IMF Sees “Exceptionally High and Multifaceted Risks” for the Brazilian Economy | Brazil

In a staff statement at the end of the mission that makes the annual X-ray of the country’s economic situation, the Fund highlights, among the main threats, “a second wave of the pandemic, the long-term consequences of a prolonged recession and the vulnerability to confidence shocks due to the high level of public debt in Brazil ”.

In this scenario, “the prompt implementation of structural reforms that guarantee consolidation in the medium term will be essential to mitigate the risk of an undesirable dynamics of public debt,” says the IMF, in a document released this Monday.

The report further assesses that, “in the absence of unequivocal evidence of maintaining the spending ceiling, any additional spending could undermine market confidence and raise interest rates.”

In the opinion of the IMF mission, “due to the sharp increase in the primary fiscal deficit, the forecast is that gross public debt will be around 100% of GDP in 2020 and will remain high in the medium term.” In addition, “gross financing needs, which represent 29% of GDP in 2020, are being covered with a combination of internal issues and the use of liquid assets (National Treasury deposits in the BCB).”

The IMF notes that “the historical minimum Selic rate, combined with the recent shortening of the average term of the debt, allowed the government to reduce its borrowing costs to historically low levels (5%, compared with the maximum of almost 15% at End of 2016) ”. The point is that “Brazil today faces a strong interest rate curve in national currency, which highlights market concerns about fiscal sustainability,” the document states.

“The unwavering commitment of the authorities to the spending limit is positive. With public debt rising to 100% of GDP, preserving the constitutional spending ceiling as a fiscal anchor is essential to support market confidence and keep the sovereign risk premium contained, ”says the IMF. “A significant fiscal consolidation will be necessary to eliminate the primary fiscal deficit, which the mission estimates is necessary to stabilize the level of public debt in the medium term.”

The document also brings the revision for the better of the Fund’s projection for GDP in 2020: instead of a fall of 9.1%, published in June, the IMF began to estimate a fall of 5.8%, even so a a figure worse than the market consensus indicated by the Central Bank (BC) Focus Bulletin, of 5.02%. For 2021, the estimate was reduced from a 3.6% growth to a 2.8% expansion, also worse than the 3.5% projected by the market.

The IMF recognizes an aspect that may positively surprise you: “the recession may be less severe or the recovery more robust than projected.” Still, the risks are significant, according to the IMF.

“With emergency aid halved in the last four months of the year, the recovery in private consumption is expected to be only moderate in the second half of 2020, with a slow expansion in 2021 due to the prolonged effects of the crisis. health and the withdrawal of fiscal support ”, says the Fund.

“The use of household savings accumulated in 2020 (up to August, there was a jump of more than 60% in household time deposits compared to the previous 12 months) will help stabilize consumption in the first quarter of 2021 and, as in many countries, investment will be inhibited by idle capacity and high uncertainty about growth prospects, ”the document states. “The current account balance is projected to show a small surplus of 0.3% of GDP in 2020 amid a sharp contraction in imports and to stabilize in 2021 with the resumption of external demand.”

The IMF also says that greater fiscal support may be necessary, “if the evolution of health, economic and social conditions is worse than expected by the authorities.” In the opinion of the Fund’s mission, “although some recent indicators are encouraging and the authorities expect a strong recovery next year, it may take some time before employment, income and poverty return to pre-covid levels” . The point is that “the evolution of the pandemic is surrounded by an exceptionally high degree of uncertainty, and the withdrawal of fiscal support at the end of the year will add pressure on an already significant output gap.”