Economic Analysis - Rising Risk Of Capital Outflows - APR 2018

BMI View: Brazil's current account deficit will remain modest over the coming years, posing minimal risk to external account stability. However, rising risks to fiscal sustainability and political uncertainty will undermine investor confidence, lift external debt costs and raise risks of capital outflows.

  • Brazil's current account deficit will widen in 2018 but remain modest by historical standards.
  • Capital inflows will most likely cover external financing needs, supporting reserve accumulation and external account stability.
  • However, rising risks to fiscal sustainability and uncertainty over policy direction ahead of the October 2018 general election will undermine investor confidence, lifting external debt costs and the risk of capital outflows.

We forecast a current account deficit of 1.3% of GDP in 2018. In 2017, the shortfall equaled 0.5% of GDP, just narrower than our 0.6% forecast ( see 'Election Will Drive Risk Of Capital Outflows', September 20 2017), underpinned by the widest goods trade surpluses seen in a decade.

Export growth will remain robust. Iron ore production growth, higher average soybean and oil prices and rising regional demand will continue to support primary products exports, which grew 26.8% y-o-y in the six months through January. Industry reports suggest that agribusinesses in Mexico are rapidly increasing purchases of Brazilian cereals, citing both competitive pricing and the need to diversify source markets in light of potential shifts in NAFTA. Additionally, value-added exports, such as autos, will see rising demand from Argentina, where economic activity is picking up.

Shortfall Will Widen As Consumption Rises
Brazil - Current Account Balance, % of GDP
f = BMI forecast. Source: BCB, BMI

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