Current Account Deterioration To Continue

BMI View: While we are adjusting our current account forecasts for Brazil for the next few years to reflect narrower shortfalls, we maintain our view that further deterioration is ahead. This is underpinned by our view that export growth will remain modest and imports will tick higher, in line with a recovery in the manufacturing sector, keeping the trade account in deficit.

We are adjusting our current account outlook for Brazil to reflect slightly narrower deficits in the coming years, although we continue to anticipate deterioration. Indeed, we now estimate that Brazil's current account shortfall came in at 3.7% of GDP in 2013, narrower than our previous 4.1% forecast, in light of stronger goods and services exports than we anticipated in recent months ( see 'Rebalancing Pressures To Continue Weighing On Current Account', October 2 2013). Moreover, with both likely to continue providing a modest boost to the current account balance in 2014, we are adjusting our current account deficit forecast to 4.2% of GDP, from 4.3% of GDP previously. Despite these changes, our long-held view for a significant deterioration in Brazil's current account balance, on the back of structurally weaker export growth and a moderate rebound in import growth, remains in place. We estimate that Brazil posted its first trade deficit in over a decade in 2013, at a modest US$200mn, and we expect the trade account to remain in the red in the red through 2016.

Trade Deficit Here To Stay

Little Respite Ahead
Brazil - Current Account Components, US$mn

Current Account Deterioration To Continue

BMI View: While we are adjusting our current account forecasts for Brazil for the next few years to reflect narrower shortfalls, we maintain our view that further deterioration is ahead. This is underpinned by our view that export growth will remain modest and imports will tick higher, in line with a recovery in the manufacturing sector, keeping the trade account in deficit.

We are adjusting our current account outlook for Brazil to reflect slightly narrower deficits in the coming years, although we continue to anticipate deterioration. Indeed, we now estimate that Brazil's current account shortfall came in at 3.7% of GDP in 2013, narrower than our previous 4.1% forecast, in light of stronger goods and services exports than we anticipated in recent months ( see 'Rebalancing Pressures To Continue Weighing On Current Account', October 2 2013). Moreover, with both likely to continue providing a modest boost to the current account balance in 2014, we are adjusting our current account deficit forecast to 4.2% of GDP, from 4.3% of GDP previously. Despite these changes, our long-held view for a significant deterioration in Brazil's current account balance, on the back of structurally weaker export growth and a moderate rebound in import growth, remains in place. We estimate that Brazil posted its first trade deficit in over a decade in 2013, at a modest US$200mn, and we expect the trade account to remain in the red in the red through 2016.

Little Respite Ahead
Brazil - Current Account Components, US$mn

Trade Deficit Here To Stay

Brazilian goods exports rebounded in Q313 and Q413, helped by stronger iron ore prices, as well as an uptick in manufactured goods exports. Although our Commodities team forecasts iron ore prices to head lower throughout 2014, averaging US$114.0/tonne, down from US$135.3/tonne in 2013, we believe that export growth will return to modestly positive territory this year at 3.3%, up from an estimated 1.1% contraction in 2013. In addition to favourable base effects, this view is underpinned by our Commodities team's forecast for another strong soybean harvest in 2014, and our view that consistent exchange rate depreciation over the last two years will help to make manufactured goods modestly more competitive. Moreover, we anticipate a continued recovery in trade with neighbouring Argentina this year, after the impact of import restrictions imposed in 2012 continues to ease. Furthermore, we anticipate that a surge in tourism related to the June 2014 FIFA World Cup will bolster the services balance, providing a further cushion to the current account.

No Return To Recent Highs
Brazil - Iron Ore Exports

That said, we expect that a moderate, if erratic, recovery in the manufacturing sector will support demand for inputs, and import growth has historically tracked very closely with industrial production. As such, we foresee import growth remaining relatively strong in 2014 at 6.6%, only slightly weaker than an estimated 7.7% in 2013. Given these factors, we maintain our view that the trade balance will remain in the red in the next several years until a surge in oil production provides a strong boost to goods exports beginning in 2017.

