Brazil’s current account deficit: reason for concern?

. Feb 08, 2020
Brazil Central Bank building deficit Brazil's Central Bank building. Photo: Diego Grandi/Shutterstock

Rocked by the economic crisis in Argentina and the swine flu outbreak in China, Brazil’s trade surplus hit USD 46.7 billion in 2019, below 2018’s USD 58.03 billion. That led Brazil to finish the year with a current account deficit of BRL 50.7 billion, or 2.76 percent of Brazil’s GDP, the biggest since 2015. But, is this important? And if so, why?

The current account deficit is a component of what economists call a country’s balance of payments, or BOP.

</p> <p>This is the resulting influx of wealth between a given country and foreign nations. It comprises current accounts—which includes transactions of goods and services, current transfers and investment income—and capital accounts, which concerns financial instruments, central bank reserves, and statistical imprecisions, as the data depends on information that is often hard to gather.</p> <p>A positive BOP normally means the country is receiving more <a href="">foreign investments</a>, while a deficit makes it more vulnerable, as it will have to find ways to compensate for the lack of inflow by taking on debt or using up reserves.&nbsp;</p> <p>Considering Brazil is a developing country, it is natural for it to need foreign resources to fund its growth. However, as Fábio Alves—columnist for newspaper <em>Estadão</em>—<a href=",contas-externas-em-alerta,70003087421">points out</a>, a rapid increase of the trade account deficit is more of a concern than the mere existence of a deficit, especially considering that stronger economic growth may lead to more imports.&nbsp;&nbsp;&nbsp;</p> <p>“Even though a current account deficit at 2 percent of the GDP is not yet concerning, the rate of increase sparks an alert for 2020: is the economic recovery increasing imports and, therefore, making the trade balance worse? Or is a <a href="">stronger GDP</a> bringing more foreign capital to Brazil? This is what we must work out,” he wrote.&nbsp;&nbsp;</p> <p>In 2019, direct investments in Brazil accounted for USD 78.6 billion, or 4.27 percent of the GDP, slightly above 2018&#8217;s 4.15 percent, which more than compensates the current account deficit.&nbsp;</p> <p>Projections show it will be important for this influx to continue: a recent <a href="">Itaú BBA investment bank report</a> projects Brazil’s trade surplus to fall to USD 40 billion in 2020, as imports are set to pick up again.&nbsp;</p> <h2>Account deficit: how did we get here?</h2> <p><a href="">As the Brazilian Central Bank shows</a>, the causes of the widening deficit came from abroad. Brazil’s trade balance fell 26.7 percent in the first ten months of 2019, mainly due to fewer exports. In this sense, the significant drop of USD 600 million in exports to China—<a href="">Brazil’s main trading partner</a>—and USD 5 billion to Argentina were the biggest culprits.&nbsp;</p> <p>Regarding Argentina, the 56.3 percent fall in the country’s imports of passenger vehicles hit Brazil the hardest, as 90 percent of Brazilian exports to Argentina comprised manufactured products, such as automobiles.&nbsp;</p> <p>As far as China is concerned, the Central Bank points out that <a href="">the trade war with the U.S.</a> and the swine flu outbreak were major causes for changes in soy exports. In 2018, the Chinese bought more Brazilian soy at higher prices, due to its restrictions on U.S. soybeans. Without this boost, the Central Bank estimated that Brazilian soy exports would have been USD 4.6 billion less over the period. However, as of 2019, not only were the Chinese buying up U.S. soy, a swine flu outbreak wiped out most of the country&#8217;s hogs and diminished the demand for the product.&nbsp;</p> <p>Analyzing the effects of changes in both countries, the Central Bank concluded that “if these episodes had not happened, Brazilian exports would have fallen USD 0.3 billion during the first ten months of 2019, versus the USD 10.6 billion observed.”</p> <h2>Is Brazil going down a dangerous path?</h2> <p>While it would be important for Brazil to increase foreign direct investment, having a deficit in the<strong> </strong>balance of payments does not necessarily spell trouble; that would depend on how this money is used.</p> <p>As InfoMoney news website <a href="">columnist</a> Matheus Tavares dos Santos explains, the trade deficits of countries such as Australia and the U.S. have helped fund investments in the productive sector, giving rise to new revenue sources. Meanwhile, in Brazil, the imports were focused on consumer goods and travel, he wrote.&nbsp;</p> <p>“Brazilians&#8217; travel spending increased from USD 2.4 billion in 2002 to 25.6 billion in 2014. Also, it represented almost 30 percent of all the services imported in the country. Instead of importing software or investing in technologies, we financed properties and traveled to Miami,” wrote Mr. dos Santos.&nbsp;</p> <p>So far, the services deficit on current accounts is diminishing, reaching USD 31.6 billion in November versus USD 32.287 billion in the same period of 2018. This is led by a fall in expenditure on equipment leases and travel. International reserves, which can be used by the Central Bank in moments of need, remain at a high level of USD 366.4 billion as of November, in spite of a USD 3.5 billion reduction since October.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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