pension rules to all state governments. Various states implemented their own pension reforms or are planning to do so.
- Reduce the public sector wage bill at all levels of government — Rationale: Ensure compliance with the federal spending cap, fiscal sustainability and fairness.
  - The government submitted draft legislation to allow cuts in civil servants' wages during periods of fiscal stress.
  - An administrative reform proposal, with an overhaul of public sector career structures, was also submitted, but affects new civil servants only.
- Review budget rigidities, including mandatory spending, revenue earmarking, and the indexation of key spending items, while protecting social programs such as Bolsa Familia — Rationale: Facilitate budget management and fiscal consolidation, while creating space for more public investment.
  - The 'Plano Mais Brasil' proposal includes mechanisms to review some minimum spending requirements, adjust mandatory spending in times of fiscal strain, and reduce earmarking of public funds.
- Simplify the tax system — Rationale: Promote economic efficiency.
  - Congress initiated discussions for the creation of a national VAT, while the federal government presented a proposal for a federal VAT. A comprehensive income tax reform is planned for a later date.
- Remove distortionary tax exemptions — Rationale: Support fiscal sustainability and promote economic efficiency.
  - No concrete steps have been taken; although the federal VAT reform proposal would eliminate some tax exemptions (revenue-neutral).
- Further strengthen revenue administration, in particular efforts to collect arrears — Rationale: Support fiscal sustainability and promote economic efficiency.
  - Reform initiatives have focused on estimating tax gaps, improving taxpayer compliance levels, defining a Business Continuity Plan and an Institution-wide Strategic Plan.
- Move toward a medium-term budget framework — Rationale: Create fiscal space, protect social programs, and increase investment.
  - No concrete steps have been taken.
- Pursue privatization of SOEs — Rationale: Promote economic efficiency, support fiscal consolidation efforts.
  - SOEs (Petrobras, public banks) sold assets in an ammount equivalent to 0.14 percent of GDP in 2019. No major SOE has been privatized thus far.
- Reduce tariffs and non-tariff barriers, and pursue free-trade negotiations outside Mercosur — Rationale: Open the economy, increase competition and efficiency.
  - The government is finalizing agreements/protocols with the EU, Canada, South Korea and the USA, but ratification may need additional political efforts.
- Revive investment in infrastructure through new concessions — Rationale: Alleviate supply bottlenecks, supporting economic growth. Lower transaction costs.
  - A newly approved sanitation and sewage bill would help overhaul the sector, opening opportunities for investment in the sector.
  - Thirty-six concesssion contracts have been negotiated in port, airports, and oil and gas sectors. No major agreement has been made in the energy sector.
- Improve business environment and reform labor markets — Rationale: Attract private investment, improve productivity.
  - The Economic Freedom Act introduced measures to cut red tape (such as simplified procedures for opening and closing companies), end the requirement to obtain licenses and permits for opening low risk businesses, and streamline some labor rules.
- Finalize National Risk Assessment (NRA) in preparation for the next FATF/GAFILAT — Rationale: Strengthen AML and anti-corruption frameworks.
  - The NRA exercise is currently underway; finalization is still pending but scheduled for the coming months.
- Enhance the collection of beneficial ownership information, for both foreign and domestic legal entities. Share the information as needed among relevant competent agencies — Rationale: Strengthen AML and anti-corruption frameworks.
  - The tax authority is collecting beneficial ownership information of domestic and foreign legal entities; it would be important to share this information among relevant competent agencies.

### Monetary and Financial Sector Policies — Implementation Status and Findings
- Legislate BCB’s independence and legal protection of its staff — Rationale: Strengthen the inflation-targetting, micro-prudential, and safety net frameworks.
  - A bill establishing central bank autonomy with a fixed-term mandate (4 years with one renewal, and staggered with the presidential mandate) for the BCB governor and deputy governors was approved by the Senate in November 2020. The bill is now with the Lower House.
- Maintain an accommodative policy stance and prepare to ease further if contractionary effects from fiscal policy materialize — Rationale: Support return of inflation to target.
  - Monetary policy was eased through the second half of 2019 and early 2020. The SELIC was further lowered to cushion the impact of COVID-19 on the economy.
- Upgrade regulatory and supervisory framework in line with 2018 FSAP recommendations — Rationale: To better deal with related party exposures, large exposures, country and transfer risk and restructured loans.
  - The National Monetary Council (CMN) has issued resolutions to address large exposure limits, credit operations between related parties and reporting requirements for the restructuring of financial instruments.
  - Several initiatives are still at the drafting stage, including IFRS9 implementation.
- Bring deposit guarantee fund into the public sector — Rationale: Preserve the financial stability function within the government, avoid conflict of interest, better deal with confidential information.
  - The recommendation to transform the FGC into a fully public-owned institution will not be implemented.
- Enhance the central bank’s ability to provide emergency liquidity assistance and implement the new resolution regime in line with FSAP recommendations — Rationale: Strengthen safety net and bolster banking sector resilience.
  - Implementation of a new permanent emergency liquidity assistance facility is ongoing, with a November 2021 deadline.
  - The draft bill on resolution was submitted to the National Congress in December 2019.
- Give mandate for macro-prudential oversight and crisis management to high level multi-agency committee — Rationale: Strengthen transparency and accountability and improve risk management.
  - The BCB finalized the draft bill “Financial Stability Coordination Law”, in agreement with CVM, Previc and SUSEP. The bill is currently being evaluated by the Office of the President’s Chief of Staff (Casa Civil).
- Improve loan collateral enforcement, foster bank competition, facilitate client mobility and improve transparency and comparability of financial products — Rationale: Improve banking sector intermediation, including by lowering delinquency costs.
  - The Credit Registry Law was amended in 2019 to adopt the opt-out model instead of the opt-in model.
  - Several BCB measures to foster an inclusive and competitive credit market are underway.
  - The Brazilian Instant Payments System (PIX) and phase one of open banking have been in place since November 2020.
- Continue to reduce state intervention in credit markets, including lending by Caixa and Banco do Brasil — Rationale: Improve banking sector intermediation.
  - Public banks were scaling back lending before the COVID-19 shock and plan to continue retrenchment after the crisis.
- Limit the use of foreign exchange intervention to addressing disorderly market conditions — Rationale: Use exchange rate as a first buffer against shocks.
  - Interventions have been limited to episodes of excess volatility.
- Preserve reserve buffers — Rationale: Maintain resilience to external shocks.
  - Reserve buffers have been preserved at adequate levels.

### External Sector Policy — Implementation Status
- No additional separate measures beyond reserve buffer preservation and limited FX interventions are detailed in this annex.

_International Monetary Fund. Annex I. Implementation of Past Fund Advice._

### References

### References

### Cited works
- International Monetary Fund (IMF). 2020. World Economic Outlook: The Great Lockdown: Dissecting the Economic Effects Economy? World Economic and Financial Surveys. Washington, October 2020
- Anna Petherick, Rafael Goldszmidt, Beatriz Kira, and Lorena Barberia. 2020. Do Brazil’s Covid-19 Government Response Measures Meet the WHO’s Criteria for Policy Easing? Blavatnik School of Government Working Paper.
- Jordà, Óscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” A.E.R. 95 (1): 161–82.

