Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2020 Article IV Consultation with Brazil







December 2, 2020















Washington, DC: The Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation

[1]

with Brazil.

COVID-19 has upended lives and livelihoods in Brazil, as it has in most
countries around the world. Over 5.5 million Brazilians have been infected
and more than 160 thousand have died from the disease. Economic activity
contracted by 7 percent in the first half of 2020, the unemployment rate
rose to 14.4 percent in September, and 11 million workers left the labor
force. Households in the lowest income deciles were the most affected by
the loss of labor income while women suffered a bigger decline in hours
worked than men. Non-financial corporate profitability fell, and leverage
surged amid reduced cash flows and high uncertainty. With the sharp
contraction in domestic demand, inflation turned negative in April and May
but gradually rose to 2.4 percent y-o-y in August, still below the lower
band of the headline inflation target.

The government’s response to the crisis was swift and sizable. The
authorities implemented emergency cash-transfer and employment-retention
programs, increased health spending, provided financial support to
subnational governments, and extended government-backed credit lines to
small businesses. In all, fiscal and quasi-fiscal measures amounted to 18
percent of GDP, raising the primary deficit to about 12 percent of GDP in
2020 from 1 percent in 2019. The Central Bank cut the policy rate by 225
bps in quick succession to 2 percent and announced extensive liquidity and
capital relief measures. The policy response averted a deeper economic
downturn, stabilized financial markets, and cushioned income loss for the
poorest. Retail and industrial activity returned to pre-COVID levels in the
third quarter, but the services’ sector remains depressed, with a negative
impact on employment.

The economy is projected to shrink by 5.8 percent in 2020, followed by a
partial recovery to 2.8 percent in 2021. The lingering effects of the
health crisis and the expected withdrawal of fiscal support will restrain
consumption while investment will be hampered by idle capacity and high
uncertainty. Inflation is expected to stay below target until 2023, given
significant slack in the economy. The current account deficit is projected
to narrow to -0.3 percent of GDP in 2020 from 2.8 percent of GDP in 2019
before gradually increasing over the medium-term as imports and profit
distribution recover. With a sharp increase in the primary fiscal deficit,
gross public debt is set to rise to 100 percent of GDP and remain high over
the medium-term. The record low SELIC has helped reduce government
borrowing costs but the local currency yield curve has steepened
considerably, highlighting market concerns over fiscal risks. Overall,
risks around the baseline are exceptionally large and multifaceted but high
international reserves, a resilient banking system, and a low share of
public FX debt are important mitigating factors.

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Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
noted that good policies had positioned the Brazilian economy to take off
in 2020, but the pandemic had a severe impact on the economy. Directors
commended the authorities’ strong policy response, which averted a deeper
economic downturn, stabilized financial markets, and cushioned the effects
on the poor and vulnerable. They stressed that policies should focus on
limiting the scarring effects of the pandemic, ensuring medium-term debt
sustainability, and pressing ahead with reforms to foster a robust and
inclusive recovery.

Directors welcomed the authorities’ commitment to preserve the
constitutional spending ceiling as a fiscal anchor to support market
confidence. At the same time, in the event that economic conditions turn
out significantly worse than expected, most Directors emphasized that the
authorities should be prepared to provide additional targeted support, and
welcomed the authorities’ willingness to consider this possibility. A
number of Directors also cautioned against an abrupt withdrawal of fiscal
support.

Directors stressed that swiftly implementing structural fiscal reforms that
lock in medium-term consolidation will be essential to mitigate the risk of
undesirable debt dynamics. They recommended reducing mandatory spending and
budget rigidities, strengthening the social safety net, reforming the
subnational pension schemes and strengthening the subnational fiscal
framework, and revamping the tax system.

