## IMF Executive Board Concludes 2018 Article IV Consultation with Brazil

_IMF News, July 11, 2018_

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## Bibliographic details
- Published: July 11, 2018

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### Economic outlook and recovery
- 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.

### Fiscal position and public debt
- 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

### Monetary policy and inflation
- 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.

### External sector and balance of payments
- 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

### Financial sector resilience and reforms
- 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.

### Structural reforms and policy recommendations
- 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.

### Social and demographic indicators (selected)
- 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).*

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## References

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_Source: https://www.imf.org/en/news/articles/2018/07/11/pr18288-imf-executive-board-concludes-2018-article-iv-consultation-with-brazil_