Itaú BBA - Lower interest expenses ensure current account surplus in March

Macro Brazil

< Volver

Lower interest expenses ensure current account surplus in March

abril 25, 2018

Lower-than-expected interest expenses were behind the biggest deviation from our call.

The current account posted a $798 million surplus in March, beating our estimate ($500 million deficit) and market consensus ($200 million deficit). Lower-than-expected interest expenses were behind the biggest deviation from our call. 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, we point out the stability in direct investment in the country and portfolio outflows.

The current account posted a $798 million surplus in March, topping our forecast ($500 million deficit) and market consensus ($200 million deficit). Over 12 months the current account deficit widened to $8.3 billion or 0.4% of GDP. The seasonally-adjusted annualized three-month moving average was virtually stable around $6 billion in March.

The trade balance posted a $6.0 billion surplus, below $6.9 billion in March 2017.

The service deficit increased to $2.8 billion in March, up slightly from $2.5 billion one year earlier. The transportation deficit continued to widen (to $489 million from $294 million), as did the international travel deficit ($980 million vs. $883 million), but these moves were partly offset by the narrowing deficit in equipment rentals ($1.3 billion vs. $1.6 billion). On a seasonally-adjusted monthly basis, the service deficit shrank 3.4%.

The income deficit narrowed to $2.6 billion from $3.2 billion in March 2017. Interest payments printed below our forecast, declining to $754 million from $1.3 billion one year earlier. The interest payment profile published by the Central Bank remains the same for 2018, so that the latest reading does not change our call for the current account balance this year. The profits and dividends deficit remained virtually stable at $1.8 billion. On a monthly basis, the income deficit was also basically unchanged.

In the financial account, direct investment in the country (DIC) added up to $6.5 billion, above our estimate ($5 billion) and market consensus ($4.5 billion). Equity capital transactions totaled $3.9 billion and accounted for 59% of total DIC. DIC accumulated over 12 months was stable at $64 billion (3.1% of GDP), and is still the biggest source of financing for the current account deficit. Preliminary data published by the Central Bank show $1.5 billion DIC inflows as of April 23.

Foreign investment in the local capital markets was negative by $7.8 billion, driven by $3.7 billion outflows from the fixed income market and $4.1 billion outflows from the stock market. Foreign investment in the local capital markets over 12 months is positive by $4.8 billion. Preliminary data released by the Central Bank (as of April 23) show $1.8 billion inflows to the stock market and $2.6 billion inflows to fixed income instruments.

International reserves ended March at $379.6 billion under the cash concept and $383.1 billion under the liquidity concept. The $3.5 billion gap is due to the Central Bank’s position in repurchase lines.

Notwithstanding stability 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, while the rebound in activity tends to squeeze 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 covers the current account deficit. Portfolio flows (to fixed income and stocks) were negative last month, but still post inflows over 12 months.


 

Julia Gottlieb



< Volver