### Annex IV. Details of The Fiscal and Quasi-Fiscal Policy Response — key findings
- Authorities announced fiscal and quasi-fiscal measures adding up to about 18 percent of GDP.
- Direct impact of these measures on the primary deficit is restricted to 2020 and estimated at 8.4 percent of GDP.
- Bulk of direct impact in 2020 is in the form of social transfers.
- Public banks expanded credit lines; authorities provided financial support to firms.

### Annex IV — Expenditure and revenue measures (selected items and exact impacts)
- Expenditure measures together cost 5.3 percent of GDP (cash transfers, Bolsa Família expansion, electricity subsidies, frontloaded pension payments and salary bonuses).
  - Beneficiaries of Emergency Aid received R$600 per month during the first 5 months; stipend halved for the remaining 4 months of the year.
  - Inclusion of 1 million new beneficiaries in Bolsa Família.
- Emergency Employment and Income Maintenance Program cost: 0.7 percent of GDP.
- Increased health spending: federal government estimates 0.7 percent of GDP in 2020.
- Revenue/tax measures:
  - Tax deferrals within the fiscal year worth 1.8 percent of GDP.
  - Tax deferrals on essential health products: 0.1 percent of GDP.
  - Tax relief on credit transactions (temporary elimination of financial transactions tax): 0.3 percent of GDP.
- Support to subnational governments:
  - Direct transfers: 1.1 percent of GDP (of which 0.1 percent of GDP earmarked to local health expenditures related to COVID-19).
  - Suspension of debt service with the federal government: 0.5 percent of GDP.
  - Renegotiation of debt with public banks and multilateral organizations: estimated impact up to 0.4 percent of GDP.
- Credit and quasi-fiscal support:
  - Treasury-backed credit lines to SMEs and micro-businesses: over 1 percent of GDP.
  - Public banks stepped up credit lines: 4.4 percent of GDP.
  - Deferral/reduction of small employers’ contributions to extrabudgetary funds: 0.5 percent of GDP.
  - Authorized new withdrawals from the FGTS: up to 0.5 percent of GDP in cash to households.

### Annex IV — Table 1 (selected numeric entries reproduced exactly)
- Total expenditure measures (a): R$485.2 billion; Total (% GDP) — 6.9
  - Advance payment of 13th pension benefit, wage bonuses to low-income workers, and sickness/disability benefits: R$58.7 billion; 0.8 (% GDP)
  - Covid-19 Emergency Aid to low-income households and informal workers: R$321.8 billion; 4.6 (% GDP)
  - Gov. compensation for workers with temporarily reduced or suspended contracts: R$51.6 billion; 0.7 (% GDP)
  - Inclusion of 1 million new beneficiaries in Bolsa Familia program: R$3.1 billion; 0.04 (% GDP)
  - 3-month electricity subsidy to poor families: R$0.9 billion; 0.01 (% GDP)
  - New Min. Health spending to fight Covid19 1/: R$49.1 billion; 0.7 (% GDP)
- Revenue measures (b): R$170.5 billion; 2.4 (% GDP)
  - Deferral of social contributions paid by employers, as well as small business taxes: R$128.8 billion; 1.8 (% GDP)
  - Other tax deferrals: R$14.3 billion; 0.2 (% GDP)
  - Temporarily lower taxes on health products: R$7.1 billion; 0.1 (% GDP)
  - Temporary elimination of the financial transactions tax: R$20.3 billion; 0.3 (% GDP)
- Support to subnational governments (SNGs) (c): R$140.0 billion; 2.0 (% GDP)
  - New transfers from federal government to SNGs: R$79.2 billion; 1.1 (% GDP)
  - Of which, transfers earmarked to health spending: R$10.0 billion
  - SNG debt renegotiation with central government, public banks, and MDBs: R$60.9 billion; 0.9 (% GDP)
- Government-backed credit lines for SMEs and micro-firms (d) 3/: R$79.9 billion; 1.1 (% GDP)
- Quasi-fiscal operations (e): R$378.2 billion; 5.4 (% GDP)
  - Credit lines from public banks to SMEs, micro businesses, and individuals: R$309.8 billion; 4.4 (% GDP)
  - Temporary cut of small employers' contributions to training funds (Sistema S) and deferral of all employers contributions to the FGTS 4/: R$32.2 billion; 0.5 (% GDP)
  - New withdrawals from FGTS authorized 4/: R$36.2 billion; 0.5 (% GDP)
  - Reallocation of public funds to finance crisis-fighting measures (f): R$35.5 billion; 0.5 (% GDP)
- Memorandum items (Percent of GDP):
  - Fiscal and quasi-fiscal measures, including use of public funds (a+b+c+d+e+f): 18.2
  - Fiscal and quasi-fiscal measures (a+b+c+d+e): 17.7
  - Fiscal measures affecting the government accounts (a+b+c+d): 12.4
  - Direct impact of measures on 2020 primary deficit (column (I)): 8.4
  - Revenue Measures (taxes): 0.4
  - Expenditure measures: 6.0
  - Of which, Covid19-related health spending (federal government and SNGs): 0.8
  - Supplementary Transfers to SNGs (not earmarked to health spending): 1.8

### Annex V. Details of The Monetary and Financial Policy Response — summary
- Banking sector liquidity increased by 4.3 percent of GDP and could potentially reach 16.2 percent of GDP.
- Banks benefited from R$1350bn in capital relief.
- Measures likely contributed to a 13.3 percent increase in non-earmarked credit provisioning from mid-March to Mid-August, compared to the same period last year.

### Annex V — Liquidity measures (selected items and exact amounts)
- Temporary reduction in banks’ reserve requirement ratio (RRR) for time deposits from 25 percent to 17 percent; increased banking sector liquidity by R$70bn. Extended through April 2021, after which RRR is to adjust to 20 percent.
- New lending facility using credit operations as collateral: freed up R$50.5bn of liquidity; maximum capacity R$670bn.
- One-year FX repo facility using federal bonds: banks have accessed R$23.2bn of a maximum R$50bn.
- 'Term Deposit with Special Guarantees' (DPGE): increased FGC coverage from R$20mn to R$40mn per depositor; higher guaranteed deposits increased liquidity by R$5.3bn but could potentially reach a maximum of R$200bn.
- Loans backed by debentures: financial institutions had borrowed R$3bn out of a maximum R$91bn (up until late August).
- 30 percent deduction of savings deposit reserve requirements to be used for micro and small company credit; could potentially contribute R$55.8bn increase in credit for micro and small companies — R$40bn has been used so far.

### Annex V — Capital measures (selected items and exact impacts)
- Immediate recognition of tax credits from FX derivatives losses: estimated direct effect on capital relieving R$46bn; could potentially increase credit provisioning by R$520bn.
- Temporary suspension of dividends, interest on own capital, and increases in top managerial compensation: could potentially increase credit by up to R$637bn.
- Working Capital Program for Business Preservation: could reach R$127bn.
- Reduction in risk-weight on SME credit exposures from 100 percent to 85 percent: could contribute to a R$35bn increase in SME lending.

