Growth prospects are good, but there are "signs of overheating" for the Brazilian economy. This was stated by the International Monetary Fund (IMF), inviting the government of Dilma Roussef to launch more measures to combat the risks associated with high inflation and the booming credit sector.
In its latest consultation with Brazil, the IMF said it maintained its forecast for economic growth this year at 4,1%. But the body noted that strong GDP growth, coupled with demand pressure and low unemployment, will lead to higher inflation, which could hit 6,6% by the end of the year. This value would slightly exceed the ceiling of the target which envisages a fluctuation between 2,5% and 6,5%.
“The executive leadership congratulated the authorities on their sound macroeconomic management and sound economic policy line,” the report reads. "But despite the prospects being favourable, there are still signs that the economy is overheating."
The entity notes that the size of credit in Brazil has increased dramatically: from 20% of GDP in 2004 it is now 46%. Bank lending to the private sector continues to grow rapidly and in April 2011 alone recorded a 20% increase. As far as the measures already taken by Brazilian authorities may have helped curb credit in some sectors, Fund directors say reforms should be more comprehensive. The IMF advises not to underestimate the financial risks associated with the large allocation of funds.
In addition, the body recommended that the Brazilian government "continue to apply macro policy adjustment measures as part of a response to the large inflow of capital", considering that "Brazil continues to be one of the favorite countries of international investors, thanks to its economic prospects and high returns”.
The report concludes with a suggestion of tax reforms and measures to simplify the regulatory framework and increase competitiveness, which "would reduce structurally high interest rates and boost long-term growth prospects."
Sources: IMF
