IMF Executive Board Concludes 2017 Article IV Consultation with Brazil
IMF News, July 13, 2017
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- Published: July 13, 2017
Overview and recent developments
- Date: July 13, 2017.
- Brazil’s deep recession appears close to an end.
- Recession drivers cited: large macroeconomic imbalances, a loss of confidence, declining terms of trade, tight financing conditions, and a political crisis.
- New government pursued an ambitious reform agenda with congressional and market support.
- A constitutional amendment caps growth in federal noninterest spending in real terms.
- Progress reported on discussion of social security and other structural reforms.
- Recent indicators suggest the economy is close to a turning point, but a recent rise in political uncertainty has increased near-term risks.
- National elections scheduled for 2018 reduce the window for legislative action on reforms.
Outlook and risks
- Fund staff growth projections:
- 2017: 0.3 percent
- 2018: 1.3 percent
- Medium term: moving towards 2 percent
- Inflation outlook:
- Projected to undershoot central target of 4.5 percent in 2017 and 2018.
- Forecast assumption: a sufficiently strong set of measures—most notably social security reform—are put in place to ensure fiscal sustainability.
- Main domestic risk: social security reform severely diluted or delayed to the next government, prompting adverse market reaction and necessitating additional fiscal measures over time.
- Main external risks: a faster than expected tightening of global financial conditions; lower likelihood of a significant slowdown in China.
Monetary policy and disinflation
- Inflation developments:
- After almost 2 years above the ceiling of the central bank’s tolerance range of 6.5 percent, inflation declined rapidly over the past year.
- Contributing factors: dissipating impact of large increases in regulated prices in 2015; widening output gap; appreciating exchange rate; declining inflation expectations; favorable shock to food prices.
- Monetary easing:
- Central bank began easing in September 2016, lowering the policy rate by a cumulative 400 bps to 10.25 percent as of June 2017.
- Inflation targets:
- National Monetary Council announced gradual reduction in the inflation target to 4.25 percent in 2019 and 4.0 in 2020.
- Recommendation: continue monetary easing while continuously reassessing policy stance in view of inflation, expectations, and fiscal reform prospects.
External sector and exchange rate
- Current account:
- Deficit narrowed to 1.3 percent of GDP in 2016 (from 3.3 percent of GDP in 2015).
- On average in 2016, external position broadly consistent with medium-term fundamentals and desirable policies.
- External financing and reserves:
- Brazil continued to attract sizeable capital inflows.
- International reserves: US$365 billion at end-2016.
- Central bank FX operations:
- Reduced rollover rate of maturing FX swaps and auctioned reverse FX swaps.
- Net forward position reduced to 1.4 percent of GDP from over 5 percent of GDP at end-2015.
- Recommendation: preserve floating exchange rate system and reserve buffers; limit interventions to addressing disorderly market conditions.
Financial sector and corporate health
- Banking sector:
- Profits before taxes surged due to high interest margins and lower funding costs.
- Banks renegotiated loan terms and wrote off delinquent loans to limit increases in non-performing loans.
- Capital ratios increased due to decline in private banks’ risk-weighted assets and higher unrealized gains on fixed income securities.
- Liquidity improved; withdrawals of saving deposits stopped; banks’ holdings of liquid assets increased.
- Overall external funding exposure and net open positions remained low.
- Recommendations:
- Further strengthen financial safety nets through enhanced monitoring and improved crisis management framework.
- Continued vigilance and close monitoring of the corporate sector and its impact on the banking system.
Fiscal outcomes, objectives, and measures
- Fiscal deterioration:
- Non-financial public sector (NFPS) debt rose from 72.5 percent of GDP to 78.3 percent between 2015 and 2016.
- Primary balances: -1.9 and -2.5 percent of GDP in 2015 and 2016.
- Overall balances: -10.3 and -9.1 percent of GDP in 2015 and 2016.
- Deficits driven by trend increases in mandatory spending and a sharp cyclical revenue downturn; high borrowing costs and contraction in output worsened debt dynamics.
- Government objective: restore fiscal sustainability by gradually bringing primary balances toward surplus territory, supported by the constitutional expenditure ceiling and social security reform.
