Brazil’s deep recession appears close to an end. The recession, triggered by large macroeconomic imbalances and a loss of confidence, was exacerbated by declining terms of trade, tight financing conditions, and a political crisis.
",
"publishDate": "2017-07-13",
"sections": [
{
"heading": "Overview and recent developments",
"content": "- Date: July 13, 2017.\n- Brazil’s deep recession appears close to an end.\n- Recession drivers cited: large macroeconomic imbalances, a loss of confidence, declining terms of trade, tight financing conditions, and a political crisis.\n- New government pursued an ambitious reform agenda with congressional and market support.\n- A constitutional amendment caps growth in federal noninterest spending in real terms.\n- Progress reported on discussion of social security and other structural reforms.\n- Recent indicators suggest the economy is close to a turning point, but a recent rise in political uncertainty has increased near-term risks.\n- National elections scheduled for 2018 reduce the window for legislative action on reforms."
},
{
"heading": "Outlook and risks",
"content": "- Fund staff growth projections:\n - 2017: 0.3 percent\n - 2018: 1.3 percent\n - Medium term: moving towards 2 percent\n- Inflation outlook:\n - Projected to undershoot central target of 4.5 percent in 2017 and 2018.\n- Forecast assumption: a sufficiently strong set of measures—most notably social security reform—are put in place to ensure fiscal sustainability.\n- Main domestic risk: social security reform severely diluted or delayed to the next government, prompting adverse market reaction and necessitating additional fiscal measures over time.\n- Main external risks: a faster than expected tightening of global financial conditions; lower likelihood of a significant slowdown in China."
},
{
"heading": "Monetary policy and disinflation",
"content": "- Inflation developments:\n - After almost 2 years above the ceiling of the central bank’s tolerance range of 6.5 percent, inflation declined rapidly over the past year.\n - Contributing factors: dissipating impact of large increases in regulated prices in 2015; widening output gap; appreciating exchange rate; declining inflation expectations; favorable shock to food prices.\n- Monetary easing:\n - Central bank began easing in September 2016, lowering the policy rate by a cumulative 400 bps to 10.25 percent as of June 2017.\n- Inflation targets:\n - National Monetary Council announced gradual reduction in the inflation target to 4.25 percent in 2019 and 4.0 in 2020.\n- Recommendation: continue monetary easing while continuously reassessing policy stance in view of inflation, expectations, and fiscal reform prospects."
},
{
"heading": "External sector and exchange rate",
"content": "- Current account:\n - Deficit narrowed to 1.3 percent of GDP in 2016 (from 3.3 percent of GDP in 2015).\n - On average in 2016, external position broadly consistent with medium-term fundamentals and desirable policies.\n- External financing and reserves:\n - Brazil continued to attract sizeable capital inflows.\n - International reserves: US$365 billion at end-2016.\n- Central bank FX operations:\n - Reduced rollover rate of maturing FX swaps and auctioned reverse FX swaps.\n - Net forward position reduced to 1.4 percent of GDP from over 5 percent of GDP at end-2015.\n- Recommendation: preserve floating exchange rate system and reserve buffers; limit interventions to addressing disorderly market conditions."
},
{
"heading": "Financial sector and corporate health",
"content": "- Banking sector:\n - Profits before taxes surged due to high interest margins and lower funding costs.\n - Banks renegotiated loan terms and wrote off delinquent loans to limit increases in non-performing loans.\n - Capital ratios increased due to decline in private banks’ risk-weighted assets and higher unrealized gains on fixed income securities.\n - Liquidity improved; withdrawals of saving deposits stopped; banks’ holdings of liquid assets increased.\n - Overall external funding exposure and net open positions remained low.\n- Recommendations:\n - Further strengthen financial safety nets through enhanced monitoring and improved crisis management framework.\n - Continued vigilance and close monitoring of the corporate sector and its impact on the banking system."
