BRASILIA, Oct 5 (Reuters) - The International Monetary Fund on Monday revised up its 2020 economic outlook for Brazil, but warned that risks remain “exceptionally high and multifaceted” and government debt is on course to end the year around 100% of gross domestic product.
The IMF now expects Latin America’s largest economy to shrink by 5.8% this year, much less than the 9.1% contraction it had previously estimated, and predicts a “partial” recovery and 2.8% growth next year.
In a document outlining the preliminary findings from a recent staff visit to Brazil, the IMF said “significant” downside risks include a second wave of the pandemic, “long-term scarring” from a long recession, and confidence shocks given Brazil’s huge public debt.
Even though the IMF welcomes the government’s commitment to reducing Brazil’s debt, it warned that it could take time for employment, incomes, and poverty to return to pre-pandemic levels.
“If health, economic, and social conditions were to turn out worse than the authorities expect, they should be prepared to provide additional fiscal support,” the IMF said, adding that the near-term policy priority is “saving lives and livelihoods.”
Emergency aid payments to millions of Brazil’s poorest families are due to expire at the end of this year, fueling political controversy, fiscal uncertainty and financial market volatility in recent weeks over what program will replace them.
The IMF noted that Brazil’s interest rate curve is “very steep”, highlighting these longer-term fiscal fears, and said a series of structural reforms to lock in “medium-term consolidation will be essential” to mitigate the debt risks.
It warned that without “unequivocal” evidence that the government’s spending cap rule will be preserved, extra spending could erode market confidence and push up interest rates.
With limited room for looser fiscal policy, Brazil must rely more on monetary policy, the IMF said, adding that the central bank has room to cut its benchmark Selic rate from its current record low 2% if inflation and inflation expectations remain low.
“As a complement, continued use of forward guidance to signal that the policy rate would stay low for longer, conditional on maintaining a sound fiscal regime, could have an expansionary effect without risks to financial stability,” the IMF said. (Reporting by Jamie McGeever Editing by Nick Zieminski)
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