The deficit remained at a low level, thanks to the good performance of the trade balance and the surplus in profits and dividends

The current account posted a $4.3 billion deficit  in January, slightly narrower than our estimate (-$4.5 billion) and below market consensus (-$5.0 billion). The monthly reading remained at a low level, thanks to the good performance of the trade balance and the surplus in profits and dividends. 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 was smaller than in recent months, but portfolio flows are back to positive territory. 

The current account deficit totaled $4.3 billion in January, narrower than our estimate (-$4.5 billion) and market consensus (-$5.0 billion). Over 12 months, the current account deficit receded to $9.0 billion or 0.4% of GDP. The seasonally-adjusted annualized three-month moving average advanced to $15 billion in January from $10 billion.

The trade balance posted a $2.4 billion surplus, down somewhat from $2.5 billion in January 2017.

The service deficit reached $2.8 billion, up from $2.4 billion one year earlier. The deficit related to international travel continued to widen (to -$1.2 billion from -$918 million in January 2017), as did the transportation deficit (to -$527 million from -$436 million). These readings were partially offset by the decline in the equipment rentals deficit (to -$1.2 billion from -$1.7 billion). On a seasonally-adjusted monthly basis, the service deficit increased just 0.6%.

The income deficit shrank significantly to $4.1 billion from $5.3 billion in January 2017, due to the surplus in the profits and dividends account. Interest payments totaled $4.4 billion ($4.5 billion in 2017). The profit and dividends account posted a surplus of $222 million as revenues were unusually larger than expenses, reversing a deficit of $870 million one year earlier. On a seasonally-adjusted monthly basis, the income deficit declined again, by 1.2%.

In the financial account, direct investment in the country (DIC) added up to $6.5 billion, topping by far our estimate ($3.5 billion) and market consensus ($3.8 billion). Equity capital transactions amounted to $3.7 billion and accounted for 57% of total DIC. DIC accumulated over 12 months slid to $65.3 billion (3.2% of GDP), but is still the biggest source of financing for the current account deficit. Preliminary data published by the Central Bank show $3.0 billion DIC inflows as of February 22.

Foreign investment in the local capital markets was positive by $10 billion (driven by inflows of $6.0 billion to the fixed income market and $4.1 billion to the stock market). Foreign investment in the local capital markets over 12 months reached $8.8 billion. Preliminary data released by the Central Bank (as of February 22) show milder readings, with $97 million outflows from the stock market and $118 million inflows to fixed income.

International reserves ended January at $375.7 billion under the cash concept and $383.7 billion under the liquidity concept. The $8.0 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. A rebound in domestic demand tends to produce weaker readings in the coming years, but not to the point of compromising Brazil’s external sustainability. In terms of financing, DIC is smaller than in previous months, but still easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during most of 2017, but are now posting inflows over 12 months.

Julia Gottlieb