Public Information Notice: IMF Executive Board Concludes Article IV Consultation with Brazil
IMF News, July 28, 2009
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- Published: July 28, 2009
Background
- Brazil has built a strong macroeconomic framework over the past decade, which has served to increase its resilience to the global economic crisis.
- Sustained fiscal discipline and implementation of the inflation targeting regime have reduced fiscal and external vulnerabilities, and the flexible exchange rate regime has played a key role, allowing the economy to adjust quickly to external shocks.
- Public debt has been lowered in relation to GDP, and substantial international reserves have been accumulated.
- The economy was sharply affected by the global crisis—GDP shrank by 4½ percent in the two quarters to March 2009—but the high credibility of the policy framework has allowed the authorities to adopt countercyclical measures.
- There are signs that the economy began to improve in the second quarter of this year, supported by private consumption and a healthy financial system.
- The global downturn affected Brazil through a sudden curtailment in external credit, a decline in commodity prices and export demand, and a liquidity squeeze for Brazilian corporates and financial firms; access to credit became limited, especially for small- and medium-sized firms.
- The currency depreciated by about 23 percent against the U.S. dollar between mid-September and end-December 2008.
- The creation of lending facilities in foreign currencies and intervention in the foreign exchange market through futures helped stabilize domestic financial conditions relatively rapidly, while making parsimonious use of cash reserves.
- Since the beginning of this year, the real has appreciated by 17 percent against the U.S. dollar, and the stock market has been among the best performers globally.
- Brazilian financial institutions were not exposed to impaired assets abroad and have built strong capital buffers, albeit at levels varying across institutions.
- Bank liquidity ratios have recovered after some dipping in the fourth quarter of 2008.
- Nonperforming loan ratios (NPLs) have risen with the weakening in economic activity.
- Extension of credit by private banks has slowed; the share of public banks in total credit has risen.
- The external financing needs of the corporate sector appear manageable.
- Monetary policy has been eased substantially: with inflation trending downward since July 2008, the policy rate has been cut by 450 basis points since January 2009, and the equivalent of 3½ percent of GDP in liquidity has been released through reductions in reserve requirements.
- Inflationary expectations have remained well anchored, despite the significant depreciation of the currency and inflation being still close to the top of the target range in late 2008.
- Federal government revenues declined by close to 7 percent in real terms during January−May 2009 compared with the same period in 2008.
- The government has announced stimulative tax and spending initiatives and is providing additional resources to the development bank BNDES (equivalent to 3½ percent of GDP over two years).
- The primary surplus is targeted to decline by 1½ percent of GDP in 2009.
- The adjustor for public investment, and resources from the sovereign wealth fund, provide additional flexibility to maintain spending should staff’s less optimistic revenue projections materialize.
- Public financing needs are large, at approximately 19½ percent of GDP; long-term interest rates have remained below the levels prevailing a year ago.
Executive Board Assessment — Findings and Policy Guidance
- Directors welcomed signs that the Brazilian economy has began to improve and considered Brazil to be in a favorable position to weather well the global crisis.
- Directors praised the Brazilian authorities’ robust policy framework and sound prudential supervision, which has allowed an appropriate and timely countercyclical policy response.
- If the growth outlook were to deteriorate significantly from the authorities’ current projections, Directors saw room for additional fiscal and monetary easing, subject to careful monitoring of market reaction.
- Directors considered that the flexible exchange rate regime has served Brazil well.
- Directors commended accumulation of a comfortable foreign reserves cushion, which has helped limit the adverse effects of the global financial turmoil.
- Directors agreed that intervention to address disorderly market conditions remains appropriate.
- Under the CGER methodology based on exchange rates prevailing during the reference period February 25–March 25, Brazil’s real exchange rate was assessed to be broadly in equilibrium, but had appreciated slightly since the reference period.
- Directors endorsed the authorities’ planned fiscal stimulus and reduction in the primary fiscal surplus target in 2009.
- If revenues are less buoyant than projected, Directors saw scope for further flexibility in the fiscal target through use of the adjustor for public investment and resources from the sovereign wealth fund.
- Directors encouraged the authorities to contain other current expenditure, including wages, which will be difficult to reverse as the economy recovers.
- Directors stressed the importance of keeping public debt on a declining path over the medium term, and welcomed plans to return to a higher primary surplus in 2010 as the economy recovers.
- Directors underscored the importance of instituting a sound medium-term fiscal framework and encouraged efforts to reinvigorate the reform process, including with respect to tax and pension reform.
- A gradual reduction of revenue earmarking and expenditure rigidities would be desirable.
- Directors praised the authorities’ adroit management of liquidity in domestic and foreign exchange markets; measures included significant cuts in reserve requirements, expansion in the range of collateral accepted in discount operations, liquidity provision to smaller banks by the Deposit Insurance Fund, and temporary extension of deposit guarantees.
- Directors welcomed recent proposals to change the taxation of savings accounts, noting that further changes may be needed to facilitate monetary easing.
- Directors encouraged efforts to lower the high interest rate spreads.
- Directors considered that the financial system has proven resilient during the global crisis but that some risks may persist at the individual bank level.
