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Brazil - Economic Briefing November 2003

Government Seeks New IMF Agreement

The government is well on target to meet its fiscal commitments agreed to with the IMF under the current stand-by agreement. In addition, authorities have made significant inroads on structural reforms sought by the multilateral institution. Meanwhile, some sectors of the economy are showing signs of a nascent recovery but the full impact of lower interest rates on domestic demand is unlikely to be felt before next year.

Fiscal balances remain on target and new IMF accord in making
In the third quarter, the government again exceeded its primary fiscal surplus target agreed to with the International Monetary Fund (IMF). According to the Central Bank, the primary fiscal surplus reached 57.1 billion reais (5.1% of GDP) in the January-September period. The figure was well above the 54.2 billion reais target agreed to with the International Monetary Fund (IMF).

The government is likely to agree to a new stand-by accord with the IMF in mid-November. The current US$ 30.0 billion stand-by agreement expires at the end of this year. Authorities are expected to request a one year programme of US$ 14.0 billion. The fiscal and monetary policy continuity of the current administration and progress on structural reform has prompted questions as to whether the Brazilian government will seek a new accord for 2005. Nevertheless, a new agreement for next year is likely to serve as an important boost to investor confidence and will provide the government with a necessary insurance to consolidate the current reform progress.

Inflationary pressures easing but central target out of reach
In October, the National Statistical Institute (IBGE) reported that consumer prices rose 0.29% – down from the 0.78% increase in the previous month but in line with market expectations. Thus, the annual inflation rate dropped from 15.1% in September to 13.9% in October. The moderation in inflation observed over the past six months reflects the deceleration in economic activity and the strengthening exchange rate, which is likely to reduce inflation further by the end of the year. Nevertheless, inflation still remains well ahead of the 8.5% year-end Central Bank inflation target but is above the +/- 2.5% tolerance margin set for annual inflation. Consensus participants remain sceptical about the Central Bank’s ability to meet its target but see annual inflation dropping to within the band at 9.5% by year-end. Next year, inflation is expected to moderate further, with participants anticipating year-end inflation to reach 6.5%, which is 0.2 percentage points below last month’s forecast but exceeds monetary officials’ central target rate of 5.5%. Similar to this year’s figure, the Consensus estimate is still within the +/- 2.5% tolerance.

Central Bank eases monetary reins further
The easing of inflationary pressures and a lack of a strong rebound in economic activity prompted monetary authorities to lower the benchmark SELIC interest rate again on 22 October, this time by 100 basis points to 19.0%. The October Central Bank move represented the fifth consecutive downward adjustment to the SELIC rate, which is now 600 basis points below its level at the end of last year. If the currency appreciation trend and subdued economic activity persists, monetary authorities are likely to maintain the more accommodating monetary policy in the coming months. In fact, Consensus Forecast participants anticipate interest rates to drop further to reach 17.6% by the end of the year, which is down 0.7 percentage points from last month’s forecast. Despite the likelihood that the pick up in economic activity will exert pressures on consumer prices next year, participants see the SELIC rate declining further throughout 2004 to reach 14.8% by year-end, which is down 0.2 percentage points from last month.


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Note:  The above text is an abridged version of the LatinFocus Consensus Forecast country briefing.  For more details please click here.


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