},
{
"heading": "Fiscal outcomes, objectives, and measures",
"content": "- Fiscal deterioration:\n - Non-financial public sector (NFPS) debt rose from 72.5 percent of GDP to 78.3 percent between 2015 and 2016.\n - Primary balances: -1.9 and -2.5 percent of GDP in 2015 and 2016.\n - Overall balances: -10.3 and -9.1 percent of GDP in 2015 and 2016.\n - Deficits driven by trend increases in mandatory spending and a sharp cyclical revenue downturn; high borrowing costs and contraction in output worsened debt dynamics.\n- Government objective: restore fiscal sustainability by gradually bringing primary balances toward surplus territory, supported by the constitutional expenditure ceiling and social security reform.\n- 2017 authorities’ aim: bring the primary deficit to ‑2.1 percent of GDP.\n- Adjustment measures introduced: 0.9 percent of GDP, including cuts in discretionary spending of 2/3 percent of GDP and a partial roll-back of payroll tax exemptions.\n- Executive Directors’ views:\n - Fiscal sustainability is a key priority; commended ambitious consolidation and reform efforts.\n - Further efforts needed to achieve fiscal targets; fiscal effort will need to be more intense as recovery takes hold.\n - A rolling medium term fiscal framework would help clarify and update debt stabilization goals.\n - Concern over subnational finances; encouraged durable solutions in coordination with the states."
},
{
"heading": "Structural reforms and governance",
"content": "- Priority reforms:\n - Social security reform, including schemes for civil servants at all levels of government, to address unfavorable demographic trends and large actuarial imbalances.\n - Tax policy, labor market, and infrastructure reforms to raise long-term growth.\n - Trade reforms to enhance competitiveness and efficiency.\n- Governance:\n - Ongoing efforts to combat corruption noted.\n - Continued strong action to improve governance, increase transparency, and strengthen institutional frameworks emphasized as key to securing strong, durable and inclusive growth."
},
{
"heading": "Executive Board Assessment (summary)",
"content": "- Directors welcomed signs of recovery but noted political uncertainty poses risks to outlook and reforms.\n- Supported current pace of fiscal adjustment given challenges but emphasized need for more intense effort as recovery proceeds.\n- Recommended continuing monetary easing while reassessing stance as conditions evolve.\n- Emphasized preserving floating exchange rate and reserve buffers; limiting FX interventions to disorderly conditions.\n- Urged strengthening of financial safety nets and monitoring of corporate sector.\n- Stressed importance of ambitious structural reforms and improved governance."
},
{
"heading": "Brazil: Selected economic indicators (selected exact figures)",
"content": "- Social and demographic indicators:\n - Area (thousands of sq. km): 8,512\n - Agricultural land (percent of land area): 31.2\n - Physician per 1000 people (2013): 1.9\n - Hospital beds per 1000 people (2012): 2.3\n - Access to safe water (2015): 98.1\n - Total population (million) (est., 2015): 204.5\n - Annual rate of growth (percent, 2015): 0.8\n - Density (per sq. km.) (2015): 24.0\n - Adult illiteracy rate (2015): 7.4\n - Unemployment rate (latest, 2017): 13.7\n - Net enrollment rates, percent in: Primary education (2014): 99; Secondary education (2014): 84\n - Life expectancy at birth (years): 75\n - Infant mortality (per thousand live births): 14\n - Poverty rate (in percent, 2014): 13.3\n - Income distribution by highest 10 percent of households: 40.9\n - By lowest 20 percent of households: 3.6\n - Gini coefficient (2015): 49.1\n - GDP, local currency (2016): R$6,267 billion\n - GDP, dollars (2016): US$1,799 billion\n - GDP per capita (est., 2016): US$8,795\n - Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.