IMF Executive Board Concludes 2018 Article IV Consultation with Brazil

IMF News, July 11, 2018

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A mild recovery is underway supported by accommodative monetary and fiscal policies.
Real GDP growth:
- 2017: 1 percent
- Projected 2018: 1.8 percent
- Projected 2019: 2.5 percent
Recovery driven by a rebound in domestic consumption and investment.
Risks: underperformance relative to potential, high and rising public debt, uninspiring medium-term growth absent further reforms, tightening global financial conditions, possible trade disruptions, and discontinuity of the reform agenda.

Even if federal expenditure remains constant in real terms at its 2016 level (as mandated by a constitutional rule), public debt is expected to rise further and peak in 2023 at above 90 percent of GDP.
Non-financial public-sector (NFPS) debt:
- 2016: 78.3 percent of GDP (noted in text)
- 2017: 84 percent of GDP
Primary fiscal deficit:
- 2017 primary fiscal deficit: 1.7 percent of GDP (declined, below authorities’ target)
Authorities’ 2018 strategy: restore fiscal sustainability by faster fiscal consolidation than implied by the expenditure ceiling, depending on revenue performance; bring the primary deficit down by keeping discretionary spending under control, containing wage increases, and optimizing social benefits eligibility.
From Table 1 — Selected projections and indicators (percent of GDP unless noted):
- NFPS gross debt: 2016: 78.4; 2017: 84.0; 2018: 88.2; 2019: 90.4; 2020: 92.4; 2021: 94.2; 2022: 95.1; 2023: 95.6
- Net public sector debt: 2016: 46.2; 2017: 51.6; 2018: 56.2; 2019: 59.9; 2020: 62.9; 2021: 65.7; 2022: 67.7; 2023: 68.9
- NFPS primary balance: 2016: -2.5; 2017: -1.7; 2018: -2.4; 2019: -1.1; 2020: -0.4; 2021: 0.2; 2022: 0.7
- NFPS overall balance (including net policy lending): 2016: -9.0; 2017: -7.9; 2018: -8.5; 2019: -7.8; 2020: -7.5; 2021: -6.8; 2022: -6.5

Inflation path:
- 2017: inflation decreased from 6.3 to 2.9 percent (just below the target range)
- Projected to increase towards the 4.25 midpoint of the inflation target in 2019
Drivers of low inflation in 2017: slack in the economy, exceptional harvest and fall in food prices, well-anchored expectations.
Policy rate: since September 2016 easing cycle, Central Bank lowered the policy rate by 775 bps to a record low of 6.5 percent.
Directors’ view: current monetary policy stance is appropriate and should remain accommodative to help close the output gap but remain vigilant to domestic and external inflationary pressures.

Current account developments:
- Current account deficit shrank from 4.2 percent of GDP in 2014 to 0.5 percent in 2017.
- As recovery strengthens, current account expected to deteriorate to about ‑2 percent of GDP over the medium term.
External position: on average in 2017, broadly consistent with medium-term fundamentals and desirable policies.
Capital flows: Brazil continued to attract sizeable capital inflows, especially foreign direct investment.
Table 1 — Balance of payments (US$ billions):
- Trade balance: 2016: 45.0; 2017: 64.0; 2018: 59.4; 2019: 55.4; 2020: 55.6; 2021: 57.8; 2022: 60.3; 2023: 62.6
- Exports: 2016: 184.5; 2017: 217.2; 2018: 234.1; 2019: 242.8; 2020: 253.5; 2021: 265.7; 2022: 277.8; 2023: 289.5
- Imports: 2016: 139.4; 2017: 153.2; 2018: 174.7; 2019: 187.4; 2020: 197.9; 2021: 207.9; 2022: 217.4; 2023: 226.9
- Current account (US$ billions): 2016: -23.5; 2017: -9.8; 2018: -24.4; 2019: -30.5; 2020: -35.1; 2021: -39.3; 2022: -43.8; 2023: -46.9
- Foreign direct investment (net, US$ billions): 2016: 65.4; 2017: 64.1; 2018: 60.0; 2019: 55.1; 2020: 50.7; 2021: 48.8; 2022: 48.1; 2023: 48.7
- Total external debt (in percent of GDP): 2016: 37.2; 2017: 32.5; 2018: 32.0; 2019: 30.4; 2020: 28.9; 2021: 27.3; 2022: 25.7; 2023: 24.2
Memorandum items:
- Current account (in percent of GDP): -1.5; -1.6 (listed)
- Gross official reserves: 365.0; 374.0 (listed)
- REER (annual average in percent; appreciation +): 6.8; 9.6

Banks broadly resilient despite large losses in 2015−16:
- FSAP found banks to be well capitalized, profitable, and liquid, reflecting high interest margins and fees.
- Economic recovery reduced loan losses and boosted profits.
- Capital ratios are above regulatory minima.
- FSAP systemic risk analysis: bank solvency and liquidity broadly resilient to further severe macro‑financial shocks.
Directors’ recommendations:
- Further action needed to strengthen microprudential, macroprudential, and safety net frameworks.
- Improve efficiency of the financial system by reducing high intermediation costs.
- Reduce state intervention in credit markets.

Fiscal policy:
- Continued fiscal consolidation is paramount given high public debt.
- Consider additional expenditure measures, including decisive efforts to contain the public wage bill while protecting public investment and social programs.
- Strengthen the fiscal framework.
Pension reform:
- Directors agreed pension reform is imperative to ensure sustainability and improve equity.
Tax and regulatory reforms:
- Consider reforms to simplify taxes.
- Prioritize structural reforms to raise productivity and potential growth: reduce state intervention in credit markets, enhance trade integration, improve public infrastructure.
Governance and financial integrity:
- Ongoing efforts to combat corruption and money laundering are vital to secure strong and inclusive growth.
Exchange rate and reserves:
- Preserve the floating exchange rate regime and large reserve buffers.
- Limit foreign exchange intervention to address disorderly market conditions.
- Monetary policy should respond to exchange rate movements only insofar as there are risks to inflation expectations.
- Underscored importance of central bank independence.

Area (thousands of sq. km): 8,512
Agricultural land (percent of land area): 31.2
Physician per 1000 people (2018): 2.1
Hospital beds per 1000 people (2018): 2.0
Access to safe water (2015): 98.1
Population total (million) (est., 2018): 208.8
Population annual rate of growth (percent, 2015): 0.8
Density (per sq. km.) (2018): 24.5
Adult illiteracy rate (2016): 7.2
Unemployment rate (latest, Apr 2018): 13.1
Net enrollment rates:
- Primary education (2016): 99
- Secondary education (2015): 84
Life expectancy at birth (years): 76
Infant mortality (per thousand live births): 13
Poverty rate (in percent, 2017): 25.4 (computed by IBGE using the World Bank threshold for upper‑middle income countries of U$5.5/day)
Income distribution (2016):
- By highest 10 percent of households: 40.9
- By lowest 20 percent of households: 3.6
- Gini coefficient (2016): 52.5
GDP:
- GDP, local currency (2017): R$6,559 billion
- GDP, dollars (2017): US$2,055 billion
- GDP per capita (est., 2017): US$9,896
Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

IMF Communications Department — Press Release No. 18/288 (July 11, 2018).