São Paulo – In its latest assessment of Brazil, the International Monetary Fund (IMF) says the country’s economy should retract by 1% in 2015. Issued this Friday (10th), the forecast is grimmer than the one last presented by the Fund, in January this year, in an update of the World Economic Outlook report (WEO). The document’s former estimate was for 0.3% growth in 2015 and 1.5% growth in 2016. The revised estimate is of recession this year and 0.9% growth in the next one.
The document asserts that “difficult challenges” lie ahead, and the country needs to further strengthen policy credibility and market confidence in order to get growing again.
According to the IMF, the boost seen over the last decade led to increased income, less poverty and higher consumption, but lost steam in the past few years. The inflation rate is high, and despite the weak domestic demand, the current account deficit reached 4.2% of GDP in 2014. In 2012, the deficit accounted for 2.4% of GDP.
The IMF says Brazil is yet to see any potential effects from the high US dollar, and remarks that the country is not performing well on global markets. It also notes that the ongoing fiscal adjustment and lower investment by government-owned oil company Petrobras are detracting from Brazil’s growth.
“The deterioration reflects worsening terms of trade, a drop in exports to Argentina, and an increase in fuel imports necessitated by the drought. The recent depreciation against the U.S. dollar, arising in part from general dollar strength, has not translated one-for-one into gains against competitors in global markets,” the document reads.
The IMF stresses that the slowdown in growth and the deterioration of fiscal performance have affected the country’s risk ratings, even though rating agencies have maintained Brazil’s “investment grade” status.
The document concedes that since this year began, the government has implemented a set of measures designed to restore credibility. It claims the linchpin of said strategy is an “ambitious” fiscal adjustment to bring the primary surplus from 1.2% of GDP in 2015 to 2% in 2016 and 2017. The primary surplus is savings intended to pay interest on government debt.
The IMF also acknowledges the importance of Brazil’s floating exchange rate policy, and says the government’s scaling down of foreign exchange intervention is “welcome.” “Up until April, the Brazilian Central Bank was auctioning US dollars on a daily basis, in a bid to curb the currency’s price hike. The Fund believes these measures should the economy back on track to growth by the end of this year.
“Directors saw a need for continued fiscal reforms to reduce budget rigidities, simplify the tax system, and address structural sources of fiscal pressure more broadly, including the pension and wage indexation systems.” The Fund’s directors convened with Brazilian authorities on March 16th.
*Translated by Gabriel Pomerancblum
