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
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
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.