The Kindness of Strangers

• Whoever might be paying attention to Brazilian external accounts may have stumbled upon a curious development: whereas the 12-month trade surplus has been decreasing relatively fast, from a recent peak over US$ 30 billion to US$ 24 billion, the current account deficit has remained roughly stable around US$ 50 billion;

• This did not happen by chance. As we intend to explore in more detail along this report, this pattern results from two key features. The first is the change in the balance of payments financing, more concentrated on equity investment than debt issuance;

• The second is a floating currency that – in the absence of intervention – tends to strengthen in good times, when growth is robust and commodity prices high, weakening, however, when the opposite happens.;

• As a result of these two developments the payments associated to foreign capital have become strongly procyclical. During good times, when profits are high and the currency strong, dividend remittances are generally high as well; yet, when this is reversed, and both the economy and the currency weaken, remittances dwindle;

• In other words, the current account deficit becomes more sensitive to growth and the exchange rate than under a scenario in which the bulk of financing would still come from debt, rather than equity;

• This development alone ought to provide a good case for favoring foreign investment, but recent measures indicate that the government has yet to understand the point.

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