\n\n- National accounts and prices (annual percentage change; selected cells):\n - GDP at current prices: 3.8 (2015), 4.4 (2016), 7.8 (2017), 6.1 (2018), 6.8 (2019), 7.1 (2020)\n - GDP at constant prices: -3.8 (2015), -3.6 (2016), 0.3 (2017), 1.3 (2018), 2.0 (2019)\n - Consumption: -3.3 (2015), -4.7 (2016), -0.2 (2017), 0.4 (2018), 1.5 (2019), 1.1 (2020)\n - Investment: -23.8 (2015), -10.4 (2016), 4.0 (2017), 7.2 (2018), 5.6 (2019)\n - Consumer prices (IPCA, end of period): 10.7 (2015), 6.3 (2016), 4.5 (2017)\n- Gross domestic investment (percent of GDP): 19.1 (2015), 17.5 (2016), 17.6 (2017), 17.9 (2018), 18.5 (2019), 18.8 (2020), 19.6 (2021)\n - Private sector: 17.3 (2015), 15.8 (2016), 16.0 (2017), 16.3 (2018), 17.0 (2019), 17.4 (2020), 17.7 (2021), 18.3 (2022)\n - Public sector: 1.8 (2015), 1.6 (2016), 1.4 (2017)\n- Gross national savings (percent of GDP): 16.2 (2015), 16.8 (2016), 17.2 (2017), 24.1 (2018), 23.3 (2019), 23.1 (2020), 23.4 (2021), 22.8 (2022), 22.9 (2023)\n- Public sector finances (percent of GDP; selected):\n - Central government primary balance 1/: -2.0 (2015), -2.3 (2016), -1.8 (2017), -1.3 (2018), -0.6 (2019), 0.0 (2020), 0.5 (2021)\n - NFPS primary balance: -1.9 (2015), -2.5 (2016), -2.1 (2017), -1.1 (2018), -0.4 (2019), 0.2 (2020)\n - NFPS cyclically adjusted primary balance: -1.4 (2015), -1.0 (2016), -0.8 (2017), -0.3 (2018)\n - NFPS overall balance (including net policy lending): -10.3 (2015), -7.5 (2016), -8.8 (2017), -10.2 (2018), -9.8 (2019), -9.7 (2020)\n - Net public sector debt: 35.6 (2015), 46.2 (2016), 51.4 (2017), 55.9 (2018), 58.9 (2019), 61.0 (2020), 62.4 (2021), 63.3 (2022)\n - General Government gross debt, Authorities’ definition: 65.5 (2015), 69.9 (2016)\n - NFPS gross debt: 72.5 (2015), 78.3 (2016), 81.5 (2017), 85.8 (2018), 88.6 (2019), 90.5 (2020), 91.7 (2021), 92.4 (2022)\n - Of which: Foreign currency linked: 3.5 (2015), 3.4 (2016), 3.3 (2017)\n- Money and credit (annual percentage change; selected):\n - Base money 2/: 8.4 (2015), 8.1 (2016)\n - Broad money 3/: 9.7 (2015), 12.4 (2016), 11.6 (2017), 8.7 (2018), 10.0 (2019), 13.8 (2020), 14.4 (2021), 14.5 (2022)\n - Bank loans to the private sector: -2.9 (2015), 5.7 (2016), 11.0 (2017), 12.9 (2018), 12.2 (2019)\n- Balance of payments (in billions of U.S. dollars; selected):\n - Trade balance: 45.0 (2015), 49.0 (2016), 51.8 (2017), 52.3 (2018), 53.9 (2019), 56.5 (2020)\n - Exports: 190.1 (2015), 184.5 (2016), 200.1 (2017), 205.4 (2018), 214.3 (2019), 221.8 (2020), 231.3 (2021), 241.8 (2022)\n - Imports: 172.4 (2015), 139.4 (2016), 151.0 (2017), 156.3 (2018), 162.5 (2019), 169.5 (2020), 177.4 (2021), 185.3 (2022)\n - Current account: -59.4 (2015), -23.5 (2016), -32.4 (2017), -37.4 (2018), -38.1 (2019), -42.9 (2020), -47.1 (2021), -50.4 (2022)\n - Capital account and financial account: 55.6 (2015), 16.7 (2016), 32.4 (2017), 37.4 (2018), 38.1 (2019), 42.9 (2020), 47.1 (2021), 50.4 (2022)\n - Foreign direct investment (net): 61.2 (2015), 71.1 (2016), 59.0 (2017), 53.6 (2018), 50.5 (2019), 49.7 (2020), 49.8 (2021)\n - Terms of trade (percentage change): -11.0 (2015), 3.0 (2016), -2.4 (2017), -1.2 (2018), -1.5 (2019), -0.9 (2020)\n - Merchandise exports (in US$, annual percentage change): -15.2 (2015), -3.0 (2016), 8.5 (2017), 2.7 (2018), 8.0 (2019), 4.3 (2020)\n - Merchandise imports (in US$, annual percentage change): -25.3 (2015), -19.1 (2016), 8.3 (2017), 7.6 (2018), 4.7 (2019)\n - Total external debt (in percent of GDP): 36.9 (2015), 32.2 (2016), 31.7 (2017), 30.7 (2018), 29.7 (2019), 28.6 (2020), 27.5 (2021)\n- Memorandum items:\n - Current account (in percent of GDP): -1.7\n - Gross official reserves: 356.5 (2015), 365.0 (2016)\n - REER (annual average in percent; appreciation +) 4/: -15.8 (2015), 6.7 (2016), 13.6 (Q1 2017 only)\n\nIMF Executive Board Concludes 2017 Article IV Consultation with Brazil; Press Release No. 17/279; July 13, 2017.\n\n---\n\n\n References\n\n- Brazil and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- http://www.imf.org/external/np/sec/misc/qualifiers.htm\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/07/13/pr17279-imf-executive-board-concludes-2017-article-iv-consultation-with-brazil"