### Annex V — Table: Financial measures (selected totals and shares)
- Total potential credit impact (liquidity support measures): R$1,141 billion; As a share of GDP: 16.1%
- Total potential capital relief measures: R$1,348.2 billion; As a share of GDP: 19.1%
- More flexible credit renegotiations requirements: R$3,200 (amount appears in table context); provisioning waiver amount refers to outstanding credit potentially affected.
- Swap lines with the Federal Reserve:
  - US$ 60 billion
  - US$ 30 billion
- Real estate as collateral to more than one loan: R$ 60 billion

### Annex VI. External Sector Assessment — overall assessment and policy implications
- NIIP was -40.0 percent of GDP at end-2019; external debt about 37 percent of GDP and 264 percent of exports at end-2019.
- Short-term gross external financing needs are around 13 percent of projected 2020 GDP.
- Overall Assessment for 2019: external position was moderately weaker than level implied by medium-term fundamentals and desirable policies.
- Preliminary 2020 adjustment: move in overall external position in 2020 to broadly in line with level implied by medium-term fundamentals and desirable policies, but assessment is highly uncertain due to lack of full-year data and COVID-19 crisis.
- Potential Policy Responses:
  - Raise national savings for sustainable expansion in investment.
  - Fiscal consolidation anchored by the federal spending cap to boost net public savings.
  - Structural reforms to improve efficiency and reduce cost of doing business.
  - Foreign exchange intervention, including using derivatives, can be appropriate to alleviate disorderly market conditions.

### Annex VI — Current account and REER (selected figures)
- CA deficit widened from -2.2 percent of GDP in 2018 to -2.8 in 2019.
- Jan-Jul 2020 trade balance: US$26 billion vs US$22 billion (same period in 2019).
- Staff projects improvement in the CA to about -0.3 percent of GDP over the year.
- 2019 (percent of GDP): Actual CA: –2.8; Cycl. Adj. CA: –3.7; EBA CA Norm: –2.5; EBA CA Gap: -1.2; Staff Adj.: 0; Staff CA Gap: -1.2
- REER: depreciated by 1.9 percent in 2019 relative to 2018; depreciated by 24.9 percent as of end-June 2020 relative to end-2019.
- Staff assesses REER gap at end-2019 in range [-4, 11] percent, with a mid-point of 3.5 percent (overvalued). The sharp exchange rate correction likely leads to a negative gap (undervaluation) in 2020.

### Annex VI — Capital and financial accounts (selected items)
- Net FDI averaged 3.2 percent of GDP during 2015-19 and financed CA deficits since 2015.
- Net portfolio outflows averaged (0.6 percent of GDP) during 2015-19; accelerated to 1.6 percent of GDP in 2020Q1 before easing.
- Sizable external buffers and new Swap line with the US Federal Reserve for US$60 billion provide cushion against external shocks.

### Annex VI — FX intervention and reserves (selected figures)
- Gross reserves ended 2019 at US$357 billion (about 19 percent of GDP or 158 percent of the IMF’s composite reserve adequacy metric).
- Gross reserves net of FX swaps at end-2019: US$322 billion.
- Reserves through June 10, 2020: US$348 billion (gross); gross reserves net of FX swaps declined to US$289 billion.
- Assessment: reserves are adequate; authorities should retain strong external buffers, with intervention limited to addressing disorderly market conditions.

*Source: Excerpted material from the provided content unit.*

### Annex VII. External Sector Debt Sustainability Analysis

### Annex VII. External Sector Debt Sustainability Analysis

### Summary findings
- External debt is assessed to be sustainable over the medium term, but subject to risks.
- After a significant increase in 2020, mainly driven by the GDP contraction and exchange rate depreciation, external debt is expected to decline gradually supported by a recovery in equity investments and improved macro-economic conditions.
- The debt path remains sensitive to real exchange rate shocks.
- A significant deterioration in the fiscal position could also deteriorate debt dynamics through higher interest rates and current account deficit.

### Baseline projections and key statistics (selected)
- Total external debt (baseline, in percent of GDP):
  - 2015: 36.9
  - 2016: 37.6
  - 2017: 32.3
  - 2018: 35.3
  - 2019: 36.7
  - 2020: 48.7
  - 2021: 46.6
  - 2022: 43.0
  - 2023: 40.9
  - 2024: 39.0
  - 2025: 37.6
- Change in external debt (percent of GDP):
  - 2015: 7.9
  - 2016: 0.7
  - 2017: -5.3
  - 2018: 3.0
  - 2019: 1.4
  - 2020: 12.0
  - 2021: -2.1
  - 2022: -3.5
  - 2023: -2.1
  - 2024: -2.0
  - 2025: -1.4
- Identified external debt-creating flows (4+8+9) (percent of GDP):
  - 2015: 9.6
  - 2016: -2.5
  - 2017: -6.7
  - 2018: 1.4
  - 2019: 1.1
  - 2020: -0.9
  - 2021: -4.0
  - 2022: -3.4
  - 2023: -3.0
  - 2024: -2.7
  - 2025: -2.5
- Current account deficit, excluding interest payments (percent of GDP):
  - 2015: -2.0
  - 2016: -0.3
  - 2017: 0.3
  - 2018: -1.0
  - 2019: -1.5
  - 2020: -1.8
  - 2021: 1.2
  - 2022: 1.3
  - 2023: 0.3
  - 2024: -0.5
  - 2025: -1.1
- Net non-debt creating capital inflows (negative) (percent of GDP):
  - 2015: -4.0
  - 2016: -3.9
  - 2017: -2.6
  - 2018: -3.9
  - 2019: -2.6
  - 2020: -4.1
  - 2021: -4.0
  - 2022: -4.3
  - 2023: -4.6
  - 2024: -4.7
  - 2025: -4.9
- Automatic debt dynamics (percent of GDP):
  - 2015: 11.6
  - 2016: 1.1
  - 2017: -3.9
  - 2018: 4.2
  - 2019: 2.1
  - 2020: 4.5
  - 2021: 0.2
  - 2022: 0.4
  - 2023: 0.4
  - 2024: 0.4
  - 2025: 0.4
- Contribution from nominal interest rate (percent of GDP):
  - 2015: 1.0
  - 2016: 1.1
  - 2017: 1.0
  - 2018: 1.2
  - 2019: 1.2
  - 2020: 1.6
  - 2021: 1.5
  - 2022: 1.4
  - 2023: 1.3
  - 2024: 1.2
  - 2025: 1.2
- External debt-to-exports ratio (in percent):
  - 2015: 296.8
  - 2016: 310.6
  - 2017: 264.1
  - 2018: 242.1
  - 2019: 259.8
  - 2020: 279.8
  - 2021: 253.8
  - 2022: 244.5
  - 2023: 242.5
  - 2024: 237.5
  - 2025: 231.8
- Gross external financing need (in billions of US dollars):
  - 2015: 157.5
  - 2016: 121.6
  - 2017: 118.6
  - 2018: 141.1
  - 2019: 167.0
  - 2020: 133.3
  - 2021: 147.2
  - 2022: 159.5
  - 2023: 172.3
  - 2024: 186.0
  - 2025: 198.0
- Gross external financing need (in percent of GDP) (selected years):
  - 2015: 8.8
  - 2016: 6.8
  - 2017: 5.8
  - 2018: 7.5
  - 2019: 9.1
  - 2020: 10-Year10-Year9.8  (table lists "10-Year10-Year9.8..."—source formatting preserved)

### Shock and scenario analysis
- COVID-19 shock:
  - Debt and gross financing needs are projected to increase to 48.7 and 9.8 percent of GDP, respectively, in 2020 compared to 36.7 and 9.1 percent in 2019.
  - The increase is mainly driven by GDP contraction and currency depreciation and by reversal of equity investment flows reducing non-debt financing.
  - Currency depreciation contributed to lower goods and service imports; current account excluding interest payments expected to reach a zero balance in 2020.
  - Over the medium term the current account (CA) is projected to return to trend as equity investments and growth recover, leading to a steady decline in external debt and gross financing needs.
- Historical scenario:
  - If the current account, growth, interest rates, and real exchange rate remain at historical levels over the projection period, external debt would increase to 60 percent of GDP by 2025.
- Real exchange rate shock:
  - A 30 percent real depreciation would cause external debt to reach 68.6 percent of GDP during the first year and to stabilize at 55 percent of GDP by 2025.
- Combined fiscal deterioration scenario:
  - A significant deterioration of the fiscal position could raise current account deficits, interest rates, and slow economic activity, materially worsening external debt dynamics (illustrated by a combined shock scenario).

