Letter IEDI n. 1008–External accounts: 2019 performance and the impact of COVID-19 in early 2020
Today's Letter IEDI analyzes the performance of Brazil's external accounts in 2019 and early 2020. The effects of the coronavirus crisis reinforced some trends already present last year, especially in the financial account, and show signs of hindering others, such as the deterioration of the current account balance.
In 2019, the current account deficit (CAD) of the Brazilian economy totaled US$ 50.8 billion, representing 2.76% of GDP, the highest share since December 2015. Compared to 2018, the deficit grew +22.2%, mainly due to the reduction in the trade surplus (-25.7%).
Thus, the COVID-19 shock hit the Brazilian economy at a time of deterioration in current transactions and, consequently, greater dependence on the absorption of foreign capital.
With the intensification of the outbreak worldwide, the current account downward trend was halted in 2020. The CAD fell 30% in Jan–Apr/20 compared to the same period of the previous year. Much of this resulted from the reduction in travel expenses, due to social isolation, and in the outflow of investment income (profits and dividends), discouraged by the depreciation of the real.
The trade balance, in turn, did not improve. Despite the strong contraction in the level of domestic economic activity, imports of goods were flat in Jan–Apr/20, while exports shrank 4.2% against Jan–Apr/19. The fall in commodity prices and the contraction of international trade (of the order of -11% according to the IMF) will continue to be obstacles to our foreign sales throughout the year, even though the more competitive level of our exchange rate helps to soften their negative effects.
In the capital and financial account, the surplus reached US$ 52.7 billion in 2019, an increase of +25.5% compared to 2018, the greatest since 2015. This result was obtained despite the strong outflow of portfolio investments (four times higher than in 2018), given the risk aversion of international financial agents, and the stability of foreign direct investment.
The main responsible for the improvement in the financial account were, then, the fall in direct investments by Brazilians abroad and the lower outflow of resources classified as "other investments" (currency, deposits, loans, commercial credit, etc.).
The balance of the capital and financial account showed a decrease of 42.4% at the beginning of 2020, already under the effect of the coronavirus, especially due to the flight of portfolio capital. The net inflow of portfolio investment in Jan–Apr/19 became a net outflow of US$ 33.8 billion in Jan–Apr/20. This amount is about three times greater than the capital flight of the four-month period from Oct/08 to Jan/09, that is, during the 2008 global financial crisis.
It is exactly the behavior of portfolio investments, the main component of short-term external liabilities, that explains the improvement in the Brazilian economy external vulnerability after the COVID-19 shock, according to most indicators calculated by the IEDI for this Letter.
Such indicators, which had pointed to a deterioration from Dec/18, both in the short term (external liquidity) and in the medium-to-long term (external solvency), started to show an improvement as of Dec/19, given the reduction in the stock of non-resident portfolio investments (due to net outflows, depreciation of the real and deflation of asset prices). Other indexes, however, such as the one used by Standard & Poors, suggest a further deterioration in the short-term external vulnerability after the COVID-19 shock.
The flow of financial resources through other types of investments was also reversed to a net outflow and foreign direct investment in Brazil fell by no less than 23% in Jan–Apr/20. The net balance of direct investments did not worsen because Brazilian investors stopped investing abroad and repatriated around US$ 5.9 billion in this period.
Considering the decline of Brazilian GDP in 2020 and the expectations of a world FDI contraction of around 30% to 40%, according to the OECD and UNCTAD (Letter IEDI n. 1004), it is possible that the 55.9% increase in the net balance of direct investments is not maintained as 2020 unfolds.