## Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Brazil

_IMF News, April 10, 2015_

## Source details

**Canonical URL:** [Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Brazil](https://www.imf.org/en/news/articles/2015/09/14/01/49/pr15167)

## Other formats

- [Markdown version](/en/news/articles/2015/09/14/01/49/pr15167/index.md)
- [Structured JSON version](/en/news/articles/2015/09/14/01/49/pr15167/index.json)
- [Bundle manifest](/en/news/articles/2015/09/14/01/49/pr15167/bundle-manifest.json)

## Bibliographic details
- 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).*

---


## References

- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](https://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr15167_