### Sensitivities and drivers
- Main drivers of the 2020 spike in external debt: GDP contraction, exchange rate depreciation, and reversal of equity investment flows.
- The share of external debt of the non-financial public sector declined from one third to one fourth of the total in the period 2015-2019.
- Key macro assumptions underlying baseline (selected):
  - Nominal GDP (US dollars): 2015: 1800.0; 2016: 1796.6; 2017: 2062.8; 2018: 1885.5; 2019: 1839.1; 2020: 1364.1; 2021: 1431.9; 2022: 1562.8; 2023: 1666.2; 2024: 1787.2; 2025: 1891.7
  - Real GDP growth (in percent): 2015: -3.5; 2016: -3.3; 2017: 1.3; 2018: 1.3; 2019: 1.1; 2020: 1.4; 2021: 3.2; 2022: -5.8; 2023: 2.8; 2024: 2.3; 2025: 2.2
  - Nominal external interest rate (in percent): 2015: 2.6; 2016: 2.9; 2017: 3.0; 2018: 3.4; 2019: 3.4; 2020: 3.2; 2021: 0.5; 2022: 3.2; 2023: 3.3; 2024: 3.3; 2025: 3.2
  - Current account balance, excluding interest payments (percent of GDP): see baseline series above.

### Policy implications and vulnerabilities
- Exchange rate management: External debt dynamics are particularly sensitive to real exchange rate depreciation shocks; policy responses should account for exchange rate risk.
- Fiscal position: A significant deterioration in the fiscal position could materially worsen external debt dynamics via higher interest rates and larger current account deficits; maintaining fiscal sustainability is important.
- External financing and equity flows: Recovery in equity investments and macro conditions is key to reducing external debt and gross financing needs over the medium term.
- Contingency planning: Combined shocks (fiscal deterioration plus exchange rate/interest shocks) could lead to much higher external debt ratios, underscoring the need for policies that preserve market confidence.

*Source: Annex VII. External Sector Debt Sustainability Analysis.*

### 2020. Technical studies to include banks allocated to S2 Segment in Add-on by

### 1braea2020002 - 2020. Technical studies to include banks allocated to S2 Segment in Add-on by

### Financial sector oversight
- Recommendation: Upgrade the 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. (Time: MT)
- Authorities’ actions (compiled by the Brazilian authorities):
  - CMN issued Resolution 4,677/2018 (Basel III reform on Large Exposure Limits), establishing limits and report requirements for single client and large exposures.
  - Rules applied for Prudential Segments S1 and S2 since January 2019 and will apply 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 issued Resolution 4.693/2018 addressing credit operations between related parties.
  - BCB issued 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.
  - For Res 4,693 (Oct/18), accounting items created to collect information from Related Parties (data from Jan/19); fields added in SCR (as of Jan/19) to indicate related party operations.
- Initiatives under analysis or being drafted:
  - Regulation on prudential treatment for transactions with related parties.
  - Amendment to the regulation establishing specific requirements for country and transfer risks, with specific treatment of indirect risks.
  - Requirement of producing concentration risks data on a regular basis.
  - Structured assessment of country, transfer and indirect risk.
  - IFRS9 implementation, which will enhance the credit risk framework definitions, including the definition of credit risk exposure.

### Securities regulation and market conduct
- 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. (Time: ST)
- Authorities’ actions:
  - Analysis to expand scope of agreement with Anbima is ongoing to include supervision of (1) mandate (portfolio breaches) and (2) liquidity management; about 555 funds (representing more than 85% of industry) will be affected; expectation of new version of this agreement in the first half of 2021.
  - CVM Instruction 607 issued to regulate the new Law that expanded CVM’s enforcement power; the new regime is totally applicable and in effect.

### Group-wide supervision of insurance groups and conglomerates
- Recommendation: Implement (BCB, ANS and SUSEP) consistent group-wide supervision of insurance groups and conglomerates with joint rulemaking, implementation, and on-site inspections and granular data sharing. (Time: MT)
- Authorities’ actions and constraints:
  - Granular data sharing depends on legal provisions and establishment of partnerships among supervisors.
  - BCB view: creation of the “Financial Stability National Committee” would partially bridge the data-sharing gap.

### Crisis management and bank resolution; safety nets
- Recommendation: Revise the draft resolution law in line with the FSAP team’s recommendations and promptly enact it. (Time: ST)
- Authorities’ actions:
  - Draft bill submitted to the National Congress in December 2019. Bill of Law 281 of 2019 is pending appreciation by the Lower Chamber.
- 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. (Time: ST)
- Authorities’ actions:
  - BCB position: solvency on a point-in-time basis should not be the main determinant of ELA approval; systemic impact of denying ELA is relevant; BCB prefers to retain discretionary power.
  - Recommendation of MoF indemnity for ELA in systemic circumstances will not be implemented because it may increase moral hazard and the current BCB capital structure is public.
  - BCB deployed Temporary Liquidity Facilities (ELA for the COVID-19 crisis) in April 2020.
  - Implementation of new permanent liquidity facilities is underway as part of the BC# Agenda, with a deadline in November 2021.
- 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. (Time: ST; MT)
- Authorities’ actions:
  - FGC amended its by-laws to establish communication to the BCB prior to each assistance operation.
  - Process to establish the “Financial Stability National Committee” is ongoing.
  - BCB signed an MoU with the FGC to grant access to detailed information on financial institutions that are members of the FGC to facilitate assessment and avoid lending to maintain weak or insolvent banks.
  - 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. (Time: ST)
- Authorities’ actions:
  - Coordination attributed to the Brazilian Intelligence Unit (Coaf).
  - Decree to establish the Strategic Committee for the National AML/CFT Risk Assessment issued on March 6, 2020.

### Financial intermediation efficiency
- Recommendation: Foster competition through client mobility and financial product cost transparency and comparability. (Time: ST)
- Authorities’ actions:
  - National Monetary Council issued Resolution 4,639/2018 to enhance portability of salaries’ accounts.
  - Credit Registry Law (Lei do Cadastro Positivo) amended by Lei Complementar 166/2019 and regulated by Resolution 4,737/2019 to adopt the opt-out model instead of opt-in.
  - Resolution 4,734/2019 and Circular 3,952/2019 set rules for registering and blocking credit and debit card receivables pledged as collateral; volume of blocked receivables cannot exceed the outstanding balance of the transaction; allows retailers to discount receivables at any financial or accrediting institution.
  - Credit portability rules expanded: portability now includes credit granted to individual microentrepreneurs; Resolution 4,762/2019 allows credit portability for legal entities but depends on enacting a specific rule (Circular).
  - Different credit modalities can be destination of ported credit, enabling portability of revolving credit operations into personal credit lines with fixed installments.

