Monetary and financial issues

Economic Survey of Brazil 2009: Looking beyond the global financial and economic crisis towards sustained growth


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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Brazil  published on 14 July 2009.




Brazil has not been spared from the global financial and economic crisis, although it is expected to weather its effects reasonably well

Domestic financial conditions tightened considerably as the global financial and economic outlook deteriorated from mid September 2008. The supply of foreign credit to Brazilian enterprises, including exporters, had been abundant before the crisis but dried up rapidly. The cost of domestic borrowing rose sharply, and the real depreciated by over 40% from the highs of mid-2008 through year-end. Activity plummeted in the last quarter, dragged down by a collapse in industrial production, especially in credit sensitive sectors, such as the motor industry, and a run-down in inventories, albeit from high levels. Demand for Brazilian exports also began to weaken later in the year. However, pressures were notably lower than those experienced by other large emerging-market economies. This is due essentially to the continued consolidation of macroeconomic adjustment following the floating of the real in 1999 – based on a policy framework combining inflation targeting, a floating exchange rate, rules-based fiscal policymaking and prudent public-debt management. This policy framework has delivered gradually falling inflation and public indebtedness, and has reduced external vulnerabilities. These factors have been essential for increasing resilience to external shocks and have laid the groundwork for raising the economy’s growth potential. Another reason for relatively good performance in spite of the crisis is that the banking sector is in good shape, and the non-financial corporate and household sectors do not suffer from the balance-sheet weaknesses that are at the heart of financial distress elsewhere. Indeed, there are signs that the economy is recovering, although the global economic outlook remains extremely uncertain.


Brazil has entered this financial and economic crisis with better fundamentals than in the past1
Dotted line: t0 = 100 for April 2002 (2002Q2 for capacity utilisation and business confidence)
Solid line: t0 = 100 for July 2008 (2008Q3 for capacity utilisation and business confidence)

1. The events reflect large nominal exchange-rate depreciation episodes, which were selected using the following criterion: a sustained monthly depreciation of the exchange rate during at least five months, leading to a cumulative depreciation of at least 40%. On the basis of this definition, two episodes can be selected since the abandonment of exchange rate targeting in 1999: the periods April-October 2002, when the exchange rate depreciated by 64%, and July-December 2008, when the exchange rate depreciated by 44%.
Source: Central Bank of Brazil and OECD calculations.


The monetary policy responses to the global crisis have been appropriate

The central bank took decisive action to enhance liquidity in the domestic money market by reducing compulsory reserve requirements for banks, which have traditionally been tight, by some 3.5% of GDP during September-December 2008. The authorities also created incentives for larger financial institutions to purchase the loan portfolios of smaller banks, which were affected particularly adversely by the deteriorating credit environment. As in previous periods of financial distress, interventions in foreign-exchange markets were carried out in a transparent manner; they were aimed at ensuring liquidity in periods of thin trade and geared towards smoothing excessive volatility in the exchange rate. The relaxation of the monetary stance as from January 2009 has been appropriate; it has brought real ex ante interest rates to historically low levels. There may well be room for some further monetary easing in the near term, depending on the strength of the recovery and the evolution of inflation expectations over the coming months.

Inflation, exchange rate and monetary policy responses: An event analysis1
Solid line: t0 = 100 for April 2002
Dotted line: t0 = 100 for July 2008

1. The events reflect large exchange-rate depreciation episodes, which were selected using the following criterion: a sustained monthly depreciation of the exchange rate lasting at least five months, leading to a cumulative depreciation of at least 40%. On the basis of this definition, two episodes can be selected since the abandonment of exchange rate targeting in 1999: the periods April-October 2002, when the exchange rate depreciated by 64%, and July-December 2008, when the exchange rate depreciated by 44%.
Source: Central Bank of Brazil.


Fiscal support is being suitably provided, but further discretionary stimulus is not warranted

Fiscal policy responses to the crisis have included an alleviation of the tax burden on selected sectors, including the motor vehicle and construction industries, and on financial transactions. Cyclical revenue losses associated with the automatic fiscal stabilisers will also add to fiscal support, together with an increase in the duration of unemployment insurance and higher spending related to hikes in the minimum wage and in social protection, infrastructure development and social housing programmes. The consolidated primary surplus is projected by the OECD to fall from 4.6% of GDP in 2008 (before a transfer of 0.5% of GDP to a newly created Sovereign Wealth Fund) to 2.3% of GDP in 2009, which is close to the official target of 2.5% of GDP. A federal loan to BNDES, the National Development Bank, as well as other government-owned banks, of up to 4% of GDP during 2009-10 is allowing these institutions to expand their lending. Moving forward, the authorities are advised to let the automatic stabilisers work unimpeded, rather than engaging in further discretionary activism, unless the slowdown in activity turns out to be more severe than expected. A supplementary rise in the budget deficit needed to finance additional discretionary measures would put pressure on financial markets and therefore crowd out the private sector in a particularly challenging credit environment. In addition, counter-cyclical fiscal action that would result in an increase in expenditure commitments on a permanent basis would be inconsistent with efforts to prevent a further ratcheting-up of current expenditure. The pace of monetary easing would also certainly be constrained if confidence in the fiscal programme is eroded.

Longer-term growth prospects have improved in earnest, but further reforms are needed

Annual GDP growth rose to 4.7% on average during 2004-08, more than double the outturn of the previous five years that had followed the floating of the real. The fact that faster growth is delivering tangible improvements in the distribution of income, which nevertheless remains notoriously skewed in Brazil, is particularly auspicious. But, for the strong performance of the last few years to be maintained, there is no room for complacency. Policy effort will need to be focused on building on past achievements and on making headway into policy areas where progress has been less comprehensive than desired. This is the case for reform of Brazil’s indirect taxes and labour levies, as well as initiatives to enhance the efficiency of government operations, discussed in detail in this Survey. New policy challenges have also arisen, including those related to the regulatory framework for developing the recently discovered offshore oil and gas fields and to the use of the associated revenues accruing to the budget. They will need to be confronted in the near term to make sure that Brazil makes the best possible use of these natural resources so as to generate dividends for future generations.

How to obtain this publication


The complete edition of the Economic Survey of Brazil is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.


Additional information

For further information please contact the Brazil Desk at the OECD Economics Department at

The OECD Secretariat's report was prepared by Luiz de Mello and Mauro Pisu under the supervision of Peter Jarrett. Research assistance was provided by Anne Legendre.




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