Brazil’s Current Account Deficit Likely Narrowed in February

The current account deficit likely narrowed to US$3.9 billion in February, from a deficit of US$5.4 billion in January, but widened compared to a deficit of US$3.3 billion in February 2010. A widening of the merchandize trade surplus to US$1.2 billion—driven by higher commodity prices—despite an expected narrowing in the net services deficit to US$5.3 billion, should explain the deterioration from January. This would mean that, on 12-months rolling basis, the current account shortfall shrank to US$49.3 billion in February from US$48.6 billion in the previous month. We highlight that FDI and portfolio inflows have been more than enough to cover the gap; however, the quality of the funding has deteriorated as portfolio, rather than FDI, becomes more prominent. We expect the current account to continue to deteriorate in 2011 to US$70 billion, or 3% of GDP, as domestic demand should continue to grow at a faster pace than external demand as the currency remains overvalued—though elevated commodity prices should help in avoiding a sharper deterioration.

Brazil’s Current Account (USD mn, 12-month rolling basis, forecast in shaded area)

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Source: BCB and RGE

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE clients, Brazilian Inflation Pressures Easing in March.