Brazil’s need for dollars to shrink in 2014 – but the long-term view remains bleak

January 29, 2014

Brazil’s current account deficit will probably narrow this year. That may sound as a reassuring (or rather optimistic) forecast after the recent sharp sell-off in emerging markets, which prompted Turkey to raise interest rates dramatically to 12 percent from 7.75 percent in a single shot on Tuesday. But that was the outlook of three major banks – HSBC, Credit Suisse and Barclays - in separate research published earlier this week.

The gap, a measure of the extra foreign resources Brazil needs to pay for the goods and services it buys overseas, will probably shrink to 3.0-3.4 percent of GDP in 2014, from 3.7 percent last year, they said.

“Brazil’s external vulnerabilities are overstated,” claims Barclays’ Sebastian Brown, adding: “the central bank’s FX intervention program should limit bouts of excessive BRL weakness.”

So far, so good. Brazilian international reserves are huge compared to other emerging countries at about $375 billion – a decent war chest. But looking beyond the day-to-day mood swings of financial markets, Brazil’s still deep current account deficit tells us a more worrying story about long-term prospects for economic growth in Latin America’s largest economy.

This is how it worsened over the past decade:

In 2005, when booming Chinese growth translated into golden years for Brazilian commodity exporters, Brazil had a current account surplus of little less than 2 percent. Since then, salaries and job creation grew steadily, fueling demand for foreign items; businesses also ramped up investment in many of those years, requiring specialized machinery and services from other countries.

In other words, much of Brazil’s economic growth over the past decade relied on an abundant, but limited, stock of foreign resources.

This is now gone, says Felipe Salto, an economist with research firm Tendencias Consultoria in Sao Paulo. “Brazil’s current account deficit cannot widen by 6 percentage points over the next 10 years, as it has done until now.”

The disappointing economic growth of the latest years will probably be repeated for many others, then, unless locals cut back spending – which would possibly throw the country in recession first – or a sharp currency drop that forces millions of Brazilians to change their recently-acquired habits, buying more local clothes and staying home for holidays.

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