Financial Account Surplus To Remain Off Its Highs

Given a relatively weak growth outlook, a key general election in October 2014, as well as numerous structural problems facing the Brazilian economy in the coming years, we maintain our view that the country's financial account surplus is unlikely to return to its 2010 highs in the foreseeable future. As such, we do not rule out further instances in which the quarterly financial account surplus does not cover the current account shortfall, forcing the central bank to dip into its foreign reserves. That said, we believe that the bank's robust US$358.8bn reserves stockpile will provide a substantial buffer against volatility.

Major Uptick Unlikely
Brazil - Financial Account Components, US$mn

Significant intervention in industry in recent years, as well as near-constant changes to the terms of transport concessions have kept foreign investors relatively cautious. With the government likely to continue struggling with the above issues, and political risk likely rising ahead of the general election, we expect this trend to persist in the next few quarters. In the same vein, we see little significant upside for portfolio inflows, as short-term investors are likely to remain wary of Brazilian assets in light of weak growth, still-high inflation, and potential for fiscal slippage to send credit risk higher once again.

Risks To Outlook

Should iron ore prices decline by more than we anticipate in the coming year, Brazilian goods exports could underperform our current expectations, posing major downside risks to our current account forecast this year. While this is not our core view, the government's failure to complete all of the necessary infrastructure projects in advance of the June 2014 FIFA World Cup and further bad press related to public safety could see a weaker tourist turn out than we expect this year, posing downside risks to our services and current account forecasts.

BRAZIL - CURRENT ACCOUNT
2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Goods imports, US$bn 2 181.8 226.2 223.1 240.2 256.0 268.0 290.0 315.0 340.0
Goods imports, % of GDP 2 8.5 9.1 9.9 11.0 11.6 11.6 11.3 11.0 10.5
Goods exports, US$bn 2 201.9 256.0 242.6 240.0 248.0 260.0 280.0 318.0 355.0
Goods exports, % of GDP 2 9.4 10.4 10.8 11.0 11.2 11.3 10.9 11.1 11.0
Goods exports, % of imports 2 111.1 113.2 108.7 99.9 96.9 97.0 96.6 101.0 104.4
Balance of trade in goods, US$bn 2 20.1 29.8 19.5 -0.2 -8.0 -8.0 -10.0 3.0 15.0
Balance of trade in goods, % of GDP 2 0.9 1.2 0.9 -0.0 -0.4 -0.3 -0.4 0.1 0.5
Services imports, US$bn 2 62.4 76.1 80.9 87.0 92.0 93.0 93.0 95.0 95.0
Services imports, % of GDP 2 2.9 3.1 3.6 4.0 4.2 4.0 3.6 3.3 2.9
Services exports, US$bn 2 31.6 38.2 39.9 38.0 41.0 38.0 38.0 40.0 40.0
Services exports, % of GDP 2 1.5 1.5 1.8 1.7 1.9 1.6 1.5 1.4 1.2
Goods and services exports, US$bn 2 233.5 294.2 282.4 278.0 289.0 298.0 318.0 358.0 395.0
Goods and services exports, % of GDP 2 10.9 11.9 12.6 12.8 13.1 12.9 12.4 12.5 12.2
Balance of trade in goods and services, US$bn 2 -10.7 -8.1 -21.6 -49.2 -59.0 -63.0 -65.0 -52.0 -40.0
Balance of trade in goods and services, % of GDP 2 -0.5 -0.3 -1.0 -2.3 -2.7 -2.7 -2.5 -1.8 -1.2
Income account balance, US$bn 2 -39.5 -47.3 -35.4 -35.4 -36.0 -36.0 -35.0 -35.0 -37.0
Income account balance, % of GDP 2 -1.8 -1.9 -1.6 -1.6 -1.6 -1.6 -1.4 -1.2 -1.1
Net transfers, US$bn 2 2.9 3.0 2.8 3.2 3.2 3.2 3.3 3.3 3.4
Net transfers, % of GDP 2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Current account balance, US$bn 2 -47.5 -52.5 -54.2 -81.4 -91.8 -95.8 -96.7 -83.7 -73.6
Current account balance, % of GDP 2 -2.2 -2.1 -2.4 -3.7 -4.2 -4.1 -3.8 -2.9 -2.3
Openness to international trade, % 1,2 17.9 19.5 20.7 22.1 22.8 22.9 22.3 22.1 21.5
Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 BCB/BMI.
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