Brazil current account deficit doubles, FDI inflows rise in 2018

Brazil’s current account deficit doubled in 2018 as economic growth fuelled demand for foreign goods and services, while foreign investment reached its highest share of GDP since 2001, reveals the country’s central bank.

The deficit remains narrow enough not to dim the generally positive outlook for Brazil that is taking shape among international investors for the year ahead.

Brazil’s current account deficit last year rose to $14.51 billion, or 0.77% of gross domestic product (GDP), almost exactly double the $7.235 billion shortfall registered the year before, equivalent to 0.35% of GDP.

Imports rose 21% on the year while exports rose 10%, which narrowed the trade surplus to $53.59 billion from $64 billion the year before.

But economists at Citi said the current account deficit, a broader measure of trade and capital flows, remains «comfortable» at less than 1% of GDP.

Investors are paying close attention to plans of the government to increase Brazil’s economic competitiveness via a mix of tax cuts, privatization and, most importantly, pension reform. The latter could save up to 1.3 trillion reais over the next decade, according to Economy Minister Paulo Guedes.

Some $88.3 billion of foreign direct investment (FDI) poured into Brazil last year, the central bank said, exceeding its earlier projections of $83 billion. Net FDI flows over the 12 months to December totaled 4.7% of GDP, the highest since June 2001, the central bank said.

Investors pulled funds out of Brazilian financial markets last year, however. Central bank figures showed that foreign investors withdrew $4.265 billion from Brazilian stocks in 2018, the most in a decade.

The pace of foreign inflows into Brazilian financial assets is expected to pick up this year, however, with investors attracted by Bolsonaro’s market-friendly policies and by relatively high interest rates.

Amundi, Europe’s largest fund manager with 1.45 trillion euros of assets under management, already said that Brazil is emerging as one of the most attractive destinations for long-term investment in local currency debt instruments.

Brazil’s benchmark Selic interest rate stands at 6.50%. That may not rise much if at all this year, thanks to the uncertain global economic outlook, but a growing consensus among international investors is that is an investment risk worth taking.

Original story:Reuters |Jamie McGeever and Marcela Ayres
Photo: Neves
Edition: Prime Yield