IMF Executive Board Concludes 2020 Article IV Consultation with Brazil
IMF News, December 2, 2020
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- Published: December 2, 2020
Pandemic impact and policy response
- Health and human cost
- Over 5.5 million Brazilians have been infected and more than 160 thousand have died from the disease.
- Labor market and activity
- Economic activity contracted by 7 percent in the first half of 2020.
- Unemployment rate rose to 14.4 percent in September.
- 11 million workers left the labor force.
- Households in the lowest income deciles were the most affected by the loss of labor income; women suffered a bigger decline in hours worked than men.
- Retail and industrial activity returned to pre-COVID levels in the third quarter; the services sector remains depressed, with a negative impact on employment.
- Inflation and corporate sector
- 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.
- Non-financial corporate profitability fell, and leverage surged amid reduced cash flows and high uncertainty.
- Policy response and scale
- Fiscal and quasi-fiscal measures amounted to 18 percent of GDP.
- Primary deficit rose 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.
Macroeconomic outlook and risks
- Near-term projections
- The economy is projected to shrink by 5.8 percent in 2020, followed by a partial recovery to 2.8 percent in 2021.
- 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.
- External and market considerations
- 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.
- Important mitigating factors: high international reserves, a resilient banking system, and a low share of public FX debt.
Executive Board assessment and policy recommendations
- General assessment
- Executive Directors commended the authorities’ strong policy response and agreed policies should focus on limiting pandemic scarring, ensuring medium-term debt sustainability, and pressing ahead with reforms to foster a robust and inclusive recovery.
- Fiscal policy
- Welcome commitment to preserve the constitutional spending ceiling as a fiscal anchor to support market confidence.
- In the event economic conditions are significantly worse than expected, most Directors emphasized being prepared to provide additional targeted support and cautioned against an abrupt withdrawal of fiscal support.
- Recommended structural fiscal reforms to lock in medium-term consolidation, including:
- Reducing mandatory spending and budget rigidities.
- Strengthening the social safety net.
- Reforming subnational pension schemes and strengthening the subnational fiscal framework.
- Revamping the tax system.
- Monetary and exchange rate policy
- Monetary policy should remain supportive next year amid substantial withdrawal of fiscal stimulus.
- Some Directors noted 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 policy interest rate; careful monitoring of implications for financial stability and capital flows is warranted.
- Approval of formal central bank independence would further strengthen the integrity of the monetary framework.
- Flexible exchange rate and sizable foreign reserves remain important shock absorbers; FX intervention should remain limited to addressing excess volatility.
- Financial sector and supervision
- Brazilian banking system remains resilient but continued close surveillance is warranted.
- Use the flexibility of the regulatory framework to weather the pandemic without diluting prudential standards.
- Continued progress in implementing the 2018 FSAP recommendations will be important.
- Structural reforms and longer-term growth
- Urged authorities to press ahead with structural reforms to raise potential growth and improve living standards, including:
- Lower financial intermediation costs.
- Pass comprehensive tax reform.
- Accelerate the pace of new concessions and privatizations.
- Finalize trade agreements.
- Labor market reforms, education and re-skilling to facilitate job reallocation.
- Prevent legal and institutional setbacks to combating corruption and effectively implement anti-money laundering measures; ensure integrity of public procurement.
- Policies for a green recovery were highlighted by a number of Directors.
Key statistics and selected indicators (as reported)
- COVID-19 and labor market
- Over 5.5 million infected.
- More than 160 thousand deaths.
- Economic activity contracted by 7 percent in the first half of 2020.
- Unemployment rate 14.4 percent (September 2020).
- 11 million workers left the labor force.
- Policy response
- Fiscal and quasi-fiscal measures: 18 percent of GDP.
- Primary deficit: about 12 percent of GDP in 2020 (from 1 percent in 2019).
- Central Bank policy rate cut: 225 bps to 2 percent.
- Outlook and debt
- GDP growth: -5.8 percent in 2020; 2.8 percent in 2021.
- Inflation: 2.4 percent y-o-y in August; expected to stay below target until 2023.
- Current account: -0.3 percent of GDP in 2020 (from 2.8 percent of GDP in 2019).
- Gross public debt: set to rise to 100 percent of GDP.
- Selected Table 1 entries
- Area (thousands of sq. km): 8,510
- Agricultural land (percent of land area): 30.2
- Physician per 1000 people (2018): 2.2
- Population total (million) (est., 2019): 210.1
- Access to safe water (2018): 83.6
- Annual rate of growth (percent, 2018): 0.8
- Density (per sq. km.) (2019): 25.3
- Adult illiteracy rate (2019): 6.6
- Unemployment rate (2019): 11.9
- Net enrollment rates, Primary education (2019): 98
- Net enrollment rates, Secondary education (2019): 85
- Life expectancy at birth (years): 76
- Infant mortality (per thousand live births): 12
- Poverty rate (in percent, 2018) 1/: (see table)
- Ratio between average income of top 10 percent of earners over bottom 40 percent: 12.4
- GDP, local currency (2019): R$7,257 billion
- GDP, dollars (2019): US$1,839 billion
- GDP per capita (2019): US$8,751
- Gini coefficient (2018): 53.9
- Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.
- NFPS gross debt (series in table): 83.7, 87.1, 89.5, 101.1, 99.3, 100.3, 100.9, 101.8, 102.3
- General Government gross debt, Authorities’ definition (series in table): 73.7, 76.5, 75.8, 96.6, 96.7, 97.4, 97.7, 98.3, 98.5
- Trade balance (US$ billions, series in table): 64.0, 53.0, 40.5, 51.9, 53.3, 56.7, 57.9, 57.7, 58.9
- Exports (US$ billions, series in table): 218.1, 239.5, 225.8, 210.3, 229.1, 236.5, 240.2, 249.6, 260.5
- Imports (US$ billions, series in table): 154.1, 186.5, 185.3, 158.3, 175.8, 179.7, 182.3, 191.9, 201.7
- Total external debt (in percent of GDP, series in table): 32.3, 35.3, 36.7, 48.7, 46.6, 43.0, 41.0, 39.0, 37.6
- Current account (in percent of GDP, memorandum): -2.8, -0.3, -2.4, -2.9, -3.2
- Unemployment rate (series in table): 12.8, 13.4, 14.1, 13.3, 12.5, 11.6, 10.8
- Gross official reserves (series in table): 374, 375, 357
- REER (annual average in percent; appreciation +): 8.5, -13.3, ...
- Notes from table
- 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.
IMF Press Release No. 20/362 — IMF Communications Department, December 2, 2020.
