2015 International Monetary Fund

IMF Country Report No. 15/122

BRAZIL SELECTED ISSUES

This Selected Issues Paper on Brazil was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on March 4, 2015.

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International Monetary Fund

Washington, D.C.

May 2015

BRAZIL SELECTED ISSUES

Approved By Western Hemisphere

Department

M. Garcia-Escribano, C. Goes, I. Karpowicz, F. Lipinsky,

T. Matheson (all WHD), H. Kang (MCM), J. Pereira (FAD), and

C. Saborowski (SPR)

FILLING THE GAP: INFRASTRUCTURE INVESTMENT IN BRAZIL _______________________ 5

A. Overview ________________________________________________________________________________ 5

B. How Integrated is Brazil? ________________________________________________________________ 6

C. The State of Infrastructure ______________________________________________________________ 8

D. Infrastructure Investment Trends ______________________________________________________ 17

E. The Role of the Concession Program ___________________________________________________ 19

F. Filling the Gap __________________________________________________________________________ 20

BOXES

1. The Choice of Infrastructure Comparator _______________________________________________ 9

2. Infrastructure Adequacy Indicator ______________________________________________________ 13

3. Electricity Sector Woes _________________________________________________________________ 16

FIGURES

1. Infrastructure Quality Indicators ________________________________________________________ 10

2. Transportation. Infrastructure Quality Indicators _______________________________________ 11

3. Infrastructure Quality and Income ______________________________________________________ 15

APPENDICES

I. Infrastructure Indictors __________________________________________________________________ 21

II. Panel Unit Root Methodological Note _________________________________________________ 22

REFERENCES _____________________________________________________________________________23

MACROECONOMIC IMPLICATIONS OF MINIMUM WAGE INCREASES IN BRAZIL ___24

A. Introduction ___________________________________________________________________________ 24

CONTENTS

March 4, 2015

BRAZIL

2 INTERNATIONAL MONETARY FUND

B. The Minimum Wage and Inequality in Brazil ___________________________________________ 25

C. Is Brazils Minimum Wage too High? ___________________________________________________ 26

D. Potential Macroeconomic Implications of the Current Minimum Wage Rule __________ 29

E. Policy Implications _____________________________________________________________________ 31

APPENDIX

Regressions and General Equilibrium Model ______________________________________________ 32

REFERENCES _____________________________________________________________________________38

FISCAL MULTIPLIERS FOR BRAZIL ______________________________________________________39

A. Fiscal Policy and Growth in Brazil since the Global Financial Crisis _____________________ 39

B. Fiscal Multipliers in Brazil: What do we know? _________________________________________ 40

C. Methodology __________________________________________________________________________ 41

D. Estimated Fiscal Multipliers ____________________________________________________________ 43

E. Have the Multipliers Changed? _________________________________________________________ 45

F. Robustness _____________________________________________________________________________ 48

G. Policy Implications _____________________________________________________________________ 49

FIGURES

1. Fiscal Stimulus and Economic Growth __________________________________________________ 39

2. Basic Multipliers ________________________________________________________________________ 44

3. Multipliers, Basic Shocks _______________________________________________________________ 46

4. Multipliers, Credit Shocks ______________________________________________________________ 47

5. Basic Multipliers ________________________________________________________________________ 48

APPENDIX

Data ______________________________________________________________________________________ 50

REFERENCES _____________________________________________________________________________51

NORMALIZATION OF GLOBAL MONETARY CONDITIONS: THE IMPLICATIONS FOR

BRAZIL ___________________________________________________________________________________52

A. The Taper Episode and Beyond ________________________________________________________ 52

B. Why did Long-Rates Rise in the U.S.? __________________________________________________ 53

C. What was the Impact on Brazil? ________________________________________________________ 54

D. Why are Brazilian Interest Rates so Responsive to U.S. Developments? ________________ 57

E. Policy Implications _____________________________________________________________________ 57

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INTERNATIONAL MONETARY FUND 3

FIGURES

1. Brazil and U.S. Sovereign Bond Yields __________________________________________________ 52

2. Cumulated Change in U.S. 10Y Bond Yield _____________________________________________ 53

3. Impact of Money and News Shocks ____________________________________________________ 59

4. Explanatory Power of Different Shocks at Different Horizons___________________________ 60

5. Cumulated Changes Since Taper Episode and Contributions ___________________________ 61

APPENDIX

Data ______________________________________________________________________________________ 62

REFERENCES _____________________________________________________________________________63

ASSESSMENT OF FOREIGN EXCHANGE INTERVENTION ______________________________64

A. Background ____________________________________________________________________________ 64

B. Intervention Tool Kit ___________________________________________________________________ 66

C. Intervention Program Following the Tapering Talk ____________________________________ 69

D. Distribution Channels to Spot and Derivative Markets _________________________________ 72

E. Effectiveness ___________________________________________________________________________ 74

F. Limits to Intervention __________________________________________________________________ 80

G. Discussion _____________________________________________________________________________ 82

FIGURES

1. Foreign Currency Intervention _________________________________________________________ 66

2. USD Linked Debt and Foreign __________________________________________________________ 66

3. Cupom cambial, FX Rate, and FX _______________________________________________________ 66

4. Convertibility Risk ______________________________________________________________________ 66

5. Ratio of Daily Turnover in Derivatives Markets to Spot Market _________________________ 67

6. Outstand Balance of FX Swap and FX __________________________________________________ 70

7. FX Swap Exposure by Counterparties __________________________________________________ 70

8. FX Swaps at Maturity ___________________________________________________________________ 71

9. Net Increase of FX Swap _______________________________________________________________ 71

10. Rollover Rate of FX Swap _____________________________________________________________ 71

11. Capital Flows __________________________________________________________________________ 72

12. FX Flows Financed by FX Repo and Commercial Banks Short FX Position ____________ 73

13. End Users of FX Swaps ________________________________________________________________ 73

14. FX Implied Volatility Relative to Peers _________________________________________________ 77

15. Foreign Exchange Rate ________________________________________________________________ 78

16. International Reserve Adequacy ______________________________________________________ 81

17. Size of FX Swap to Measures of External Debt ________________________________________ 83

BRAZIL

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TABLES

1. Explaining Volatility ____________________________________________________________________ 76

2. Impacts of Important Announcements of FX Swap Auctions ___________________________ 79

3 Public Sector Net Creditor Position _____________________________________________________ 81

REFERENCES _____________________________________________________________________________84

NON-FINANCIAL CORPORATE SECTOR VULNERABILITIES ____________________________85

A. Global Environment ____________________________________________________________________ 85

B. Balance Sheet Developments __________________________________________________________ 87

C. Corporate Defaults _____________________________________________________________________ 95

D. Sen