Itaú BBA - Third consecutive monthly current account surplus

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Third consecutive monthly current account surplus

June 27, 2017

The strong trade surplus continues to support positive current account readings.

For a third consecutive month, the balance of payments showed a current account surplus in May, which was larger than our estimate and market consensus. Equipment rentals and the service and income deficit were behind the surprise. The strong trade surplus continues to support positive current account readings. In our view, lower commodity prices and some recovery in domestic demand will produce somewhat weaker results in the coming months. Nevertheless, the current account deficit will likely remain low throughout 2017, due to the good performance in the trade balance.

The current account surplus totaled $2.9 billion in May, topping our estimate ($1.9 billion) and market consensus ($2.0 billion). The reading was better than the $1.2 billion surplus recorded in May 2016. Over 12 months, the current account deficit receded to $18.1 billion or 1.0% of GDP. The seasonally-adjusted annualized three-month moving average points to $9 billion surplus in May (vs. $2.2 billion surplus previously).

The biggest positive contribution again came from the trade balance, with a $7.4 billion surplus, up from $6.2 billion in May 2016. The trade surplus is set to weaken this year, due to lower commodity prices and to some rebound in economic activity. Yet, the positive trade balance will continue to be the main factor supporting a low current account deficit.

The service deficit reached $2.5 billion, virtually the same as in May 2016. Deficits related to international travelling and transportation continued to widen (the former to $1.1 billion from $679 million and the latter to $315 million from $187 million), but were offset by a narrower equipment rentals deficit (to $1.3 billion from  $1.7 billion in May 2016).On a seasonally-adjusted monthly basis, the service deficit shrank 3.0%.

The income deficit receded to $2.3 billion from $2.8 billion one year earlier. Interest payments decreased to $911 million from $1.1 billion in May 2016. The profit and dividends deficit also narrowed (to $1.4 billion from $1.7 billion). On a seasonally-adjusted monthly basis, the income deficit narrowed 15.3%, marking a third consecutive decline.

Notwithstanding a monthly drop, year-to-date, the service and income deficit widened 13.8% from one year earlier (to $29.5 billion from $25.9 billion)

In the financial account, direct investment in the country (DIC) added up to $2.9 billion, in line with our estimate and market consensus (both at $3.0 billion). Equity capital transactions accounted for $2.9 billion of total DIC, while intercompany loans resulted in $21 million outflows, as debt amortizations topped credits received from abroad. DIC accumulated over 12 months remained declined to $81 billion. Preliminary data published by the Central Bank show thinner DIC inflows in June ($1.4 billion as of June 23).

Foreign investment in the local capital markets was negative by $2.4 billion, as $3.2 billion outflows from fixed income outsized $795 million inflows to the stock market. Over 12 months, foreign investment in the local capital markets continues to decline, but outflows became less intense, at $7.9 billion. Preliminary data released by the Central Bank show outflows from stocks and fixed income as of June 23 (-$1.4 billion and -$1.6 billion, respectively).

International reserves ended May at $377.7 billion under the liquidity concept and at $376.5 billion under the cash concept. The $1.2 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 tend to produce slightly weaker readings in the next months. Thus, the current account deficit is set to widen from current levels as the year advances, but recent results pose some risks to a lower deficit estimate in 2017.

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


 

Julia Gottlieb


 

 



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