IMF Says Brazil Needs Major Reforms Now, or Recession Will Continue

Image of Brazil flag flyingThe International Monetary Fund sent out a warning to Brazilian lawmakers yesterday, urging the new regime to make the difficult policy decisions needed to rescue the country from its deep recession.

The IMF’s suggestions were far-reaching and expressed a clear sense of urgency. From Reuters:

In the preliminary findings, the IMF warned that substantial changes to fiscal reforms in Congress could threaten the country’s gradual recovery from a two-year recession that has slowed the reduction of social inequalities due to income.

“If key reforms are watered down or get stalled in Congress, the boost to confidence will be short lived, and the recession may continue,” the IMF wrote in a summary ahead of the full report expected in coming months.

The crux of the IMF’s suggestions is reducing the country’s massive debt load by balancing its budget. Some analysts believe Brazil could have problems repaying its debt if changes aren’t made quickly:

In an unusually detailed menu of recommendations, the IMF said Brazil should aim to reach a primary budget surplus goal of 3.5 percent of its gross domestic product in five years and also consider revenue measures to shore up its accounts.

Brazil recently ousted its former president, Dilma Vana Rousseff, who finally left in disgrace in late August after a long legal battle. New head of state Michel Temer called for a government of “national salvation” in his inaugural speech earlier this month, but has yet to enact any significant changes.

But despite ongoing risks, and some very bearish calls on the country’s prospects for a meaningful recovery, Brazilian equities have exploded higher this year.

EWZ-2016-09-30

The iShares MSCI Brazil Index ETF (NYSE:EWZ) rose $0.17 (+0.51%) to $33.75 per share in Friday morning trading. Year-to-date, the largest Brazil-focused fund by assets, with over $4 billion under management, has surged 63.39%.