- Directors encouraged the authorities to further strengthen the financial safety net and the assessment of contagion risks across financial intermediaries.
- Directors emphasized the importance of ensuring that banks, including public banks, do not take on excessive risk.
- Directors encouraged reviewing limits on financial funds’ exposures to single counterparties and the regulations on asset sales between banks and affiliated funds.
- Directors suggested clarifying the role of the central bank and other institutions to ensure that adequate resources would be available in the event of systemic crisis scenarios.
- Directors supported efforts to ensure greater availability of information on nonfinancial firms’ foreign exchange exposures.
- Some Directors encouraged the authorities to undertake a Financial Sector Assessment Program (FSAP) update in the near future.
Key Statistics and Projections (select figures exactly as reported)
- Real GDP growth: 2004: 5.7; 2005: 3.2; 2006: 4.0; 2007: 5.1; 2008: -1.3; Proj. 2009: 2.5; 2010: (not fully listed in table header)
- Domestic demand (contribution to growth): 2008: -2.0
- Private consumption (annual changes shown): 2008: 5.4; Proj. 2009: 0.0
- Public consumption (annual changes shown): 2008: 5.6; Proj. 2009: -3.8
- Gross investment (annual changes shown): 2008: 11.8; Proj. 2009: -8.8
- Gross fixed capital formation: 2008: 13.8; Proj. 2009: -12.8; 2010: 3.5
- Foreign balance (contribution to growth): 2008: -1.9; Proj. 2009: 0.7
- Consumer price index (IPCA, period average): 2008: 6.6; 2009: 4.2
- Consumer price index (IPCA, end of period): 2007: 7.6; 2008: 3.1; Proj. 2009: 5.9
- GDP deflator (selected years): 2004: 8.0; 2005: 7.2; 2006: 6.2; 2007: 3.7; 2008: 2.2
- Federal government total revenues (in percent of GDP): 2004: 21.8; 2005: 22.8; 2006: 23.0; 2007: 23.9; 2008: 24.8; Proj. 2009: 23.8; 2010: 24.2
- Federal government total expenditures (in percent of GDP): 2004: 23.2; 2005: 26.2; 2006: 26.1; 2007: 25.7; 2008: 26.3; Proj. 2009: 24.9
- Federal government of which: interest (in percent of GDP): 2004: 6.0; 2005: 5.3; 2006: 4.6; 2007: 3.0
- Primary balance (consolidated public sector): 2008: 2.7
- Consolidated public sector overall balance: 2004: -2.4; 2005: -3.4; 2006: -3.5; 2007: -2.5; 2008: -3.2
- Public sector net debt (in percent of GDP): 2004: 49.3; 2005: 46.7; 2006: 45.0; 2007: 44.3; 2008: 36.5; Proj. 2009: 41.6; 2010: 40.3
- Base money (12-month percent changes): 2004: 7.7; 2005: 12.6; 2006: -17.6; 2007: 20.6; 2008: 5.8
- Broad money (M2) (12-month percent changes): 2004: 16.6; 2005: 19.2; 2006: 18.6; 2007: 18.4; 2008: 18.0; Proj. 2009: 11.5; 2010: 11.9
- Credit to the private sector (12-month percent changes): 2004: 17.2; 2005: 22.5; 2006: 28.9; 2007: 28.3; 2008: 14.3; Proj. 2009: 21.2
- Current account (in billions of U.S. dollars): 2004: 11.7; 2005: 14.0; 2006: 13.6; 2007: 1.6; 2008: -28.5; Proj. 2009: -18.0; 2010: -21.8
- Exports (in billions of U.S. dollars): 2004: 96.5; 2005: 118.3; 2006: 137.8; 2007: 160.6; 2008: 197.9; Proj. 2009: 158.0; 2010: 166.8
- Imports (in billions of U.S. dollars): 2004: -62.8; 2005: -73.6; 2006: -91.4; 2007: -120.6; 2008: -173.2; Proj. 2009: -140.3; 2010: -151.4
- Foreign direct investment (gross, in billions of U.S. dollars): 2004: 18.1; 2005: 15.1; 2006: 18.8; 2007: 34.6; 2008: 45.1; Proj. 2009: 25.0; 2010: 27.6
- Change in net international reserves (in billions of U.S. dollars): 2004: 28.5; 2005: 32.0; 2006: 94.5; 2007: 13.4; 2008: 7.8; Proj. 2009: 8.5
- Current account (in percent of GDP): 2004: 1.3; 2005: 0.1; 2006: -1.8; 2007: -1.4; 2008: -1.6
- Outstanding external debt (in percent of GDP): 2004: 19.1; 2005: 15.8; 2006: 14.4; 2007: 12.4; 2008: 14.7; Proj. 2009: 14.2
- Debt service ratio (in percent of exports of goods and services): 2004: 66.6; 2005: 68.9; 2006: 58.2; 2007: 65.9; 2008: 40.7; Proj. 2009: 48.3; 2010: 47.5
- Gross reserves/short-term external debt (residual maturity, in percent): 2004: 73.0; 2005: 100.0; 2006: 231.3; 2007: 259.2; 2008: 284.4; Proj. 2009: 272.4
IMF Public Information Notice No. 09/92 (July 28, 2009).