## IMF Executive Board Concludes 2016 Article IV Consultation with Brazil

_IMF News, November 15, 2016_

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## Bibliographic details
- Published: November 15, 2016

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### Summary of economic situation and recent policy actions
- Brazil is poised to emerge from a deep recession that involved marked contractions in 2015 and 2016 driven mainly by long-standing domestic issues, with terms of trade changes and weak global demand also important.
- Key factors behind the recession: tighter financial conditions, slowing credit, political uncertainty, declining investment and consumption, rising unemployment, sharp realignment of regulated prices, and monetary policy tightening.
- Government measures since May 2016:
  - Sent to Congress a constitutional amendment limiting the growth in federal noninterest spending to the rate of consumer price inflation of the previous year for the next 20 years.
  - Announced a reform of the social security system.
- IMF staff view: a strong push to implement proposed expenditure-side measures would help restore policy credibility, market confidence, investment, and growth; early implementation would also help moderate inflation expectations and facilitate monetary policy easing.

### Activity, inflation, and monetary policy
- Staff project output growth of -3.3 percent in 2016 and about ½ percent in 2017 (projection assumes approval of the fiscal spending cap and social security reform in a reasonable timeframe and meeting proposed fiscal targets for 2016 and 2017).
- Headline and core inflation have been above the central target and around the upper limit of the central bank’s tolerance range for several years.
- In 2016 some price increases began to moderate, but disinflation proceeded slowly due to above-target, albeit declining, inflation expectations and rising food prices.
- Monetary policy remained at a tight stance for over a year; Directors recommended monetary policy should remain relatively tight until more tangible progress in fiscal adjustment and reforms is made and inflation expectations move closer to the central bank’s inflation target.
- Central bank foreign exchange operations:
  - Lowered the net notional value of outstanding FX swaps to about US$35 billion (from a high of about US$110 billion) by issuing reverse swaps and failing to roll over maturing swaps.
  - International reserves are above most IMF adequacy and other standard indicators.

### External sector and external financing
- Current account deficit narrowed from 4.3 percent of GDP in 2014 to 3.3 percent in 2015.
- FDI fully financed the current account deficit in 2015.
- External position remained moderately weaker than the level consistent with fundamentals, reflecting the reversal of exchange rate depreciation in 2015.
- Balance of payments (selected items, in billion of U.S. dollars where provided):
  - Exports: 224.1 (2014), 190.1 (2015), 197.6 (2016 proj.), 206.7 (2017 proj.)
  - Imports: 230.7 (2014), 172.4 (2015), 149.1 (2016 proj.), 158.1 (2017 proj.)
  - Current account: -104.2 (2014), -58.9 (2015), -14.7 (2016 proj.), -29.5 (2017 proj.)
  - Foreign direct investment (net): 70.9 (2014), 61.6 (2015), 61.8 (2016 proj.), 56.7 (2017 proj.)

### Fiscal outlook and public finances
- Fiscal outcomes:
  - Non-financial public sector primary deficit: 1.9 percent of GDP in 2015; expected to reach 2.7 percent of GDP in 2016.
  - Overall deficit: 10.4 percent of GDP in 2015; overall balance in 2016 expected to be close to that observed in 2015.
- Staff and Directors emphasized the need for fiscal consolidation to ensure macroeconomic stability and debt sustainability.
- Public debt indicators (selected):
  - Net public sector debt: 33.1 (2014), 36.2 (2015), 45.9 (2016 proj.), 50.9 (2017 proj.), 54.1 (2018 proj.), 56.8 (2019 proj.), 59.7 (2020 proj.), 62.5 (2021 proj.)
  - NFPS gross debt: 63.3 (2014), 73.7 (2015), 78.4 (2016 proj.), 82.9 (2017 proj.), 85.7 (2018 proj.), 88.2 (2019 proj.), 90.9 (2020 proj.), 93.5 (2021 proj.)

### Financial sector
- Banking sector: health deteriorated somewhat but remains solid.
  - System-wide capital ratios fell in 2015 but remain well above regulatory minima.
  - Liquidity risk increased in 2015, but overall funding profile remained strong.
  - External funding exposures are low and foreign exchange risks are largely hedged.
  - Profitability declined due to a spike in provisions for loan losses and higher funding costs.
  - Non-performing loans (NPLs) at 4.1 percent; loan loss reserves cover 150 percent of NPLs.
- Directors recommended enhancing the financial safety net, continued vigilance, and close monitoring of corporate sector vulnerabilities and links to banks.

### Structural issues, reforms, and capacity
- Directors strongly recommended stepping up structural reform efforts to raise long-term growth, including in:
  - Tax policy
  - Labor markets
  - Infrastructure
- Directors also underscored the importance of trade reforms to increase competitiveness and efficiency.
- Social security reform was emphasized as central to fiscal viability and to making the federal spending cap workable; reforms are needed for civil servant schemes at all levels of government.
- Directors urged strengthened reporting of fiscal statistics for SOEs, public banks, and states’ finances, and encouraged monitoring and enforcement of subnational fiscal rules.
- Directors commended Brazil for effective implementation of AML/CFT measures and encouraged pursuit of further reforms.

### Outlook, risks, and staff conditionalities
- Staff expect activity to start to recover gradually but remain weak for a prolonged period.
- Outlook contingent on: approval of fiscal spending cap and social security reform in reasonable timeframe, and meeting proposed fiscal targets for 2016 and 2017.
- Downside risks include:
  - Re-intensification of political uncertainties (e.g., developments in the corruption probe).
  - Protracted slower growth in advanced and emerging economies, especially China.
  - Further declines in export commodity prices.
  - Tighter global financial conditions.

### Key social, demographic, and selected statistical indicators (selected exact figures from the country table)
- Population total (million) (est., 2015): 204.5
- Annual rate of growth (percent, 2015): 0.8
- GDP (2015): R$5,904 billion; US$1,773 billion
- GDP per capita (est., 2015): US$8 billion
- Unemployment rate (average, 2016): 11.6
- Consumer price index (IPCA, end of period): 6.4 (2014), 10.7 (2015), 5.0 (2016 proj.), 4.8 (2017 proj.), 4.5 (2018 proj.)
- Gross domestic investment (percent of GDP): 21.0 (2014), 19.2 (2015), 18.4 (2016 proj.), 18.9 (2017 proj.), 19.4 (2018 proj.), 20.1 (2019 proj.), 20.7 (2020 proj.), 21.3 (2021 proj.)
- Gross official reserves (billion of U.S. dollars): 363.6 (2014), 356.5 (2015), 369.3 (2016 proj.)

*Press Release No. 16/507 — IMF Executive Board Concludes 2016 Article IV Consultation with Brazil.*

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## Content in this bundle

- **FMI pede ações imediatas de política para garantir a retoma do crescimento**
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## References

- [The Executive Board](http://www.imf.org/external/np/sec/memdir/eds.aspx)
- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [http://www.imf.org/en/News/Articles/2017/02/03/NA020317-Indonesia-Resilient-Economy-Can-Benefit-from-Stronger-Reforms](http://www.imf.org/en/News/Articles/2017/02/03/NA020317-Indonesia-Resilient-Economy-Can-Benefit-from-Stronger-Reforms)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](http://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/2016/11/15/pr16507-brazil-imf-executive-board-concludes-2016-article-iv-consultation-with-brazil_