Brazil

Brazil’s deep recession appears close to an end. But risks remain. The government that took office last year found an economy in recession and structural problems that threatened fiscal sustainability. The recession, triggered by large macroeconomic imbalances and a loss of confidence, was exacerbated by declining terms of trade, tight financing conditions, and a political crisis. Buoyed by congressional and market support, the government has pursued an ambitious reform agenda. A constitutional amendment that caps growth in federal noninterest spending in real terms has been passed and progress has been made on the discussion of social security and other structural reforms. Disinflation has gathered momentum, providing more room for monetary easing. While the end of the recession appears to be in sight, a recent rise in political uncertainty has cast a shadow over the outlook. The government’s ability to deliver on social security reform, a necessary step toward securing fiscal sustainability, has become more uncertain—and, with national elections scheduled for 2018, the window for legislative action is closing.