BRASILIA Oct 23 Brazil must take more decisive action to raise productivity and boost private investment if it is to restore robust growth to its once-booming economy, the International Monetary Fund said on Wednesday.
In its annual economic assessment of Brazil, the IMF also recommended continued tightening of monetary policy to curb inflation, which it sees remaining high due to a tight labor market and high consumption.
The IMF projects the gross domestic product of Latin America's largest economy will grow by a moderate 2.5 percent this year, less than other major economies in the region and well down from the 7.5 percent achieved in 2010. It forecast growth of 3.2 percent in 2014.
President Dilma Rousseff, who is expected to run for re-election next year, has been banking on a recovery in private investment as a result of tax breaks and other incentives taken by her government. Still, the economy remains stagnant in its third year of slower growth.
The IMF said the recent expansion of the private sector's role in infrastructure projects should help investment pick up. But it said greater policy predictability and measures to enhance competitiveness and rebalance domestic demand away from consumption are needed to strengthen investor confidence.
Economists blame Brazil's supply-side constraints and weak investment on high taxes and labor costs, severe infrastructure bottlenecks and the government's heavy role in the economy.
"Absent comprehensive and decisive reform efforts to boost investment and productivity, Brazil's potential growth would revert to its long-term historical average of about 3 percent," the IMF report said.
It warned that Brazil's recovery could prove "more uneven and sluggish than envisioned" if investor confidence remains fragile for reasons including social discontent, such as the massive protests against corruption and poor public services that rocked the country in June.
The IMF said the Brazilian government needs to restore confidence in the country's long-standing macroeconomic policies that have ensured two decades of stability through fiscal savings and inflation targeting.
"A steady process of fiscal consolidation, anchored on Brazil's long-standing target for a fiscal primary surplus of 3.1 percent of GDP, would support monetary policy and bolster the recovery in confidence and investment," it said.
The IMF expects inflation to remain at about 5.8 percent this year and into 2014, followed by a slow convergence to the 4.5 percent target due to continued tightness in labor markets, the effects of exchange rate depreciation and the lag between new investments and expansion of capacity.
"A front-loaded tightening and clear indication of the priority assigned to meeting the target over the relevant horizon will help anchor medium-term inflation expectations," it said.
The IMF said Brazil's financial supervision and banking system remain sound. But it warned that a correction in real estate prices, although not systemic, could worsen asset quality in public banks due to the rapid expansion of mortgage loans in recent years.
Corporate bond issuance has picked up, helping improve balance sheets and the lengthening of maturities, but increased leverage in some sectors should be monitored carefully, it said.