Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Brazil
IMF News, April 10, 2015
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- Published: April 10, 2015
Overview and outlook
- The Executive Board concluded the Article IV Consultation with Brazil on March 16, 2015.
- Fund staff projects negative output growth of 1 percent in 2015, with a return to positive growth in 2016 conditional on successful implementation of fiscal adjustment and other policy actions.
- The outlook is subject to significant downward risks, including drought-induced rationing of energy and water, the possible fallout from the Petrobras case, and a more adverse international environment.
Growth, demand, and inflation
- Growth has decelerated in recent years as the boost from decade-old reforms, expanding labor income, and favorable external conditions has lost steam.
- Drivers of weakness:
- Sluggish investment reflecting eroding competitiveness, a worsening business environment, and lower commodity prices.
- Moderating consumption despite strong wage increases, as job creation has halted and financial conditions have tightened.
- Inflation dynamics:
- Headline and core inflation have been near the upper-edge of the inflation tolerance band in recent years, due in part to sustained wage cost pressures, lingering indexation practices, and the ongoing drought.
- Longer-term inflation expectations rose since 2011, although they have edged down since end-2014.
- Moderating inflation in market-determined prices reflects tighter financial conditions and subdued activity, but new inflation pressures are emerging from the Real's nominal depreciation.
- Monetary policy:
- The central bank hiked the monetary policy rate 375 basis points to 11 percent between April 2013 and April 2014.
- Policy tightening paused from May through September 2014.
- Between October 2014 and March 2015, the rate was increased by a cumulative 175 basis points.
External position and reserves
- Current account:
- Despite weakening domestic demand, the current account deficit reached 4.2 percent of GDP in 2014, up from 2.4 percent of GDP in 2012.
- Deterioration reflects worsening terms of trade, a drop in exports to Argentina, and an increase in fuel imports necessitated by the drought.
- Competitiveness:
- Recent depreciation against the U.S. dollar has not translated one-for-one into gains against competitors.
- Persistently high unit labor costs continue to dampen competitiveness; the real was still overvalued at end-2014.
- Reserves and capital flows:
- FDI financed more than 70 percent of the current account deficit in 2014.
- At about US$362 billion, gross international reserves (cash concept) are well above the IMF’s reserve adequacy metric and other standard benchmarks.
- Capital flows have remained stable and portfolio inflows have been buoyant.
Public finances and fiscal strategy
- Fiscal outcomes:
- In 2013, the non-financial public sector (NFPS) primary balance declined to 1.9 percent of GDP, undershooting its 2.3 percent target.
- The NFPS primary balance reached -0.6 percent of GDP in 2014 despite one-off measures of about ½ percent of GDP.
- NFPS gross debt increased to 71 percent of GDP.
- Declining growth and weak fiscal performance affected Brazil’s sovereign credit rating in 2014: Standard & Poor’s cut Brazil’s credit rating to BBB- in March 2014; in September 2014, Moody’s revised Brazil’s sovereign rating outlook to negative.
- Government strategy since January 2015:
- Ambitious fiscal adjustment to bring the primary surplus of the nonfinancial public sector to 1.2 percent of GDP in 2015 and to at least 2 percent of GDP in 2016 and 2017.
- Measures aim first to stabilize NFPS gross debt and then put it on a downward trajectory.
- The strategy includes targets for 2015−17, the decision to end policy lending to public banks, and emphasis on reducing gross debt ratios.
- Executive Directors’ fiscal guidance:
- Achieving budget targets requires ambitious, front-loaded measures.
- Support for cuts in current expenditures and tax exemptions to make room for priority spending on investment and social programs.
- Many Directors pointed to the benefits of targeting a higher primary surplus over the next two years, though some cautioned about growth impacts.
- Continued fiscal reforms recommended to reduce budget rigidities, simplify the tax system, and address structural sources of fiscal pressure, including the pension and wage indexation systems.
Financial sector and banking system
- System soundness:
- Banking system soundness indicators remain favorable, showing adequate levels of capitalization and provisioning as confirmed by stress tests.
- Private sector leverage and past expansion of public bank lending are potential sources of stress.
- Recommendations:
- Monitor banks’ balance sheets and corporate leverage in the low-growth environment.
- Enhance bank supervision, including for public banks, and apply targeted microprudential measures as needed.
- Directors were encouraged by significant progress in implementing key recommendations of the Financial Sector Assessment Program.
Structural and supply-side reforms
- Directors’ priorities:
- Strengthen policy credibility and market confidence, boost investment and competitiveness, and reinforce the foundation for strong, balanced, and sustainable growth.
- Strengthened governance frameworks in state-owned enterprises; immediate priority to address problems at the state-owned oil company.
- Supply-side reforms critical for boosting productive capacity and growth potential, with priority on infrastructure investment, tax efficiency, improving the business climate, and fostering international trade.
- Prioritization of reforms and greater private sector participation emphasized as keys to success.
Key statistics (selected, as reported)
- Growth and prices:
- Fund staff projects: -1 percent GDP growth in 2015.
- Consumer price index (IPCA, end of period): 6.5 (2011); 5.8 (2012); 5.9 (2013); 6.4 (2014); 7.0 (2015); 4.8 (2016); 4.5 (2017).
- External and reserves:
- Current account deficit: 4.2 percent of GDP (2014); 2.4 percent of GDP (2012).
- Gross international reserves (cash concept): about US$362 billion.
- FDI financed more than 70 percent of the current account deficit in 2014.
- Public finances:
- NFPS primary balance: 1.9 percent of GDP (2013); -0.6 percent of GDP (2014).
- NFPS gross debt: 71 percent of GDP (2014).
- Central government primary balance and NFPS overall balance figures are reported in the Selected Economic and Social Indicators table.
- Social and demographic snapshot:
- Area (thousands of sq. km): 8,512.
- Population total (million, est., 2013): 198.3.
- GDP (2013): R$4,845 billion; US$2,246 billion.
- GDP per capita (est., 2013): US$11,326 billion.
- Poverty rate (in percent, 2013): 15.1.
- Gini coefficient (2013): 49.5.
- Balance of payments (selected, in billion of U.S. dollars):
- Exports: 256.0 (2011); 242.6 (2012); 242.0 (2013); 225.1 (2014); 212.3 (2015 est.).
- Imports: -226.2 (2011); -223.2 (2012); -239.6 (2013); -229.0 (2014); -202.4 (2015 est.).
- Current account (memorandum, in percent of GDP): -2.4 (2011); -3.5 (2012); -3.4 (2013).
- Other macro indicators are provided in the "Brazil: Selected Economic and Social Indicators" table included in the source.
Press Release No. 15/167 — IMF Executive Board Concludes 2014 Article IV Consultation with Brazil (April 10, 2015).