Over 12 months, the current account deficit widened to USD 13 billion or 0.65% of GDP.


The current account posted a USD 729 surplus million in May, slightly above our forecast (USD 550 million) and below market consensus (USD 935 million). Over 12 months, the current account deficit widened to USD 13 billion or 0.65% of GDP. The trade balance posted a USD 5.6 billion surplus, below USD 7.4 billion in May 2017, due to the truckers’ protest late in the month. The service deficit increased slightly to USD 2.7 billion in May from USD 2.5 billion one year earlier. The transportation deficit continued to widen (-USD 422 million vs. -USD 315 million), as did the international travel deficit (-USD 1.2 billion vs. -USD 1.1 billion). Meanwhile, the deficit in equipment rentals narrowed (-USD 1.2 billion vs. -USD 1.3 billion). The income deficit shrank somewhat to USD 2.3 billion from USD 2.4 billion in May 2017. Interest payments declined to USD 797 million from USD 1.0 billion one year earlier. Meanwhile, the profits and dividends deficit expanded to USD 1.6 billion from USD 1.4 billion.

In the financial account, direct investment in the country (DIC) added up to USD 3.0 billion, matching both our estimate and market consensus. Equity capital transactions totaled USD 1.9 billion and accounted for 63% of total DIC. DIC accumulated over 12 months remained stable at USD 62 billion (3.1% of GDP), a figure that is lower than what was observed over the past year but is still the biggest source of financing for the current account deficit. Preliminary data published by the Central Bank show USD 5.0 billion DIC inflows as of June 21. International reserves ended May at USD 383 billion under both the cash and liquidity concepts, as the Central Bank’s position in repurchase lines is zeroed.

At the margin, the current account deficit increased somewhat in May, weakened by a thinner trade surplus and wider service and income deficits. These worsened figures, however, will not hurt the sustainability of Brazil’s external accounts. In terms of financing, DIC declined but is still easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during the month but remain positive (albeit smaller) over 12 months.
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According to the Focus survey, the median GDP growth expectations declined 21 bps for 2018 (to 1.55 %) and 10 bps for 2019 (to 2.60%), and did not change for 2020 (at 2.50%). In the opposite direction, IPCA inflation expectations increased 12 bps for 2018 (to 4.00%) and remained flat for 2019 and 2020 (at 4.10% and 4.00%, respectively). Median forecasts for the exchange rate slightly increased to BRL 3.65/USD for 2018 (from 3.63) and did not change for 2019 and 2020 (at BRL 3.60/USD for both years).

Macro Vision: At what level will the BRL stabilize? Short-term FX moves may be erratic and hard to predict, as currencies may follow a random walk. However, in the medium and long term, exchange rates tend to be more sensitive to fundamentals. In the long run, the exchange rate depends on the amount of foreign funds available to finance one country’s current account deficit. Since 1947, Brazil has been able to finance current account deficits around 2% of GDP, on average. However, this average includes two different regimes: one with plenty of available funding (and current account deficits of 3%-4% of GDP) and another without external funding (and current account surpluses around 1% of GDP). We analyzed the external and macroeconomic conditions during each regime. The main driver of the availability of external financing was apparently the quality of the country’s macroeconomic policies. While the international scenario alone is not the main driver, in times of deterioration abroad, local vulnerabilities tend to become more evident and the availability of funds decreases.
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The Copom minutes was just released; we will publish a report on the central bank’s document today.


Day Ahead: Argentina will hold its second monetary policy meeting of June. While we and the consensus expect the rate to remain unchanged at 40.0%, we don’t rule out the central bank changing the monetary policy instrument (possibly to the 1-day repo or going back to Lebac’s). In any case, we expect that the yield paid by Lebac’s will be consistent with any policy instrument (current or new). So, if the policy instrument is not the short-term Lebac itself, it will likely be set around the current Lebac’s yield in the secondary market (43%) or will have a range where the Lebac’s yield falls within. On the activity front, the statistics agency (INDEC) will publish the EMAE (official monthly GDP proxy) for April at 4:00 PM (SP Time). We expect activity to decline 1% mom/sa. If our forecast is correct, activity would decline 2.6% year-over-year (consensus: 1.80%). Throughout the day, INDEC will also release the current account balance for 1Q18. We expect to see some improvement in the current account balance in 1Q18, mainly due to the weakening of peso registered last December and in January this year. We estimate a current account deficit of USD 6.3 billion (consensus: – USD 8.9 billion).


Day Ahead: The statistics institute (INEGI) will announce May’s unemployment rate at 10:00 AM (SP Time). We expect the unemployment rate to post 3.5% (consensus: 3.43%).

Fuente: Itaú

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