Economic Analysis - Goods Trade Surpluses Will Stabilise Shortfalls - MAY 2017


BMI View : Brazil's current account deficit will remain at historically modest levels in 2017 , as export growth rebounds in line with higher commodity prices and competitiveness gains . Capital inflows will amply cover the country's shortfalls.

Brazil's current account shortfall will stabilise at modest levels in the coming years. After a sharp contraction of imports narrowed the country's deficit in 2016, improving business sentiment will spur investment and import growth over the coming months. While import growth will modestly widen the deficit, exports will rebound after five consecutive years of contraction, driven by higher average commodity prices and more competitive manufactured exports. The country's shortfalls will be adequately financed by capital inflows, particularly direct investment, which will keep its external accounts stable.

Shortfall Will Stabilise In Years Ahead
Brazil - Current Account Balance, % of GDP
f = BMI forecast; Source: BCB, BMI

In 2016, Brazil posted a shortfall equal to 1.3% of GDP, in line with our previous forecast ( see 'Narrower Current Account Shortfalls, But Little Room For Gains', September 20 2016). Overall, goods imports contracted more than we anticipated over the year, while primary and secondary income account outflows exceeded our expectations.

We forecast a deficit of 1.4% of GDP in 2017. Though we expect the deficit to widen modestly over the coming years, reaching 2.0% in 2021, this marks an improvement on the 3.0% shortfall averaged between 2012 and 2016.

Goods Surplus Drives More Modest Deficits

Brazil's more modest deficits will be supported primarily by wider goods trade surpluses in the years ahead. From an average 0.8% of GDP surplus between 2012 and 2016, we expect an average surplus of 2.1% between 2017 and 2021. Though imports will rebound in line with an expected rise in business investment and higher average oil prices, a relatively sluggish growth outlook ( see ' Quick View: Q416 Growth Print Illustrates Difficult Road Ahea d', March 7), particularly for consumers, will keep import demand constrained.

Value-Added Goods Gaining Momentum
Brazil - Goods Exports, 6mma (% y-o-y)
Source: BCB, BMI

Meanwhile, goods exports will grow steadily. Commodities exports, which equalled 59.4% of total in 2016, will return to growth as prices of key commodities, including soybeans and iron ore, average higher. Additionally, our Mining team expects iron ore production to pick up as large scale projects come on line ( see 'Key Factors Align To Drive Recovery', March 6). Manufactured and semi-manufactured exports, which were up 40.2% and 18.1% y-o-y in January, respectively, will grow their share of exports, benefitting from a more competitive real.

Direct Investment Signals Confidence

Investment inflows will continue to amply cover Brazil's current account shortfalls, keeping the country's external accounts stable. Although portfolio inflows are likely to be volatile in the coming year, with outflows a risk in light of political uncertainty ( see 'Additional Near Term Gains Likely Limited', March 8), foreign direct investment has picked up over recent months as investors aim to make long-term bets on the Brazilian economy.

FDI Flows Easily Cover Shortfalls
Brazil - Foreign Direct Investment & Current Account Balance, USDmn
Source: BCB, BMI

While over the near-term we expect investments to continue to be driven by value purchases of existing assets in the infrastructure, power and construction sectors, new productive investment in oil and power will pick up in the coming years. Combined, these inflows will more than cover Brazil's relatively modest external financing needs.