### Reform of public banks (BNDES, CAIXA)
- Recommendation: Change product offering of BNDES under new strategy with focus on catalyzing private sector finance and developing the financial sector. (Time: ST)
- Authorities’ actions (BNDES):
  - Launched 2020-2022 Triennial Plan in December 2019 based on three pillars: financial sustainability, focus on social development and divestments of the equity portfolio.
  - Financial sustainability: Long-Term Rate (TLP) in force and market convergence from 2023 forward; deleveraging policy of continued prepayments of loans from the National Treasury; seeking new funding alternatives, syndication strategies, and adjusting loan agreements to allow securitization.
  - BNDES started divestments in 2019, aiming to reduce its risk limit by 90% up to December 2022.
  - In 2020 from January to September, BNDES has divested around R$33.7 billion in equity positions including Petrobras (R$ 22 billion) and Vale (R$ 8.1 billion).
  - FAEP provisional act lapsed without approval of Congress; BNDES continues to support States and Municipalities in privatization efforts and project preparation.
  - As of September 2020, there were 74 projects being structured by BNDES: 31 federal, 30 state and 13 municipal across sectors including water and sanitation, ports, highways, street lighting, power distribution.
  - Capital markets: Fund Manager for the Infrastructure Bonds Special Purpose Vehicle (FDIC Debêntures de Infraestrutura) selected in second semester 2019 but fund not active in 2020 due to interest rate curve structure.
  - Sustainable Energy Fund (launched 2016, implemented 2018) with assets under management of R$500 million in infrastructure projects private bonds related to a low-carbon economy:
    - Over 50 primary investment opportunities analyzed; subscription of 12 different project debentures.
    - Annualized return (last 12 months) was 19.4% per year.
    - Annualized volatility (last 12 months) was 3.95% per year.
    - Fund's annualized return, from Sep/2018 to Dec/2019, was 18.85% per year.
  - May 2020: RFP process for selection of FDICs for SMEs as emergency COVID measures; Bank pre-selected 12 FDICs, of which 10 will receive funds up to R$ 5 billion to offer credit for small businesses.
- Recommendation: Focus CAIXA on core activities, improve governance, and invite a strategic investor. (Time: ST)
- Authorities’ actions (CAIXA):
  - Focus: repositioning credit operations to prioritize loans to microenterprises, promote housing loans, maintain “Minha Casa Minha Vida” operations, expand operations to the middle class through savings and payroll loans portfolio.
  - Improve governance: updating governance model, decision-making forums and bodies, policies and decision-making processes; aiming to adopt transparency, equal treatment, accountability, corporate social responsibility, compliance, strategic risk management and sustainability.
  - Invite a strategic investor: strengthened investment banking group via internal reallocation; structured team to lead potential strategic and capital market operations and advise Government; studies in progress with potential transactions—about 40 transactions under analysis across ECM, M&A, DCM, and Asset Securitization that may exceed R$100 billion.

### Fund relations (As of September 21, 2020)
- Membership Status: Joined January 14, 1946; Article VIII.
- General Resources Account:
  - Quota: 11,042.00 SDR Million (100.00 percent)
  - Fund holdings of currency (Exchange Rate): 8334.48 SDR Million (75.48 percent)
  - Reserve Tranche Position: 2718.18 SDR Million (24.62 percent)
  - Lending to the Fund: (none listed)
  - New Arrangement to Borrow: 211.98 SDR Million
- SDR Department:
  - Net cumulative allocation: 2,887.08 SDR Million (100.00 percent of allocation)
  - Holdings: 2939.13 SDR Million (101.80 percent)
- Outstanding Purchases and Loans: None
- Financial Arrangements (selected):
  - Stand-by 09/06/2002–03/31/2005: Amount Approved 27,375.12 (SDR Million); Amount Drawn 17,199.64
  - Stand-by 09/14/2001–09/05/2002: Amount Approved 12,144.40; Amount Drawn 11,385.37
  - Stand-by 12/02/1998–09/14/2001: Amount Approved 13,024.80; Amount Drawn 9,470.75
- Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/interest: 0.05 (2020), 0.04 (2021), 0.04 (2022), 0.04 (2023), 0.04 (2024)
  - Total: 0.04 (2021), 0.04 (2022), 0.04 (2023), 0.04 (2024)
- Safeguards Assessments: A safeguards assessment of the Banco Central do Brasil (BCB) was completed in June 2002 and updated in March 2005.
- Exchange Rate Arrangement: Since January 18, 1999, Brazil’s de facto and de jure foreign exchange regime classified as floating. Brazil accepted obligations of Article VIII, Sections 2(a), 3, and 4, effective November 30, 1999.
- Tax on financial transactions (IOF): 6.38 percent on exchange transactions carried out through credit card, debit card, and traveler's checks (including cash withdrawals) by companies; IOF raised to 2.38 percent in January 2008 and further increased to 6.38 percent in March 2011; scope of operations expanded in December 2013.
- Last Article IV Consultation: Concluded July 15, 2019. Brazil on the 12-month cycle. FSAP took place in 2002 and updated in 2012 and 2018.
- Technical Assistance highlights: STA mission on Quarterly National Accounts (August 2020); multiple FAD missions on fiscal topics including subnational fiscal rules, cost accounting, public investment management, expenditure rule implementation, fiscal transparency; TADAT Performance Assessment mission in January 2020; April 2020 remote mission supporting State of São Paulo on cost accounting.

