Weak Domestic Demand and Low Investment Make Brazil Ugly Duckling of LatAm’s Recovery

Brazil will have to resist pressures for fiscal easing to sustain high primary surpluses and to raise medium term growth through reform efforts including improving the quality of fiscal policy and the business climate, according to IMF’s World Economic Outlook released this week.

IMF forecasts Brazil’s expansion in 2006 and 2007 to be in the range of 3.5%, but corrected downwards growth estimate for 2005 from last September’s 3.3% to 2.3%.

In Brazil, says the report, activity slowed sharply last year. Domestic demand remained subdued due primarily to inventory adjustments and some softening in investment following the earlier tightening of monetary policy, although private consumption has remained robust, underpinned by rising employment and real incomes.

There are recent signs of a pickup in activity, such as in retail sales and industrial production, and growth is expected to strengthen in 2006 as lower interest rates spur a recovery in investment.

With inflationary pressures moderating and inflation expectations well grounded, IMF believes there’s room to continue the gradual reduction of policy interest rates initiated in September 2005.

Furthermore reflecting strong revenue efforts the consolidated primary surplus reached 4.8% of GDP in 2005 well above the 4.25% target.

Finally IMF recommends that to continue the progress made in reducing public debt, Brazil will have to resist pressures for fiscal easing to sustain high primary surpluses and to raise medium term growth through reform efforts.

The report also points out that in 2005 in contrast with the robust expansion of Latin America given the strong global demand for commodities, in particular fuels, metals and agriculture, Brazil’ growth owing to weak domestic demand and investment, slowed.

Although not specifically mentioning any country, IMF underlines that the region as a whole faces a busy electorate schedule this year "underscoring the importance of maintaining sound economic policies and defending hard earned credibility among domestic and foreign investors during political transitions."

Next October Brazil is holding presidential and congressional elections.

Mercopress – www.mercopress.com

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