Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Brazil

IMF News, August 3, 2011

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Published: August 3, 2011

Background and recent developments

Brazil grew by 7.5 percent in 2010, with output estimated to now be above potential.
Unemployment rate fell to 6.4 percent in May 2011.
Current account deficit widened to 2.3 percent of Gross Domestic Product (GDP) in 2010.
Inflation reached the top of the 2.5–6.5 percent inflation target band in May 2011.
Credit-to-GDP ratio rose from 24 percent of GDP in 2004 to 46 percent of GDP in 2010.
Bank credit to the private sector rose by 20 percent in April 2011.
Net capital inflows reached US$52.6 billion through end-April 2011.
Foreign exchange intervention: purchases of about US$37 billion in the spot market in the first half of 2011.
International reserves reached US$335 billion at end-June 2011.
Monetary policy: policy rate raised by 200 basis points during April–July 2010; increased by 150 basis points since the beginning of 2011 to reach 12.25 at end-June 2011.
Fiscal measures: a package of spending reductions equivalent to 1.2 percent of GDP and a primary surplus target of about 3 percent of GDP for 2011; plans to reduce Treasury transfers to the development bank BNDES.

Executive Board assessment — macroeconomic policy stance and risks

Commendation:
- Directors commended the authorities for sound macroeconomic management and strong policy framework that increased resilience, spurred growth, and promoted greater social equity.
Near-term risks and overheating:
- Directors agreed there are signs of overheating and stressed the importance of further calibrating the policy mix to address near-term macroeconomic pressures.
Fiscal policy:
- Directors welcomed phasing out crisis-era fiscal stimulus.
- Additional fiscal tightening was recommended to support disinflation, manage capital inflows, and reduce the need for raising already high interest rates.
- Support for reducing exceptional funding to the National Development Bank (BNDES) in view of rapid credit expansion.
Monetary policy:
- Directors supported tightening of monetary conditions to contain inflation risks.
- Acknowledged inflation pickup reflects commodity price shocks, strong demand, and labor market pressures.
- Welcomed the central bank’s commitment to tighten monetary policy as needed to meet the midpoint of the inflation target band by end-2012.
Financial sector and macro-prudential policy:
- Overall financial soundness indicators considered favorable.
- Need for heightened vigilance against financial risks given rapid credit growth and continued reliance on external borrowing.
- Macro-prudential measures have helped slow credit in some segments; some Directors noted they may need broader application.
- Commended steps toward Basel III implementation and welcomed a Financial Sector Assessment Program (FSAP) update next year.
Capital flows and exchange rate management:
- Directors noted pragmatic use of the policy toolkit: macroeconomic tightening, substantial exchange rate appreciation, and reserve accumulation.
- Considered use of capital flow management measures appropriate, but cautioned about circumvention and distortionary effects.
- Many Directors recommended further macroeconomic policy adjustment as part of the response to large capital inflows.
Structural reforms:
- Directors underscored the need to tackle longstanding structural rigidities.
- Encouraged fiscal reforms including increasing budget flexibility, reforming the state VAT system, and implementing social security reform.
- Noted that improving the business climate and enhancing competitiveness would lower structurally high interest rates and boost long-term growth prospects.

Key statistics (selected from "Brazil: Selected Economic Indicators, 2005–11")

Real GDP (annual percentage changes):
- 2005: 3.2
- 2006: 4.0
- 2007: 6.1
- 2008: 5.2
- 2009: -0.6
- 2010: 7.5
- 2011 (Prel., Proj): 4.1
Domestic demand (contribution to growth, percent):
- 2005: 2.8
- 2006: 4.8
- 2007: 7.1
- 2008: 6.6
- 2009: -0.7
- 2010: 9.6
- 2011: 5.7
Consumer price index (IPCA, period average):
- 2005: 6.9
- 2006: 4.9
- 2007: 5.0
Consumer price index (IPCA, end of period):
- 2005: 3.1
- 2006: 5.9
- 2007: 4.3
- 2008: 6.3
Federal government (in percent of GDP):
- Total revenues (2005–2011): 22.8, 23.0, 23.3, 23.6, 23.2, 25.0, 23.9
- Total expenditures (2005–2011): 26.2, 26.1, 25.5, 24.0, 26.6, 27.2, 26.0
- Public sector net debt (2005–2011): 48.2, 47.0, 45.1, 38.1, 42.2, 40.2, 39.1
Money and credit (12-month percentage changes):
- Base money (2005–2011): 7.7, 12.6, 21.8, -17.6, 11.6, 131.7, 11.0
- Broad money (M2) (2005–2011): 19.2, 18.6, 18.4, 18.0, 15.8, 9.2, 10.8
- Credit to the private sector (2005–2011): 19.3, 25.7, 36.6, 30.1, 21.6, 15.6
Balance of payments (in billions of U.S. dollars):
- Current account (2005–2011): 14.0, 1.6, -28.2, -24.3, -47.4, -57.9
- Exports (2005–2011): 118.3, 137.8, 160.6, 197.9, 153.0, 201.9, 259.9
- Imports (2005–2011): -73.6, -91.4, -120.6, -173.1, -127.7, -181.7, -239.4
- Foreign direct investment (2005–2011): 12.5, -9.4, 27.5, 24.6, 36.0, 36.9, 55.5
Reserves and external metrics:
- Change in net international reserves (2005–2010): -4.3, -30.6, -87.5, -46.7, -49.1, -67.0
- Current account (in percent of GDP, 2005–2009): -1.7, -1.5, -2.3, -2.4
- Outstanding external debt (in percent of GDP, 2005–2010): 19.1, 14.1, 11.8, 12.2, 12.3, 11.9
- Gross reserves/short-term external debt (residual maturity, in percent, 2005–2010): 73.0, 100.0, 231.3, 235.5, 314.7, 303.8, 353.9

Public Information Notice (PIN) No. 11/108 — July 20, 2011; Executive Board discussion concluded July 20, 2011. Sources: Central Bank of Brazil; Ministry of Finance; and IMF staff estimates.