### Statistical issues (As of September 21, 2020)
- Assessment: Data provision is adequate for surveillance.
- National Accounts:
  - Since 2015, national accounts estimates compiled in accordance to the 2008 System of National Accounts.
  - Availability of annual supply and use tables contributes to consistent national accounts estimates.
  - Authorities working on improving seasonal adjustment methodology, including better adjust for working days.
  - National accounts series and methodological notes available on the internet (http://www.ibge.gov.br); GDP series available in International Financial Statistics (IFS).
- Price Statistics:
  - Since July 1999, IPCA compiled by IBGE is reference for monetary policy.
  - IPCA covers households earning between one and forty times the minimum wage in 11 metropolitan areas and two municipalities.
  - Weight structure derived from 2008-09 Consumer Expenditure Survey.
  - Getúlio Vargas Foundation and IBGE compile producer price indices (IPA and IPP) since 2010.
- Government Finance Statistics:
  - Ministry of Finance and BCB compile and disseminate GFS using GFSM 2014 presentation.
  - Reported statistics include statement of government operations and balance sheet for general government.
  - 2015: National Treasury introduced accrual basis for government expenditures (series beginning in 2010); since then, revenues on cash basis and expenditures on accrual.
  - 2017: Non-financial assets incorporated in balance sheet for period 2014–2016.
  - Gross debt indicator excludes government securities held by central bank and not used in monetary policy operations.
- Monetary and Financial Statistics:
  - BCB compiles and publishes MFS broadly in line with MFSM 2000.
  - Standardized report forms based on accounting data introduced in March 2013.
  - Institutional coverage of other financial corporations needs expansion to include insurance corporations, open pension funds, capitalization funds, and exchange houses.
  - BCB reports quarterly FSIs: all core and 18 encouraged FSIs with data beginning Q1 2005; plans to compile rest of encouraged FSIs.
  - BCB reports some Financial Access Survey (FAS) indicators including gender data and UN SDG Target 8.10 indicators.
- External Sector Statistics:
  - Brazil disseminates monthly and quarterly balance of payments and quarterly IIP on BPM6 basis.
  - Data sources include international transaction reporting system, surveys on transportation and other services, foreign assets survey, and census of foreign capital.
  - BCB disseminates International Reserves and Foreign Currency Liquidity monthly.
  - Brazil participates in CDIS and CPIS and reports quarterly external debt data to QEDS database.
- Data Standards and Quality:
  - November 2019: Brazil completed requirements for adherence to IMF’s SDDS Plus; first country in Latin America to adhere.
  - Outstanding three data categories (sectoral balance sheets, other financial corporations survey, debt securities) need completion within transition period (within five years from adherence date).
  - Implementing G-20 DGI recommendations: many implemented; further progress to focus on monetary and financial statistics, real estate price indexes, and sectoral accounts.

### Table of Common Indicators Required for Surveillance (As of October 23, 2020) — selected latest observations and reporting frequencies
- Exchange Rates: Date of Latest Observation 9/23/2020; Date Received 9/24/2020; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Sept. 2020; Date Received 10/14/2020; Frequency M/M/M.
- Reserve/Base Money: Sept. 2020; Date Received 10/14/2020; Frequency D/M/M.
- Broad Money: Aug. 2020; Date Received 10/15/2020; Frequency M/M/M.
- Central Bank Balance Sheet: Sept. 2020; Date Received 10/14/2020; Frequency M/M/M.
- Consolidated Balance Sheet of the Banking System: Sept. 2020; Date Received 10/15/2020; Frequency M/M/M.
- Interest Rates: Sept. 2020; Date Received 10/14/2020; Frequency M/M/M.
- Consumer Price Index: Aug. 2020; Date Received 9/1/2020; Frequency M/M/M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Jul. 2020; Date Received 9/1/2020; Frequency M/M/M.
- External Current Account Balance: Q2 2020; Date Received 9/24/2020; Frequency Q/Q/M.
- GDP/GNP: Q2 2020; Date Received 9/1/2020; Frequency Q/Q/Q.
- Gross External Debt: Jun. 2020; Date Received 9/24/2020; Frequency M/M/M.
- International Investment Position: Q2 2020; Date Received 8/31/2020; Frequency Q/Q/Q.

### Debt sustainability analysis — key findings
- Debt sustainability risks are high.
- Gross debt of the non-financial public sector (NFPS) reached 89.5 percent of GDP in 2019, a small increase from 2018.
- The Covid-19 shock is expected to lead to a jump in debt to around 101 percent of GDP in 2020, driven by a primary deficit of 11.6 percent of GDP and a contraction in nominal GDP.
- Gross financing needs will reach 28 percent of GDP in 2020, with a substantial fraction financed by liquid assets.
- Under the baseline scenario, public debt will increase to around 102 percent of GDP in 2025.
- Given record-low interest rates on Brazilian debt, the interest-growth differential should turn negative in 2021 but this is still not sufficient to offset primary deficits until the end of the forecast horizon.
- A primary balance of around 0 is needed to stabilize gross debt as a ratio to GDP beyond the projection horizon. This is feasible assuming compliance with the constitutional expenditure ceiling (which would lead to a small primary surplus in 2026).
- The trajectory of the debt-to-GDP ratio is highly sensitive to shocks to real GDP growth, fiscal deficits and borrowing costs.
- The analysis follows the IMF Staff Guidance Note for Public Debt Sustainability Analysis in Market Access Countries (May 2013).

*Prepared by the Staff of the International Monetary Fund; November 9, 2020.*

### 1.      Definitions and coverage. The gross debt statistics of Brazil cover the NFPS, excluding the state-

### 1braea2020002 - 1.      Definitions and coverage. The gross debt statistics of Brazil cover the NFPS, excluding the state-

### Definitions and coverage
- Gross debt statistics of Brazil cover the NFPS, excluding the state-owned enterprises (SOEs) Petrobras and Eletrobras, and consolidate the Sovereign Wealth Fund (until 2019).
- Following the GFSM 2014 manual, the NFPS debt includes all Treasury securities on the Central Bank’s (BCB) balance sheet.
- As reported by the government, net debt corresponds to the public sector (PS), which includes consolidation with the BCB.
- Brazil’s debt is reported at nominal value.

### Debt developments (end–2019 and 2019 developments)
- At end–2019, Brazil’s NFPS gross debt amounted to 89.5 percent of GDP, 2.8 percentage points higher than a year before.
- Consolidated public sector net debt amounted to 55.7 percent of GDP at end–2019.
- Stock of assets equal to 31.1 of GDP, which included international reserves amounting to 19.8 percent of GDP.
- A primary deficit of 1 percent of GDP and a positive interest–growth differential contributed to the increase in gross debt.
- Net interest payments of the NFPS and consolidated PS stood at 6.9 and 5.1 percent, respectively.
- In 2019, BNDES repaid R$100 billion (1.4 percent of GDP) in outstanding government securities to the Treasury (in addition to R$130 billion repaid in 2018).

### Debt profile (composition and maturities)
- Federal government (FG) domestic tradable securities account for 86 percent of total NFPS gross debt.
- Around 2/3 of tradable securities are held by the private sector and the rest is held by the BCB.
- 40.5 percent of FG domestic tradable securities are linked to the SELIC rate (up nearly 4 percentage points in 2019).
- 32 percent are fixed income securities.
- 27 percent are linked to inflation.
- A residual 0.5 percent are exchange rate linked securities.
- Average duration of FG securities fell slightly in 2019, from 4.1 to 4 years while average maturity fell from 5.7 to 5.4 years.
- About 19 percent of FG domestic tradable securities will mature in 2020 of which 25 percent matured in July alone.
- Foreign currency denominated NFPS debt accounted for only 4.5 percent of GDP at end 2019.

### Baseline and macroeconomic assumptions
- Projections assume a decline in real GDP of 5.8 percent in 2020 followed by growth of 2.8 and 2.3 percent in 2021 and 2022, respectively.
- Medium-term growth is projected at 2.2 percent.
- NFPS primary balance is projected to broadly move to balance in 2025 (0.1 percent of GDP deficit), with a cumulative adjustment of about 2.6 percentage points of GDP during 2021−25 and a large adjustment of 8.9 percentage points in 2021.
- Nominal interest rates on new borrowing are substantially lower than in the past. The effective nominal interest rate is projected at 6.5 percent in 2020, relative to an average of 11.6 percent over 2009-17 and 8.4 percent in 2019.

