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IMF Predicts 3.5% Growth, But Brazil Says It Will Grow 4.5% in 2006

Pushed by strong private and government investment Brazil’s economy is in position to grow 4.5% in 2006, said Brazilian Finance Minister Guido Mantega.

Until last week, Brazilian government had estimated annual expansion in the range of 4% in 2006. Growth is expected to pick up during the second half of the year, following "a moderate expansion in the first half, January-June", admitted Mantega.

During the first quarter of this year, Brazil’s GDP expanded by 1.4%, and according to Mr. Mantega, growth should continue at an average of between 1.3% and 1.5% for the remaining quarters, which would then total the 4.5% target.

Economic growth during the rest of 2006 will be boosted by the hike in the minimum wage that took effect in April, higher public and private investment, and solid industrial output, Mantega said.

On May 31, 2006, the International Monetary Fund (IMF) reported that the Brazilian economy in 2005 had continued to expand although at a more moderate pace than in 2004 with GDP growth expected to rise by 3.5% in 2006 up from 2.25% in 2005.

IMF added that Brazil’s external position has strengthened further. Favorable global market conditions, including buoyant demand and rising commodity prices have contributed to high trade and current account surpluses.

At the same time, positive financial market sentiment, ample global liquidity, and high domestic interest rates have boosted capital inflows.

Sovereign bond spreads have narrowed to all-time lows, stock prices have risen to historic highs, and the real has appreciated to its highest level since early 2001, although the recent bout of volatility in world markets has reversed some of these gains.

The Brazilian central bank has taken advantage of these favorable conditions to build official international reserves and retire external debt, including through the early repurchase of all outstanding obligations to the IMF and repayments to Paris Club creditors, as well as buybacks of private external debt. Brazil’s external debt has declined to its lowest ratio to exports in more than 25 years.

The authorities have also taken advantage of favorable external conditions to deepen Brazil’s domestic financial markets and enhance their integration with global markets, by liberalizing foreign exchange regulations and eliminating the withholding tax on foreign holdings of public securities

In 2005, Brazil’s non-financial public sector primary surplus reached a record high, 4.8% of GDP, well above the target of 4¼ percent.

In the first few months of 2006, the 12-month primary surplus declined to around 4.4% of GDP, reflecting more subdued revenue growth and a steady increase in spending.

The 2006 Budget approved by Congress and the 2007 Budget Guidelines Law (LDO) submitted to Congress maintain the existing fiscal framework, including the target for the primary surplus.

Net public debt declined from 54¼% of GDP at end-2004 to around 51¾% in 2005, reflecting the combined effects of the primary surplus and exchange rate appreciation.

Mercopress – www.mercopress.com

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