Directors agreed that monetary policy should remain supportive next year
amid the substantial withdrawal of fiscal stimulus, with some Directors
noting the scope to loosen monetary policy further, including through
forward guidance, if inflation and inflation expectations remain below
target. Some Directors cautioned about potential tradeoffs from further
interest rate cuts given the unprecedentedly low level of the policy
interest rate. In this context, careful monitoring of the implications for
financial stability and capital flows of further rate cuts is warranted.
Directors noted that approval of formal central bank independence would
further strengthen the integrity of the monetary framework. They emphasized
that the flexible exchange rate and sizable foreign reserves remain
important shock absorbers, and intervention in the FX market should remain
limited to addressing excess volatility.

Directors noted that the Brazilian banking system remains resilient but
cautioned that continued close surveillance is warranted. They encouraged
using the flexibility of the regulatory framework to weather the impact of
the pandemic without diluting prudential standards. Continued progress in
implementing the 2018 FSAP recommendations will be important.

Directors urged the authorities to press ahead with structural reforms to
raise potential growth and improve living standards. They highlighted
reforms to make the Brazilian economy more competitive, open to business
and trade, and attractive to investment. They welcomed progress with the
agenda to lower financial intermediation costs and stressed the need to
pass comprehensive tax reform, accelerate the pace of new concessions and
privatizations, and finalize trade agreements. Directors also emphasized
the importance of labor market reforms, as well as education and
re-skilling, to facilitate job reallocation. Directors underscored that
preventing legal and institutional setbacks to combating corruption and
effectively implementing anti-money laundering is important, as are
measures to ensure the integrity of public procurement. A number of
Directors also highlighted the importance of policies for a green recovery.

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It is expected that the next Article IV consultation with Brazil will be
held on the standard 12-month cycle.



Table 1. Brazil: Selected Economic Indicators

I. Social and Demographic Indicators

Area (thousands of sq. km)

8,510

Health

Agricultural land (percent of land area)

30.2

Physician per 1000 people (2018)

2.2

Population

Hospital beds per 1000 people (2018)

2.2

Total (million) (est., 2019)

210.1

Access to safe water (2018)

83.6

Annual rate of growth (percent, 2018)

0.8

Education

Density (per sq. km.) (2019)

25.3

Adult illiteracy rate (2019)

6.6

Unemployment rate (2019)

11.9

Net enrollment rates, percent in:

Population characteristics (2018)

Primary education (2019)

98

Life expectancy at birth (years)

76

Secondary education (2019)

85

Infant mortality (per thousand live births)

12

Poverty rate (in percent, 2018) 1/

25.3

Income distribution (2017)

GDP, local currency (2019)

R$7,257 billion

Ratio between average income of top 10

12.4

GDP, dollars (2019)

US$1,839 billion

percent of earners over bottom 40 percent

GDP per capita (2019)

US$8,751

Gini coefficient (2018)

53.9

Main export products: airplanes, metallurgical products,
soybeans, automobiles, electronic products, iron ore,
coffee, and oil.

II. Economic Indicators

Proj.

National accounts and prices

2017

2018

2019

2020

2021

2022

2023

2024

2025

GDP at current prices

5.0

4.6

5.3

-2.6

6.3

6.5

6.3

6.2

6.2

GDP at constant prices

1.3

1.3

1.1

-5.8

2.8

2.3

2.2

2.2

2.2

Consumption

1.4

1.7

1.3

-5.6

2.7

1.5

1.5

1.6

1.4

Investment

2.4

3.1

3.6

-10.8

6.6

5.0

5.6

6.1

6.2

Consumer prices (IPCA, end of period)

2.9

3.7

4.3

2.0

2.9

3.2

3.3

3.3

3.3

Gross domestic investment

Private sector

12.3

12.7

13.1

12.7

12.9

13.1

13.5

14.0

14.5

Public sector

2.3

2.1

2.0

2.0

2.0

2.1

2.1

2.0

2.0

Gross national savings

Private sector

20.4

18.6

17.2

29.6

18.7

17.3

17.4

17.7

17.9

Public sector

-6.5

-6.0

-4.9

-15.2

-5.0

-3.9

-4.2

-4.6

-4.7

Public sector finances

Central government primary balance 2/

-1.9

-1.7

-1.3

-11.3

-2.7

-1.7

-1.2

-0.7

-0.1

Consolidated public sector

NFPS primary balance

-1.8

-1.7

-1.0

-11.6

-2.7

-1.7

-1.2

-0.7

-0.1

NFPS cyclically adjusted primary balance (in percent of
potential GDP)