}
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"Published: July 13, 2017",
"Date: July 13, 2017.",
"Brazil’s deep recession appears close to an end.",
"Recession drivers cited: large macroeconomic imbalances, a loss of confidence, declining terms of trade, tight financing conditions, and a political crisis.",
"New government pursued an ambitious reform agenda with congressional and market support.",
"A constitutional amendment caps growth in federal noninterest spending in real terms.",
"Progress reported on discussion of social security and other structural reforms.",
"Recent indicators suggest the economy is close to a turning point, but a recent rise in political uncertainty has increased near-term risks.",
"National elections scheduled for 2018 reduce the window for legislative action on reforms.",
"Fund staff growth projections:",
"Inflation outlook:",
"Forecast assumption: a sufficiently strong set of measures—most notably social security reform—are put in place to ensure fiscal sustainability.",
"Main domestic risk: social security reform severely diluted or delayed to the next government, prompting adverse market reaction and necessitating additional fiscal measures over time.",
"Main external risks: a faster than expected tightening of global financial conditions; lower likelihood of a significant slowdown in China.",
"Inflation developments:",
"Monetary easing:",
"Inflation targets:",
"Recommendation: continue monetary easing while continuously reassessing policy stance in view of inflation, expectations, and fiscal reform prospects.",
"Current account:",
"External financing and reserves:",
"Central bank FX operations:",
"Recommendation: preserve floating exchange rate system and reserve buffers; limit interventions to addressing disorderly market conditions.",
"Banking sector:",
"Recommendations:",
"Fiscal deterioration:",
"Government objective: restore fiscal sustainability by gradually bringing primary balances toward surplus territory, supported by the constitutional expenditure ceiling and social security reform.",
"2017 authorities’ aim: bring the primary deficit to ‑2.1 percent of GDP.",
"Adjustment measures introduced: 0.9 percent of GDP, including cuts in discretionary spending of 2/3 percent of GDP and a partial roll-back of payroll tax exemptions.",
"Executive Directors’ views:",
"Priority reforms:",
"Governance:",
"Directors welcomed signs of recovery but noted political uncertainty poses risks to outlook and reforms.",
"Supported current pace of fiscal adjustment given challenges but emphasized need for more intense effort as recovery proceeds.",
"Recommended continuing monetary easing while reassessing stance as conditions evolve.",
"Emphasized preserving floating exchange rate and reserve buffers; limiting FX interventions to disorderly conditions.",
"Urged strengthening of financial safety nets and monitoring of corporate sector.",
"Stressed importance of ambitious structural reforms and improved governance.",
"Social and demographic indicators:",
"National accounts and prices (annual percentage change; selected cells):",
"Gross domestic investment (percent of GDP): 19.1 (2015), 17.5 (2016), 17.6 (2017), 17.9 (2018), 18.5 (2019), 18.8 (2020), 19.6 (2021)",
"Gross national savings (percent of GDP): 16.2 (2015), 16.8 (2016), 17.2 (2017), 24.1 (2018), 23.3 (2019), 23.1 (2020), 23.4 (2021), 22.8 (2022), 22.9 (2023)",
"Public sector finances (percent of GDP; selected):",
"Money and credit (annual percentage change; selected):",
"Balance of payments (in billions of U.S. dollars; selected):",
"Memorandum items:",
"[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)",
"[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)"
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