IMF: Brazil has recovered from the global crisis sooner and faster than most other economies, and has already registered a full year of strong growth.

IMF Executive Board Concludes 2010 Article IV Consultation with Brazil
August 5, 2010

On July 14, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1

Background

Brazil has recovered from the global crisis sooner and faster than most other economies, and has already registered a full year of strong growth. After contracting by a cumulative 4.8 percent in the fourth quarter of 2008 and the first quarter of 2009, the economy has grown at an average annualized rate of 8.9 percent over the past four quarters, largely on the strength of domestic demand. The output gap is estimated to have closed.

Brazil’s strong macroeconomic framework and the authorities’ timely policy response were critical in containing the negative effects of the global crisis and laying the groundwork for the recovery. Macroeconomic resilience was due both to the strength of the financial system and the combination of fiscal responsibility, exchange rate flexibility, and a credible commitment to inflation targeting—the pillars of the successful macroeconomic strategy that Brazil has pursued over the last decade.

The Brazilian financial sector is supporting the economic expansion. During the crisis, as the supply of new credit from private banks to the economy fell significantly, the expansion of credit by public banks played a critical role in preventing a potentially large output loss. Banking sector vulnerability indicators have improved in recent months.

Brazil continues to be the recipient of heavy capital inflows, as global investors seek to benefit from the economy’s strong growth potential and relatively high interest rates. In October 2009, the authorities imposed a 2 percent tax on purchases of domestic bonds and equities by foreigners, which appears to have had some impact in slowing inflows. Since the beginning of 2009, the stock market index has risen by two-thirds and the real has appreciated by about 25 percent against the U.S. dollar.

The authorities have taken steps to contain inflationary pressures. In recent months, the central bank has raised the policy rate by a total of 200 basis points, to 10.75 percent. It has also reversed most of the cuts in reserve requirements, and steps to support capital adequacy, implemented at the time of the crisis. In the fiscal area, the primary surplus is projected to rise from 2.1 percent of GDP in 2009 to 3.3 percent in 2010. The authorities have indicated that they will not resort to the use of fiscal adjustors in order to achieve this target. Temporary tax incentives adopted to support domestic demand during the crisis have been mostly phased out. The quasi-fiscal operations of the development bank BNDES are projected to remain high, at around 2½ percent of GDP in 2010.
Full Article: http://www.imf.org/external/np/sec/pn/2010/pn10111.htm)