- 2017 authorities’ aim: bring the primary deficit to ‑2.1 percent of GDP.
- Adjustment measures introduced: 0.9 percent of GDP, including cuts in discretionary spending of 2/3 percent of GDP and a partial roll-back of payroll tax exemptions.
- Executive Directors’ views:
- Fiscal sustainability is a key priority; commended ambitious consolidation and reform efforts.
- Further efforts needed to achieve fiscal targets; fiscal effort will need to be more intense as recovery takes hold.
- A rolling medium term fiscal framework would help clarify and update debt stabilization goals.
- Concern over subnational finances; encouraged durable solutions in coordination with the states.
Structural reforms and governance
- Priority reforms:
- Social security reform, including schemes for civil servants at all levels of government, to address unfavorable demographic trends and large actuarial imbalances.
- Tax policy, labor market, and infrastructure reforms to raise long-term growth.
- Trade reforms to enhance competitiveness and efficiency.
- Governance:
- Ongoing efforts to combat corruption noted.
- Continued strong action to improve governance, increase transparency, and strengthen institutional frameworks emphasized as key to securing strong, durable and inclusive growth.
Executive Board Assessment (summary)
- Directors welcomed signs of recovery but noted political uncertainty poses risks to outlook and reforms.
- Supported current pace of fiscal adjustment given challenges but emphasized need for more intense effort as recovery proceeds.
- Recommended continuing monetary easing while reassessing stance as conditions evolve.
- Emphasized preserving floating exchange rate and reserve buffers; limiting FX interventions to disorderly conditions.
- Urged strengthening of financial safety nets and monitoring of corporate sector.
- Stressed importance of ambitious structural reforms and improved governance.
Brazil: Selected economic indicators (selected exact figures)
- Social and demographic indicators:
- Area (thousands of sq. km): 8,512
- Agricultural land (percent of land area): 31.2
- Physician per 1000 people (2013): 1.9
- Hospital beds per 1000 people (2012): 2.3
- Access to safe water (2015): 98.1
- Total population (million) (est., 2015): 204.5
- Annual rate of growth (percent, 2015): 0.8
- Density (per sq. km.) (2015): 24.0
- Adult illiteracy rate (2015): 7.4
- Unemployment rate (latest, 2017): 13.7
- Net enrollment rates, percent in: Primary education (2014): 99; Secondary education (2014): 84
- Life expectancy at birth (years): 75
- Infant mortality (per thousand live births): 14
- Poverty rate (in percent, 2014): 13.3
- Income distribution by highest 10 percent of households: 40.9
- By lowest 20 percent of households: 3.6
- Gini coefficient (2015): 49.1
- GDP, local currency (2016): R$6,267 billion
- GDP, dollars (2016): US$1,799 billion
- GDP per capita (est., 2016): US$8,795
- Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.
- National accounts and prices (annual percentage change; selected cells):
- GDP at current prices: 3.8 (2015), 4.4 (2016), 7.8 (2017), 6.1 (2018), 6.8 (2019), 7.1 (2020)
- GDP at constant prices: -3.8 (2015), -3.6 (2016), 0.3 (2017), 1.3 (2018), 2.0 (2019)
- Consumption: -3.3 (2015), -4.7 (2016), -0.2 (2017), 0.4 (2018), 1.5 (2019), 1.1 (2020)
- Investment: -23.8 (2015), -10.4 (2016), 4.0 (2017), 7.2 (2018), 5.6 (2019)
