Brazil: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, May 24, 2019
Source details
- Canonical URL
- Brazil: Staff Concluding Statement of the 2019 Article IV Mission
Other formats
Bibliographic details
- Published: May 24, 2019
Macroeconomic outlook and near-term findings
- Recovery remains sluggish after a deep recession: real GDP contracted by almost 7 percent during the 2015-16 recession and grew by only 1.1 percent per year in 2017 and 2018.
- Short-term indicators show weakness persisted in Q1.
- Investment remains subdued due to large spare capacity and uncertainty about fiscal and structural reforms.
- External drag: weak global growth and the recession in Argentina are holding back exports.
- Growth projections and risks:
- Growth in 2019 is projected between 1 and 1.5 percent with significant downside risks.
- Conditional on approval of a robust pension reform and favorable financial conditions, growth is expected to accelerate in 2020, supported by a recovery in private investment.
Fiscal stance and public debt
- 2018 fiscal position:
- Nonfinancial public sector primary balance improved marginally to ˗1.7 percent of GDP.
- Structural fiscal stance was neutral in 2018.
- 2019 outlook:
- The current budget may entail a slight relaxation of the fiscal stance in 2019.
- Compliance with the expenditure ceiling in following years depends on approval of the pension reform and other consolidation measures.
- Public debt and longer-run outlook:
- Public debt stands at 88 percent of GDP.
- Debt continues to grow and is projected to peak only in 2024, conditional on continued fiscal consolidation.
- State-level risks:
- Governors of seven states have declared a state of calamity; Rio de Janeiro has negotiated a fiscal recovery program with the federal government.
- Other states might receive temporary relief if they implement fiscal consolidation measures under a program being considered by the authorities.
Monetary policy and financial sector
- Monetary stance:
- The central bank has held the policy rate at the historic low of 6.5 percent since March 2018.
- Headline inflation is around the 4.25 inflation target for 2019; core inflation is more muted; inflation expectations are anchored around target.
- The monetary stance is appropriately supportive at present and should remain accommodative given the large output gap and anchored inflation expectations.
- There is scope to loosen further monetary policy in the future to the extent that fiscal consolidation is contractionary, provided inflation expectations remain well anchored.
- Exchange rate and reserves:
- A flexible exchange rate remains important to absorb shocks.
- Intervention should be limited to addressing disruptive market volatility.
- International reserves provide a buffer and should be preserved.
- Credit and banking:
- Lending by public banks has been declining, driven primarily by reduced funding available to BNDES development bank.
- Credit from private banks has grown at around 8 percent in real terms over the past year, producing moderate overall bank lending growth.
- Intermediation margins in the banking sector remain high, hindering credit demand and investment.
- The financial system is well capitalized.
- Further steps urged: enhance prudential, crisis management, safety net, and macroprudential frameworks; upgrade regulatory and supervisory approach to related party exposures, country and transfer risk, and restructured loans; promptly put in place a new financial resolution regime; bring the deposit guarantee fund into the public sector; tighten emergency liquidity assistance procedures; complete creation of a multi-agency committee with explicit mandates for macroprudential policy and crisis management.
- The recent approval of a credit registry law (cadastro positivo) is a step in the right direction.
External position
- Current account developments:
- The current account deficit widened to 0.8 percent of GDP in 2018.
- Projected to deteriorate to 1.5 percent of GDP in 2019 mostly because of one-off operations related to the energy sector and the recession in Argentina.
- Strengths:
- Large amount of reserves, a flexible exchange rate, and a contained current account deficit fully financed by large FDI inflows support the external position.
Social outcomes and labor market
- Improvement in social conditions has stalled:
- Unemployment rate declined only marginally in 2018 and remains high compared to pre-crisis levels, alongside informal labor and underemployment.
- Despite the economic recovery, income inequality and the number of people living in poverty increased in 2017.
- Policy priority: protect effective social programs, including Bolsa Familia, while pursuing fiscal consolidation and supporting public investment.
Structural reform priorities
- Overarching need: bold reform agenda to address historically low growth, high public debt, and pervasive inequality.
- Since 1980, economic growth in Brazil has averaged 2.5 percent.
- Pension reform:
- The ambitious pension reform proposal under consideration by congress would stabilize pension spending over the next decade and make the system more equitable.
- To deliver needed fiscal adjustment, Congress should preserve the proposed increase in retirement ages and decrease relatively high benefits, particularly for public sector employees.
- Additional fiscal measures beyond pension reform:
- Preserve a neutral fiscal stance in 2019.
- To comply with the constitutional expenditure ceiling in outer years, the government should lower the public wage bill and reduce other current expenditures, including by limiting minimum wage increases to cost of living adjustments.
- Windfall oil revenue—including proceeds from the upcoming Transfer of Rights transaction—should be used exclusively to lower debt.
- Tax reform:
- Move toward a single broad-based VAT, harmonize federal and state tax regimes, and remove distortionary and costly tax exemptions.
- Continue efforts to strengthen revenue administration.
- Fiscal framework improvements:
- Address budget rigidities, including revenue earmarking, mandatory expenditure, and the indexation of key spending items.
- Move toward a medium-term budget framework to facilitate prolonged adjustment implied by the expenditure ceiling.
- Privatization and state footprint:
- Ambitious privatization program expected to improve productivity in key sectors, including infrastructure and energy, and allow privatized companies to increase investment without using limited public resources.
- Trade liberalization:
- Brazil remains one of the most closed economies in the world to trade.
- Plans to lower import barriers are welcome; prospective OECD accession is an opportunity to foster trade integration.
- Trade liberalization should be pursued regardless.
- Improving bank intermediation efficiency:
- High cost of borrowing reflects banks’ large credit losses, high operating costs, and lack of competition.
- Proposed corporate bankruptcy law would reduce delinquency costs for banks.
- Continue reducing the role of public banks and directed lending; facilitate client mobility and financial product cost transparency.
- Anti-money laundering and anti-corruption:
- Continue pursuing significant money laundering and corruption cases and improve the legal framework.
- Focus on preventive measures, effective enforcement, long-term legislative improvements, and expedite completion of the national anti-money laundering risk assessment.
Risks and recommendations summary
- Main domestic risk: failure to approve a robust pension reform.
- Other fiscal risks: failure to undertake consolidation undermining confidence and deterring investment; subnational fiscal stress.
- External risks: deepening of the recession in Argentina and global trade tensions.
- Recommended policy mix:
- Approve robust pension reform.
- Implement additional consolidation measures to comply with the expenditure ceiling and stabilize debt.
- Preserve and protect effective social programs and public investment.
- Pursue ambitious tax reform, privatization, trade liberalization, and measures to improve bank intermediation and financial oversight.
- Maintain accommodative monetary policy while keeping inflation expectations anchored and preserve international reserves and a flexible exchange rate.
- Enhance prudential and crisis management frameworks as recommended by the 2018 FSAP.
Source: IMF staff concluding statement, May 24, 2019.