Itaú BBA - Another current account surplus

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Another current account surplus

May 23, 2017

The strong trade surplus has been behind positive current account readings.

In April, for a second consecutive month, the balance of payments showed a current account surplus, which was slightly larger than our estimate and in line with market consensus. The strong trade surplus has been behind positive current account readings. In our view, lower commodity prices (from current levels) and some recovery in domestic demand will produce somewhat weaker results in the coming months. Nevertheless, the current account deficit will likely low in 2017, due to the good performance in the trade balance. 

The current account surplus totaled $1.2 billion in April, slightly above our estimate ($950 million surplus), and in line with market consensus. The reading was better than the $412 million surplus recorded in April 2016. Over 12 months, the current account deficit receded to $19.9 billion or 1.1% of GDP. The seasonally-adjusted annualized three-month moving average points to a $1.2 billion surplus in April (from a $8 billion deficit previously).

The biggest positive contribution came again from the trade balance, with a $6.7 billion surplus, way up from $4.6 billion in April 2016. The trade surplus is set to weaken this year, due to the decline in commodity prices from current levels and to some rebound in economic activity. Yet, the positive trade balance will continue to be the main driver supporting a low current account deficit.

The service deficit reached $2.5 billion, virtually the same as in April 2016. The international travel deficit continued to advance ($908 million vs. $602 million one year earlier), but was offset by a narrower equipment rentals deficit ($1.4 billion vs. $1.8 billion). On a seasonally-adjusted monthly basis, the service deficit shrank 5.3%.

The income deficit widened to $3.2 billion from $1.9 billion in April 2016. Interest payments increased to $2.3 billion from $1.4 billion one year earlier. The profit and dividends deficit also advanced (to $944 million from $579 million in April 2016). On a seasonally-adjusted monthly basis, however, the income deficit receded 12.3%, marking a second consecutive decline.

Notwithstanding a monthly decline, year-to-date, the service and income deficit widened 20% from one year earlier (to $24.7 billion vs. $20.6 billion)

In the financial account, direct investment in the country (DIC) added up to $5.6 billion, in line with our estimate and market consensus (both at $5.5 billion). Equity capital transactions accounted for $6.9 billion of total DIC, but intercompany loans resulted in $1.4 billion outflows, as debt amortizations topped credits received from abroad. DIC accumulated over 12 months remained around $85 billion. Preliminary data published by the Central Bank show thinner DIC inflows in May ($1.4 billion as of May 19).

After two consecutive months of outflows, foreign investment in the local capital markets was positive by $3.6 billion, as $4.4 billion inflows to fixed income outsized $774 million outflows from the stock market. However, over 12 months, foreign investment in the local capital markets remains negative, by $11.4 billion. Preliminary data released by the Central Bank show small inflows into stocks ($184 million) and outflows from the local fixed income market (-$2.5 billion) as of May 19.

International reserves ended April at $376.3 billion under the liquidity concept and at $375 billion under the cash concept. The $1.3 billion gap is due to the Central Bank's positions in repurchase lines.

The strong trade surplus has helped to maintain low current account deficits. We still expect large trade surpluses this year, but a rebound in domestic demand and lower commodity prices (from current levels) tend to produce slightly weaker readings in the next months. Thus, the current account deficit is set to widen from current levels throughout the year.

In terms of financing, DIC remains elevated, reducing Brazil’s reliance on volatile capital flows. Portfolio flows (stocks and fixed income) are still negative over 12 months.


Julia Gottlieb



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