Brazil Potential Growth Undermined by Slow Investments, IMF Says

Brazil’s growth potential has deteriorated after lower commodity prices and government policies restricted investments in Latin America’s largest economy, the International Monetary Fund said in a report today.

The IMF staff cut its forecast for Brazil’s sustainable growth rate to 3.5 percent from 4.25 percent, according to the Washington-based lender’s Article IV Consultation report published today. Gross domestic product will climb an estimated 3.4 percent from 2015 to 2019 after increasing 3.6 percent from 2010 through next year, according to the report.

President Dilma Rousseff’s government is stuck between inflation persisting above target and GDP growth that has missed estimates made by analysts in five of the past six quarters. The IMF staff called for a clear indication of when inflation will reach target in a bid to anchor expectations and for increased investments in infrastructure and productivity.

“Brazil’s sharp growth slowdown since mid-2011 has reflected supply constraints and heightened uncertainty about macroeconomic policies,” according to the report. “This situation calls for a tightening of policy stance to restore confidence in long-standing macroeconomic frameworks.”

Policy makers have raised the benchmark Selic rate by 225 basis points, or 2.25 percentage points, since April to slow inflation that has surpassed the 4.5 percent target for three years. The central bank in August also started a $60 billion program of currency swaps and credit line auctions to stem a decline in the real that threatened to pressure import prices.

Currency interventions should remain focused on reducing volatility as a flexible exchange rate is needed to absorb shocks during periods of financial turbulence, the IMF staff wrote. Policy makers also must remain vigilant due to the “rapid” build-up of household credit, according to the staff.

The report, dated July 2, was published today. This month the IMF in its World Economic Outlook forecast Brazil’s GDP would expand 2.5 percent this year and next and 3.5 percent in 2018.

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