### Baseline debt projection and net debt dynamics
- In the baseline scenario (assuming compliance with the constitutional expenditure ceiling from 2021 onwards), gross debt jumps to 101.1 percent of GDP in 2020.
- Gross debt declines by around 2 percentage point in 2021 and then rises again at a diminishing pace to around 102 percent of GDP in 2025.
- Debt stabilizing primary balance in the baseline scenario is 0 such that debt would stabilize in 2026 under continued abidance with the expenditure ceiling.
- Net debt of the consolidated public sector is expected to increase faster and longer than gross debt of the NFPS because international reserves are assumed to be broadly constant in nominal terms.

### Baseline gross financing needs projection
- Gross financing needs declined from close to 18 percent of GDP in 2015 to below 15 percent in 2019.
- They are expected to increase to 28 percent of GDP in 2020, with extensive use of the cash buffer.
- Gross financing needs are projected to average 20 percent of GDP over 2021-2025 and breach the high-risk threshold of 15 percent of GDP throughout the projection period.
- Amortization payments would be about 30 percent lower on average excluding the automatic rollover of BCB held bonds.
- On a cash basis, financing needs are estimated to be on average over 1 percentage point higher per year over 2020-21.

### Fan chart analysis and realism of projections
- Debt only stabilizes at the very end or immediately after the forecast horizon and the path is highly sensitive to the real interest rate, growth and the speed of fiscal adjustment.
- A negative combination of macroeconomic variables at the 10th percentile would yield debt at 120 percent of GDP in 2025.
- In the most optimistic scenarios, positive shocks could lower public debt to 90 percent of GDP (10th percentile of positive outcomes).
- Forecast errors for GDP growth are larger than those in surveillance countries during 2014−16.
- Brazil’s projected fiscal adjustment in 2021 (reversing the 2020 stimulus) would be in the very tail of the historical distribution; the level of the PB over the forecast horizon is in line with other surveillance countries’ experience.

### Contingent risks from systemic SOEs
- Government holds about 50 percent of Petrobras’ and Eletrobras’ shares, both excluded from the debt definition.
- Fiscal risks could arise from possible future capitalizations to cover losses.
- Petrobras’s net debt/EBITDA fell continuously; 2020 plans revised with debt expected to remain constant at the 2019 level.
- Government plans to privatize Eletrobras in the medium term.
- Overall, fiscal risks from Petrobras and Eletrobras are deemed limited at this point.

### Longer-term debt outlook (2025-35 scenarios)
- All three scenarios keep nominal GDP growth and the effective interest rate at their 2025 levels.
- Scenario 1: Primary balance remains constant as a share of GDP from 2025 onwards (0.1 percent of GDP deficit) — expenditure ceiling abandoned after 2025 — debt continues to marginally increase over 2025-35.
- Scenario 2: From 2027 onwards primary expenditures remain constant as a share of GDP — debt would fall but still remain around 100 percent of GDP until 2035.
- Scenario 3: Parameters of the expenditure ceiling remain unchanged — debt drops to 81 percent of GDP by 2035. This scenario implies primary expenditures fall from a projected 20.3 percent of GDP in 2021 to 13.8 percent of GDP in 2035.
- Conclusion: Debt sustainability risks are likely to remain elevated for many years; structural fiscal reforms to cut mandatory spending or increase revenues are necessary. A better debt outlook could also be achieved if potential GDP growth were to increase substantially beyond 2.2 percent or if interest rates settled significantly below baseline assumptions.

### Box 1 — The Interest-Growth Differential (key points)
- Effective interest rate on Brazilian public debt at record-low levels.
- Around 40 percent of Brazilian public debt is directly tied to the monetary policy rate.
- Effective interest rate on new issuances fell to 4.85 percent by August 2020 (12-month rolling average).
- The low interest rate is expected to lead to a favorable interest-growth differential over 2021-25; even modest expected GDP growth over 2021-25 will take the interest–growth differential back to zero.

### Box 2 — Financing Needs and Source in 2020 and 2021 (key points)
- Debt issuances were below financing needs so far in 2020; Treasury rolled over less than 100 percent of debt coming due in March and April.
- Treasury drew down part of the cash buffer in the treasury single account (TSA) at the Central Bank — a roughly 9 percent of GDP drawdown at end-August.
- Authorities transferred part of the BCB’s non-realized FX gains on international reserves to the TSA (around 325bn Reais or 4.5 percent of GDP).
- For the remainder of 2020 financing needs will be less elevated, but 2021 amortizations will increase requiring larger issuances and/or continued use of the cash cushion.
- The first four months of 2021 alone will require rollover in excess of 7 percent of GDP of debt held in the market.

### Shocks and stress tests (selected scenarios and outcomes)
- Primary balance shock:
  - Assumes a primary deficit of 7.2 percent of GDP in 2021 and a constant primary deficit of 2.2 percent of GDP per year over 2022-25.
  - Primary balance deteriorates by a cumulative 11 percentage points of GDP over 2021−25 compared to the baseline.
  - Debt reaches close to 115 percent of GDP in 2025.
- Growth shock:
  - Real output growth reduced by one standard deviation (3.3 percent) for two consecutive periods starting in 2021.
  - Gross debt exceeds 110 percent of GDP before increasing at a much reduced rate.
- Real interest rate shock:
  - Real interest rate increased by 450bps over the period 2021−25.
  - Gross debt reaches roughly 110 percent of GDP in 2025.
- Real exchange rate shock:
  - Nominal exchange rate depreciates by 47 percent in 2021 and appreciates only marginally thereafter.
  - Impact is modest given low share of FX debt.

*Content unit: 1braea2020002*

### 15.      Combined macro-fiscal shock. The macro-fiscal shock combines the real growth, interest rate,

### 15. Combined macro-fiscal shock

### Key stress-test finding
- The macro-fiscal shock combines the real growth, interest rate, exchange rate and the primary balance shocks as described above.
- The impact of the macro-fiscal shock on gross debt-to-GDP is extreme:
  - Gross debt reaches exceeds 140 percent by 2025.
  - Public gross financing needs increase to 30 percent of GDP for several years.
- The shock assumes only 50 percent of the primary balance adjustment undertaken in the baseline in 2021 and 2022.

### Baseline fiscal and macroeconomic context (selected figures from the Public DSA and text)
- Nominal gross public debt (percent of GDP), selected years shown in the DSA table:
  - 2018: 67.7
  - 2019: 87.1
  - 2020: 89.5
  - 2021: 101.1
  - 2022: 99.3
  - 2023: 100.3
  - 2024: 100.9
  - 2025: 101.7
- Public gross financing needs (percent of GDP) in the DSA table (selected years): 13.1, 15.6, 14.3, 8.3, 23.9, 22.5, 19.2, 18.3, 19.3 (as displayed).
- Sovereign spreads and market indicators (as in DSA):
  - EMBIG: 309 (bp)
  - 5Y CDS: 214 (bp)

### COVID-19 fiscal and policy response — key figures and outcomes reported by the authorities
- Emergency Aid (EA) program:
  - Covered 67 million beneficiaries at its peak.
  - Monthly stipend of R$600 (double in the case of single mothers) for 5 months.
  - Extended in early September until the end of the year at half the original value.
  - Estimated cost for the whole year: R$322 billion (4.5 percent of GDP).
  - EA impact: 15 million people lifted above the poverty line; 10 million people prevented from falling below the poverty line due to the pandemic.
- Income and Employment Support Emergency Program:
  - Of 12 million formal jobs most vulnerable, about 10 million benefited.
  - Direct fiscal cost estimated at R$52 billion (0.7 percent of GDP).
- Additional emergency measures:
  - Support to states and municipalities: R$97 billion (1.3 percent of GDP).
  - Support to health sector, micro-businesses, small enterprises, and other credit-constrained businesses: R$113 billion (1.6 percent of GDP).
  - Several other measures with no direct impact on the primary fiscal deficit implemented to support states/municipalities, aggregate demand and credit equal to an additional 5.3 percent of GDP.
- Remaining near-term stimulus and demand supports:
  - Remaining stimulus to be disbursed in the last six weeks of the year: R$45 billion.
  - Withdrawable from workers’ severance fund (FGTS): R$15 billion.
  - Estimated precautionarily saved EA: R$50 billion.

