Brazil’s Current Account Deficit Deteriorates, Risking FDI Coverage

Brazil’s current account deficit surged nearly threefold in January, raising concerns about insufficient foreign direct investment (FDI) coverage. The deficit increased to $8.7 billion, largely due to a falling trade surplus. Central bank officials warn that while FDI currently covers the deficit, this may change, indicating potential vulnerabilities for the economy.

Brazil is experiencing a significant deterioration in its current account deficit, which has nearly tripled year-on-year as of January 2024, potentially lacking sufficient foreign direct investment (FDI) coverage. This alarming trend could signal a troubling scenario for the external accounts of Brazil, the largest economy in Latin America, especially given that severe economic distress is typically associated with such situations.

The current account deficit has ascended to $8.7 billion this January, sharply increasing from a shortfall of $4.4 billion in January of the previous year. This rise was influenced by a declining trade surplus and was worse than economists’ predictions of a narrower deficit of $8.3 billion. Meanwhile, FDI for January stood at $6.5 billion, closely aligning with the expected figure of $6.55 billion from economists.

For the 12-month period, Brazil’s current account deficit accounts for 3.02% of its gross domestic product (GDP), a stark rise from 1.11% a year prior, marking the most severe level since June 2020. Although FDI inflows still cover the current account deficit at 3.16% of GDP, Fernando Rocha, the head of the central bank’s statistics department, has warned that this could change in the foreseeable future. Rocha stated, “for a while,” Brazil may face a situation of uncovered deficits, a historical anomaly contrasted with its longstanding reliance on FDI.

Despite these concerns, Rocha reassured that Brazil’s financial standing remains robust due to alternative funding sources, including external debt operations and portfolio investments in capital markets, despite the inherent volatility of these options. The significant monthly deficit is largely attributed to a dramatic fall in the trade surplus, plummeting to $1.2 billion — a staggering 78% decrease compared to January last year, driven by increased imports amid ongoing monetary tightening aimed at controlling inflation and declining exports.

In summary, Brazil’s current account deficit has seen a dramatic rise, raising concerns about its sustainability without adequate FDI coverage. The central bank’s warnings indicate potential vulnerabilities, yet alternative financing sources could mitigate some risks. The ongoing decline in the trade surplus underscores the challenges faced by the economy as it navigates external market pressures and internal fiscal measures.

Original Source: www.marketscreener.com