On July 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Brazil.
A mild recovery supported by accommodative monetary and fiscal policies is currently underway. But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms. Against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture.
Following the severe recession in 2015–16, real GDP grew by 1 percent in 2017. Growth is projected to be 1.8 and 2.5 percent in 2018 and 2019, respectively, driven by a recovery in domestic consumption and investment. 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. Fiscal consolidation is key to maintain confidence in debt sustainability. Brazil is also vulnerable to a tightening of global financial conditions and possible trade disruptions, even though trade diversion effects may attenuate the impact. These risks can be compounded if there is no continuity in the reform agenda.
The fiscal deficit has declined, but public debt is growing and deeper reforms are lagging. Non-financial public-sector debt rose from 78.3 percent of GDP to 84 percent between 2016 and 2017. The primary fiscal deficit declined to 1.7 percent of GDP in 2017, below the authorities’ target, reflecting under-execution of spending. The government aims to restore fiscal sustainability by faster fiscal consolidation than implied by the expenditure ceiling, depending on revenue performance. For 2018, they aim to bring the primary deficit down by keeping discretionary spending under control, containing wage increases, and optimizing social benefits eligibility, where possible.
Inflation has declined to record lows. During 2017, inflation decreased from 6.3 to 2.9 percent, just below the target range, owing largely to slack in the economy, a notable fall in food prices due to an exceptional harvest, and well-anchored expectations. Inflation is projected to increase towards the 4.25 midpoint of the inflation target in 2019, as the food price shock dissipates and the output gap narrows. Since the beginning of the easing cycle in September 2016, the Central Bank has lowered the policy rate by 775 bps to the record low level of 6.5 percent.
The current account deficit shrank from 4.2 percent of GDP in 2014 to 0.5 in 2017 as imports contracted with the collapse of private investment. As the recovery gains strength, the rebound in investment will offset the effects of fiscal consolidation and lead to a deterioration of the current account to about -2 percent of GDP over the medium term. On average in 2017, the external position was broadly consistent with medium-term fundamentals and desirable policies. Brazil has continued to attract sizeable capital inflows, especially foreign direct investment.
Banks have been broadly resilient. Despite large losses during the 2015–16 recession, the recent FSAP found the banks to be well capitalized, profitable, and liquid, in large part reflecting high interest margins and fees. The economic recovery led to a decline in loan losses, which boosted profits. Capital ratios are above regulatory minima. The FSAP systemic risk analysis suggests that bank solvency and liquidity are broadly resilient to further severe macro-financial shocks.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.