- Consumer prices (IPCA, end of period): 10.7 (2015), 6.3 (2016), 4.5 (2017)
- Gross domestic investment (percent of GDP): 19.1 (2015), 17.5 (2016), 17.6 (2017), 17.9 (2018), 18.5 (2019), 18.8 (2020), 19.6 (2021)
- Private sector: 17.3 (2015), 15.8 (2016), 16.0 (2017), 16.3 (2018), 17.0 (2019), 17.4 (2020), 17.7 (2021), 18.3 (2022)
- Public sector: 1.8 (2015), 1.6 (2016), 1.4 (2017)
- Gross national savings (percent of GDP): 16.2 (2015), 16.8 (2016), 17.2 (2017), 24.1 (2018), 23.3 (2019), 23.1 (2020), 23.4 (2021), 22.8 (2022), 22.9 (2023)
- Public sector finances (percent of GDP; selected):
- Central government primary balance 1/: -2.0 (2015), -2.3 (2016), -1.8 (2017), -1.3 (2018), -0.6 (2019), 0.0 (2020), 0.5 (2021)
- NFPS primary balance: -1.9 (2015), -2.5 (2016), -2.1 (2017), -1.1 (2018), -0.4 (2019), 0.2 (2020)
- NFPS cyclically adjusted primary balance: -1.4 (2015), -1.0 (2016), -0.8 (2017), -0.3 (2018)
- NFPS overall balance (including net policy lending): -10.3 (2015), -7.5 (2016), -8.8 (2017), -10.2 (2018), -9.8 (2019), -9.7 (2020)
- Net public sector debt: 35.6 (2015), 46.2 (2016), 51.4 (2017), 55.9 (2018), 58.9 (2019), 61.0 (2020), 62.4 (2021), 63.3 (2022)
- General Government gross debt, Authorities’ definition: 65.5 (2015), 69.9 (2016)
- NFPS gross debt: 72.5 (2015), 78.3 (2016), 81.5 (2017), 85.8 (2018), 88.6 (2019), 90.5 (2020), 91.7 (2021), 92.4 (2022)
- Of which: Foreign currency linked: 3.5 (2015), 3.4 (2016), 3.3 (2017)
- Money and credit (annual percentage change; selected):
- Base money 2/: 8.4 (2015), 8.1 (2016)
- Broad money 3/: 9.7 (2015), 12.4 (2016), 11.6 (2017), 8.7 (2018), 10.0 (2019), 13.8 (2020), 14.4 (2021), 14.5 (2022)
- Bank loans to the private sector: -2.9 (2015), 5.7 (2016), 11.0 (2017), 12.9 (2018), 12.2 (2019)
- Balance of payments (in billions of U.S. dollars; selected):
- Trade balance: 45.0 (2015), 49.0 (2016), 51.8 (2017), 52.3 (2018), 53.9 (2019), 56.5 (2020)
- Exports: 190.1 (2015), 184.5 (2016), 200.1 (2017), 205.4 (2018), 214.3 (2019), 221.8 (2020), 231.3 (2021), 241.8 (2022)
- Imports: 172.4 (2015), 139.4 (2016), 151.0 (2017), 156.3 (2018), 162.5 (2019), 169.5 (2020), 177.4 (2021), 185.3 (2022)
- Current account: -59.4 (2015), -23.5 (2016), -32.4 (2017), -37.4 (2018), -38.1 (2019), -42.9 (2020), -47.1 (2021), -50.4 (2022)
- Capital account and financial account: 55.6 (2015), 16.7 (2016), 32.4 (2017), 37.4 (2018), 38.1 (2019), 42.9 (2020), 47.1 (2021), 50.4 (2022)
- Foreign direct investment (net): 61.2 (2015), 71.1 (2016), 59.0 (2017), 53.6 (2018), 50.5 (2019), 49.7 (2020), 49.8 (2021)
- Terms of trade (percentage change): -11.0 (2015), 3.0 (2016), -2.4 (2017), -1.2 (2018), -1.5 (2019), -0.9 (2020)
- Merchandise exports (in US$, annual percentage change): -15.2 (2015), -3.0 (2016), 8.5 (2017), 2.7 (2018), 8.0 (2019), 4.3 (2020)
- Merchandise imports (in US$, annual percentage change): -25.3 (2015), -19.1 (2016), 8.3 (2017), 7.6 (2018), 4.7 (2019)
- Total external debt (in percent of GDP): 36.9 (2015), 32.2 (2016), 31.7 (2017), 30.7 (2018), 29.7 (2019), 28.6 (2020), 27.5 (2021)
- Memorandum items:
- Current account (in percent of GDP): -1.7
- Gross official reserves: 356.5 (2015), 365.0 (2016)
- REER (annual average in percent; appreciation +) 4/: -15.8 (2015), 6.7 (2016), 13.6 (Q1 2017 only)
IMF Executive Board Concludes 2017 Article IV Consultation with Brazil; Press Release No. 17/279; July 13, 2017.