By Marcela Ayres
BRASILIA (Reuters) – Brazil’s 12-month current account deficit nearly tripled in January from a year ago and the central bank acknowledged it may soon go uncovered by foreign direct investment, something that only happened in the past decade during severe economic distress.
This would signal a less favorable situation for the external accounts of Latin America’s largest economy.
Since foreign direct investment (FDI) consists of long-term investments in the productive activities of companies, it is widely seen by markets as a higher-quality source of financing to cover a country’s current account deficit.
According to central bank data on Thursday, Brazil’s current account deficit reached $8.7 billion in the first month of the year, jumping from the $4.4 billion shortfall reported in January 2024 on the back of a shrinking trade surplus.
Economists polled by Reuters had expected a narrower deficit of $8.3 billion.
FDI for the month totaled $6.5 billion, broadly in line with the $6.55 billion projected by economists.
Over the 12-month period, the current account deficit rose to 3.02% of gross domestic product, from just 1.11% of GDP a year earlier, marking the worst level since June 2020.
It was still covered by FDI inflows, which stood at 3.16% of GDP on the same basis.
However, the head of the central bank’s statistics department, Fernando Rocha, said it is possible this may no longer be the case going forward, even if “for a while,” reversing a situation “Brazil has lived with for decades.”
Despite the potential shift, Rocha emphasized that the country’s position remains solid when considering other sources of financing for the current account, such as investments linked to external debt operations or portfolio investments in the capital markets.
The latter are considered more volatile and often speculative.
The monthly deficit was driven by a sharp decline in the trade surplus, which fell to $1.2 billion, a 78% drop from January last year.
This was due to rising imports, reflecting an economy that remains resilient despite an aggressive monetary tightening cycle aimed at curbing inflation, coupled with a decline in exports.
Central bank data showed the services account deficit widened by $1 billion to $4.6 billion, while the deficit in the factor payments account narrowed by $1.1 billion to $5.6 billion.
(Reporting by Marcela Ayres; Editing by Tomasz Janowski and Louise Heavens)
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