BRAZIL: IMF Increases GDP Growth Forecast For 2017, Cuts 2018 Estimate
The International Monetary Fund (IMF) raised Brazil's economic growth forecast for this year but reduced its expansion estimate for 2018, highlighting the political uncertainty in the country.
According to the IMF, the Brazilian Gross Domestic Product (GDP) should rise by 0.3% in 2017 and 1.3% in 2018. In April, the growth forecasts were at 0.2% and 1.7%, respectively. "The severe Brazilian economic recession seems to be nearing an end," IMF said in the report.
In the medium term, according to the IMF, Brazil's GDP should move to an annual expansion of 2%, although the recent increase in political instability could hurt the economy's predictability.
"The government's ability to deliver on social security reform, a necessary step toward securing fiscal sustainability, has become more uncertain - and, with national elections scheduled for 2018, the window for legislative action is closing," the Fund said.
Regarding inflation, the IMF projects that it will remain below the 4.5% target for this year and next. The slowdown in inflation, according to the Fund, should make room for more monetary easing.
"After almost two years of being above the ceiling of the central bank's tolerance range of 6.5 percent, inflation has declined rapidly over the past year. The impact of large increases in regulated prices in 2015 has dissipated, while a widening output gap, an appreciating exchange rate, declining inflation expectations, and a favorable shock to food prices have combined to speed disinflation since late 2016," IMF said in its report.
Nevertheless, the Fund stresses that political instability and the impact of corruption investigations are the primary sources of risks for Brazil, which could jeopardize reforms and economic recovery.
The IMF considers possible that the pension reform will be weakened or postponed until after the next presidential election. On the external side, the tightening of global financial conditions and a slowdown in China's economy are the main threats to Brazilian economic growth.
The Fund also mentions Brazil's flexible exchange rate and the high level of international reserves - at $ 365 billion at the end of last year, above the level deemed adequate by the IMF - as positive highlights.
The health of the Brazilian banking sector has also improved. "Despite the recession, profits before taxes have surged due to high interest margins and lower funding costs. To limit increases in nonperforming loans, banks have continued renegotiating the terms of loans and writing off delinquent loans," noted the Fund.
In order for Brazil to enter sustainably on a growth path, the IMF recommends that the government guarantee fiscal sustainability through the consolidation of public finances and pension reform. The Fund also stressed the importance of spending control and drew attention to the debt of the Brazilian states, suggesting that the federal government must continue to seek coordinated solutions to solve the problem.
On monetary policy, the Fund recommends that the Central Bank reduce the interest rate, although it considers that the institution has taken appropriate decisions so far. For the IMF, the Central Bank must constantly monitor the evolution of inflation and improve its communication and measures to alleviate distortions in the credit market.
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