The current account deficit will likely end 2017 at a low level, supported by strong trade surplus
The current account posted a $2.4 billion deficit in November, wider than our estimate (-$1.9 billion) and market expectations (-$1.8 billion). Equipment rentals and other services were behind the surprise. The current account deficit will likely end 2017 at a low level, supported by strong trade surplus, but the service and income deficit expanded during the year. For the next years, we maintain our expectation of a gradual increase in the current account deficit, in line with the rebound in economic activity, but not to the point of compromising Brazil’s e xternal sustainability.
The current account deficit totaled $2.4 billion in November, wider than our estimate (-$1.9 billion) and market consensus (-$1.8 billion). Over 12 months, the current account deficit widened to $11.3 billion or 0.6% of GDP. Year-to-date, the deficit stood at $5.4 billion, the smallest since 2007 (when the country posted a surplus). The seasonally-adjusted annualized three-month moving average reached $6.7 billion in November.
The biggest positive contribution again came from the trade balance, with a $3.2 billion surplus, down from $4.5 billion in November 2016. Despite de drop, the robust trade surplus throughout the year remains as the main factor supporting a low current account deficit.
The service deficit reached $3.1 billion, up from $2.3 billion one year earlier. The deficit related to international travel continued to widen (to -$1.1 billion from -$731 million in November 2016), as did the transportation deficit (to -$489 million from -$367 million). After a few months of declines, the equipment rentals deficit expanded (to -$1.5 billion from -$1.4 billion one year earlier). On a monthly basis, the service deficit increased 26.6%, after two months of declines.
The income deficit shrank to $2.6 billion from $3.2 billion in November 2016. Interest payments totaled $1.1 billion ($1.4 billion one year earlier). Importantly, the profile of interest payments announced by the Central Bank every month was reduced for 2017 and 2018, imposing some downside to our current account deficit estimates for both years. The profit and dividends deficit receded to $1.6 billion from $1.8 billion one year earlier. On a seasonally-adjusted monthly basis, the income deficit expanded 14.5%.
The year-to-date service and income deficit increased 9.3% from one year earlier (to -$66.9 billion from -$61.2 billion).
In the financial account, direct investment in the country (DIC) added up to $5.0 billion, topping our estimate ($4.0 billion) and market consensus ($4.3 billion). Equity capital transactions accounted for 91% of total DIC. DIC accumulated over 12 months has been stable around $80 billion. Preliminary data published by the Central Bank show $4.6 billion DIC inflows as of December 18.
Foreign investment in the local capital markets was positive by $592 million, as $692 million inflows to the fixed income market outsized $100 million outflows from the stock market. For the first time since March 2016, foreign investment in the local capital markets over 12 months posted inflows, of $2.5 billion. Preliminary data released by the Central Bank (as of December 18) show outflows from stocks and fixed income (-$334 million and -$2118 million, respectively).
International reserves ended November at $381.1 billion under both the liquidity and cash concepts, as the Central Bank’s position in repurchase lines is zeroed.
The strong trade surplus during 2017 has helped to maintain low current account deficits. However, a rebound in domestic demand and lower commodity prices (on average) tend to produce weaker readings in the coming years. November data and partial December figures already point in that direction.
In terms of financing, DIC remains resilient and hovered around $80 billion during the whole year, easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during most of the year, but now post inflows over 12 months.