### Macroeconomic outcomes and indicators cited
- Policy and monetary stance:
  - Policy rate cut of 225 bps to 2 percent (since March 2020).
  - Copom forward guidance: policy rate will not be raised as long as inflation expectations and Copom projections for the relevant policy horizon are below target, long-term inflation expectations are firmly anchored, and the fiscal regime is maintained.
- Exchange rate and capital flows:
  - Exchange rate slid by almost 20 percent since March, with interventions confined to high-volatility episodes.
- Real activity and labor market:
  - Output contracted by 9.7 percent in 2020Q2 (q-o-q, seasonally adjusted).
  - Staff revised its 2020 growth forecast to -5.8 percent (from a June WEO update projection of -9.1 percent).
  - Median market expectation cited: -4.7 percent for 2020.
  - Government projection cited: -4.5 percent for 2020.
  - Total credit by the domestic financial system to businesses and households increased by 13 percent in the twelve months to September.
  - Retail sales (broad concept) grew by 24 percent in 2020Q3.
  - Industrial production rebounded and is reported as already above pre-pandemic levels.
  - Authorities’ expected growth for 2021: in the range of 3 percent to 4 percent.
- Fiscal stock and sustainability concern:
  - Public debt approaching 100 percent of GDP (authorities’ context).

### DSA baseline drivers and decomposition (selected entries from the DSA table)
- Cumulative change in gross public sector debt (baseline, percent of GDP): 2.4, 3.4, 2.4, 11.6, -1.8, 0.9, 0.6, 0.8, 0.5, 12.8 (as listed).
- Identified debt-creating flows (selected):
  - Primary deficit contribution and primary (noninterest) revenue and expenditure levels shown in the DSA table (percent of GDP): primary (noninterest) revenue 31.6, 29.1, 30.0, 26.8, 28.3, 29.0, 29.3, 29.4, 29.4, cumulative 172.2; primary (noninterest) expenditure 31.3, 30.8, 30.9, 38.5, 31.0, 30.7, 30.5, 30.0, 29.5, cumulative 190.2 (as listed).

### Stress-test scenarios and comparative outcomes (selected)
- Stress-test types presented: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock (Combined Macro-Fiscal Shock); Contingent Liability Shock.
- Representative parameter outcomes shown for 2020–2025 under scenarios (examples from stress-test tables):
  - Baseline real GDP growth: -5.8, 2.8, 2.3, 2.2, 2.2, 2.2 (2020–2025).
  - Combined Shock real GDP growth: -5.8, -0.4, -1.0, 2.2, 2.2, 2.2 (2020–2025).
  - Combined Shock primary balance: -11.6, -7.2, -4.2, -2.2, -2.2, -2.2 (2020–2025).
  - Combined Shock effective interest rate: 6.5, 5.1, 6.8, 7.6, 8.7, 9.4 (2020–2025).
- Under the Combined Macro-Fiscal Shock charts:
  - Gross Nominal Public Debt (in percent of GDP) shows a pronounced increase over 2020–2025, reaching levels that cause the noted exceedance of 140 percent by 2025 in the stress test.
  - Public Gross Financing Needs (in percent of GDP) under the Combined Shock rise toward the 30 percent of GDP range for multiple years.

### Policy recommendations and institutional stance reported
- Fiscal policy:
  - A determined resumption of fiscal consolidation in 2021 is recommended to sustain economic growth prospects and dispel doubts about sustainability.
  - Brazil must protect the integrity of its main fiscal anchor—the constitutional expenditure ceiling—to preserve debt sustainability.
  - Further flexibility in budgetary allocation is advised to enhance the efficiency of public spending and improve quality of fiscal policy. The authorities have proposed constitutional amendments to reduce revenue earmarking, trim and redistribute mandatory spending, remove endogenous pressure from the public payroll, and improve allocation of idle resources in public funds.
  - The authorities would consider fiscal support beyond current plans only if there is a second wave of the pandemic that significantly derails the recovery.
- Monetary policy:
  - Monetary policy should remain supportive provided inflation and inflation expectations remain below target and the fiscal anchor is maintained.
  - Copom clarified forward guidance and warned that any change in fiscal policy that undermines the public debt path or compromises the fiscal anchor would lead to re-evaluation of the forward guidance.
  - Copom members indicated the remaining space for additional monetary policy stimulus, if any, would be small; concerns were expressed about asset price instability at unprecedentedly low interest rates.
- Structural and institutional reforms:
  - Resolute implementation of the reform agenda is emphasized, including: (i) privatizations and concessions; (ii) opening the economy to international trade; (iii) reducing and rationalizing subsidies; (iv) a revenue-neutral tax reform to simplify taxation and improve efficiency; (v) new regulatory frameworks for oil and gas, railways, cabotage, energy and sanitation; (vi) a new insolvency legal framework; and (vii) de jure central bank independence.
  - The Central Bank Independence bill was approved by the Senate in October (as reported).

### Authorities’ assessment of policy actions and outcomes (statements and specific impacts)
- The authorities report that policy reactions were swift and commensurate to the challenge, with substantial fiscal measures (EA, employment support, targeted health and credit support) and monetary and regulatory actions to sustain liquidity and credit flow.
- The EA program is reported to have been highly effective in poverty reduction and supporting demand.
- The Income and Employment Support Emergency Program is highlighted as efficient at preserving jobs and income with a comparatively small fiscal cost.
- Financial sector resilience is emphasized: banks were well capitalized and provisioned; liquidity measures (including reserve requirement reductions) provided funding to meet liquidity needs; regulation was adjusted to facilitate loan refinancing while monitoring credit quality.
- The authorities expect the recovery to be supported by continued fiscal, monetary and credit measures, with a projected 2021 growth in the range of 3 percent to 4 percent under their assumptions.

*Source: IMF staff; Statement by Mr. Bevilaqua on Brazil, November 25, 2020; Public DSA tables and stress-test material as included in the supplied content.*

### conclusion of the municipal election season (second round voting will take place on

### 1braea2020002 - conclusion of the municipal election season (second round voting will take place on

### Political context and timing
- Second round municipal voting will take place on November 29.
- Following the conclusion of the municipal election season, the reform agenda is expected to move more expeditiously in the Congress.

### Authorities' stance and IMF engagement
- The authorities very much welcome the staff’s views and inputs, including in the form of technical assistance, in support of the reform agenda.
- The Fund continues to be a partner of preference for the authorities in several of those key areas of reform.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1braea2020002.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1braea2020002.pdf_