-0.6

-0.7

0.0

-9.8

-1.8

-1.2

-1.0

-0.6

-0.1

NFPS overall balance

-7.9

-7.2

-6.0

-16.3

-6.1

-5.1

-5.4

-5.8

-5.8

Net public sector debt

51.4

53.6

55.7

66.8

71.3

74.4

77.0

79.4

81.3

General Government gross debt, Authorities’ definition

73.7

76.5

75.8

96.6

96.7

97.4

97.7

98.3

98.5

NFPS gross debt

83.7

87.1

89.5

101.1

99.3

100.3

100.9

101.8

102.3

Of which:
Foreign currency linked

3.6

4.1

4.3

4.7

4.7

4.6

4.5

4.4

4.4

Money and credit

(Annual percentage change)

Base money 3/

9.6

1.6

3.3

9.9

6.3

6.5

6.3

6.2

6.2

Broad money 4/

4.6

8.1

9.1

12.6

6.3

8.3

8.1

8.0

8.0

Financial sector credit to the private sector

Bank loans to the private sector

0.0

7.7

5.5

10.0

12.0

9.0

9.0

8.0

8.0

Balance of payments

(Billions of U.S. dollars, unless otherwise specified)

Trade balance

64.0

53.0

40.5

51.9

53.3

56.7

57.9

57.7

58.9

Exports

218.1

239.5

225.8

210.3

229.1

236.5

240.2

249.6

260.5

Imports

154.1

186.5

185.3

158.3

175.8

179.7

182.3

191.9

201.7

Imports of oil

Current account

-15.0

-41.5

-50.9

-3.9

-18.1

-29.0

-40.2

-51.8

-61.1

Capital account and financial account

10.3

42.9

53.8

3.9

18.1

29.0

40.2

51.8

61.1

Foreign direct investment (net inflows)

47.5

76.1

50.7

66.2

44.2

51.6

57.8

63.3

69.0

Terms of trade (percentage change)

5.8

-2.2

0.6

4.5

0.9

-1.0

-0.9

-1.3

-1.2

Merchandise exports (in US$, annual percentage change)

18.3

9.8

-5.7

-6.9

9.0

3.2

1.6

3.9

4.4

Merchandise imports (in US$, annual percentage change)

10.3

21.0

-0.6

-14.6

11.0

2.2

1.4

5.2

5.1

Total external debt (in percent of GDP)

32.3

35.3

36.7

48.7

46.6

43.0

41.0

39.0

37.6

Memorandum items:

Current account (in percent of GDP)

-0.7

-2.2

-2.8

-0.3

-1.3

-1.9

-2.4

-2.9

-3.2

Unemployment rate

12.8

12.3

11.9

13.4

14.1

13.3

12.5

11.6

10.8

Gross official reserves

374

375

357

357

357

357

357

357

357

REER (annual average in percent; appreciation +)

8.5

-13.3

-1.2

Sources: Central Bank of Brazil; Ministry of Finance; IBGE;
IPEA; and Fund staff estimates.

1/ Computed by IBGE using the World Bank threshold for
upper-middle income countries of U$5.5/day. This number is
not comparable to the estimates provided by IPEA in
previous years due to methodological differences.

2/ Includes the federal government, the central bank, and
the social security system (INSS). Based on the 2017 draft
budget, recent announcements by the authorities, and staff
projections.

3/ Currency issued, required deposits held at the Central
Bank plus other Central Bank liabilities to other
depository corporations

4/ Currency outside depository corporations, transferable
deposits, other deposits and securities other than shares




[1]

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.


[2]

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

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Raphael Anspach

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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