BRASILIA Brazil's economy is recovering gradually from the slowdown that began in mid-2011, but more efforts to boost productivity, competitiveness and investment are critical for spurring growth, the International Monetary Fund said on Wednesday.
In a report based on annual consultations with Brazilian economic authorities, the IMF praised Brazil's focus on reforms to ease supply-side constraints, saying it would boost investment and alleviate infrastructure bottlenecks.
Latin America's largest economy, which rode high on a decade-long commodities boom, is in its third year of slow growth that has defied stimulus efforts by President Dilma Rousseff's government through tax breaks and other incentives aimed at spurring industrial output.
"After a protracted period of weakness, investment has begun to recover in recent quarters while business confidence has firmed," the IMF report said.
Low unemployment and hefty real wage gains have kept consumption strong and, with the economy operating at close to potential, supply constraints have held back growth and fueled inflation, the report said.
The IMF welcomed the initiation of a monetary tightening cycle by Brazil's central bank, which is expected to hike its benchmark Selic rate by another 50 basis points later on Wednesday. The bank started in April an aggressive rate tightening cycle that brought rates from record low of 7.25 percent to 8.50 percent in July.
"In addition to headwinds from external conditions, domestic supply-side constraints and policy uncertainties may be holding back near-term growth," the IMF said.
The IMF said it will be important for Brazil to increase domestic saving, improve the minimum wage indexation mechanism and continue to reform its pension system.
"Other efforts to foster private investment should include streamlining taxation and improving business conditions," it said.
The IMF said Brazil's banking system is sound and well placed to implement Basel III capital requirements ahead of schedule. But it warned that household credit and mortgage loan levels remain risky and warrant vigilance.
Brazil's flexible exchange rate remains the best shock absorber to cushion the country from external financial turbulence, as long interventions in the foreign exchange market are limited to moderating excessive volatility, the IMF said.
In a bold move, the central bank last week launched a $60 billion forex intervention program to ease the depreciation of the real that has lost about 15 percent of its value since May.
(Reporting by Anthony Boadle; Editing by Chizu Nomiyama)