Despite a good headline at the margin, we do not expect the current account deficit to remain so low throughout the year
The current account posted a $283 million surplus in February, below our estimate ($2.0 billion) and market consensus ($475 million). Profit and dividends were behind the biggest deviation from our call, reversing the surplus seen as of February 22 to a monthly deficit. 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 external sustainability. In terms of financing, direct investment in the country has been smaller than in recent years, but portfolio flows are still positive.
The current account posted a $283 million surplus in February, narrower than our estimate ($2.0 billion) and below market consensus ($475 million). Over 12 months, the current account deficit receded to $7.8 billion or 0.4% of GDP. The seasonally-adjusted annualized three-month moving average declined to $6.5 billion in February from $15 billion in January.
The trade balance posted a $4.6 billion surplus, increasing somewhat from $4.4 billion in February 2017.
The service deficit reached $2.5 billion, up from $2.4 billion one year earlier. The transportation deficit continued to widen (to -$493 million from -$261 million in February 2017), but was partially offset by narrower deficits related to equipment rentals (-$1.1 billion vs. -$1.3 billion) and international travelling (-$794 million vs. -$827 million). On a seasonally-adjusted monthly basis, the service deficit narrowed 5.0%.
The income deficit shrank significantly to $2.0 billion from $3.1 billion in February 2017, due to the smaller deficit in the profits and dividends account (-$1.3 billion vs. -$2.5 billion). Importantly, the surplus seen in the earliest days of the month (as indicated by partial readings published by the Central Bank) reversed into a deficit. Interest payments totaled $744 million (up from $628 million in February 2017). On a seasonally-adjusted monthly basis, the income deficit widened 18.6%.
In the financial account, direct investment in the country (DIC) added up to $4.7 billion, slightly above our estimate and market consensus (both at $4.5 billion). Equity capital transactions totaled $4.1 billion and accounted for 87% of total DIC. DIC accumulated over 12 months was stable at $65 billion (3.1% of GDP), and remains the main source of financing for the current account deficit. Preliminary data published by the Central Bank show $3.5 billion DIC inflows as of March 21.
Foreign investment in the local capital markets was positive by $516 million (driven by inflows of $450 million to the fixed income market and $66 million to the stock market). Foreign investment in the local capital markets over 12 months reached $10.3 billion. However, preliminary data released by the Central Bank (as of March 21) show $3.7 billion outflows from the stock market and $2.1 billion outflows from fixed income instruments.
International reserves ended February at $377 billion under the cash concept and $382 billion under the liquidity concept. The $5.0 billion gap is due to the Central Bank’s position in repurchase lines.
All in all, the current account deficit remains low thanks to the good performance of the trade balance and favorable results in the profit and dividends account in the past two months. Despite a good headline at the margin, we do not expect the current account deficit to remain so low throughout the year. The stock of foreign investments in Brazil will pressure the profits and dividends line in 2018, while the rebound in activity tends to shrink trade surpluses. We anticipate weaker results in the next few years, but not to the point of jeopardizing the sustainability of external accounts. In terms of financing, DIC is easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during most of 2017, but now post inflows over 12 months.