Brazil Contests IMF Forecast

By Marcela Canavarro, Contributing Reporter

RIO DE JANEIRO – The International Monetary Fund (IMF) forecast for the world economy in 2009 predicts a decline in Brazilian GDP. The survey “World Economic Outlook”, released last week, indicates economic activity 1.3% lower this year. The Brazilian government admitted the country will probably finish the first trimester in a technical recession, configured when GPB drops for two consecutive trimesters. Despite the pessimistic scenario, Brazilian authorities still believe the IMF projection for the whole year is wrong, believing Brazil will in fact close 2009 with a timid growth.

The Treasury Ministry is working on a 2% growth goal for 2009, but, according to local newspaper O Globo, it will probably reduce it for next month’s budget plan. Authorities believe some recent structural changes, such as falling interest rates and tax reductions, might help Brazil to regain economic strength – conditions not taken into consideration by IMF projections.

Recently, the Brazilian government reduced the Industrialized Products Tax (IPI) in an attempt to give a breather to the industrial and retail sector, which saw activity decrease 17.2% in January and February compared to the same period last year. After that, sales of house utilities like refrigerators and washing machine increased 21%.

Economic deceleration started in the last trimester of 2008, when GPB decreased 3,6% compared to previous trimester. The decline in commodity prices is also hurting large economies in Latin America, including Brazil who is among the world’s major exporters of primary products.

IMF Deputy Director of Research, Charles Collyns, confirmed the institution sees some signs of improvement in performance in the first quarter of 2009, “in part because the Brazilian authorities are using macroeconomic policies actively to respond to the shock”.

“Nevertheless, our global view is that the world economy is going to continue to struggle this year, only pick up pace gradually and return to growth next year. Our forecast for Brazil has to be affected by this global view”, Collyns stated.

Compared to other Latin American countries, Brazil still holds some advantages, according to IMF report. The cost of financing is one of them. While it has increased substantially for countries like Argentina, Ecuador and Venezuela, it remains relatively low for other countries with better initial positions and larger policy buffers, including Brazil, Chile, Colombia, Mexico and Peru.

Depreciation of the Real, which valued at US$1,75 at the start of 2008 and reached US$2,31 in the fourth quarter, brought significant losses to corporations that used currency derivative strategies in anticipation of continued appreciation of domestic currency. Despite that, the “Global Financial Stability Report”, also issued by the IMF, affirms that local funding in Brazil may be able to mitigate the drop-off in foreign inflows “to a greater extent”.

“External corporate refinancing needs are equivalent to about 10 percent of domestic bank credit to the private sector in China, India, and Brazil”, stated the survey.

History has also taught Brazil some valuable lessons in handling world financial crises. The stock market crash in the U.S. in October of 1987 led Brazil to declare a debt service moratorium. On another occasion, a collapse of US-based hedge fund preceded by a Russian default culminated in a 70% depreciation of the Brazilian Real in January of 1999.

It seems Brazil is learning to manage the ups-and-downs of the world economy. Rather than react to a crisis with pro-cyclic policies, the strategy now is anti-cyclic with structural changes that might put Brazil on the growth path again.