Brazil: Surplus in oil and derivatives cushions the impact of war

RIO DE JANEIRO, BRAZIL – Russia’s military operation in Ukraine has triggered a new oil price shock, with the potential to spread new rounds of inflationary pressures and undermine the growth of the global economy. But this time, Brazil has a buffer that it did not have in other such crises.

Since 2016, the country has been a net exporter of oil and fuels, data from the Foreign Trade Secretariat (Secex) of the Ministry of Economy show. Last year, the trade balance of oil and oil products had a record surplus of US$19 billion, according to calculations by the Brazilian Institute of Oil and Gas (IBP), which represents oil and gas companies.

Crude oil exports totaled US$30.6 billion in 2021, a leap of 56% compared to 2020 when the barrel prices plummeted at the beginning of the pandemic and brought down the exported value. In 2021, the volume even registered a drop, but prices skyrocketed. According to Secex data, the 2021 surplus was US$20.4 billion, considering only the trade balance of oil and fuel oils and not all derivatives. In 2016, the positive balance was US$1 billion.

According to economists, this buffer is not enough to prevent the impacts of the war in Ukraine on Brazil. In the end, the balance of the new crisis is negative. Being a large exporter of raw materials, including the balance of oil and oil products, avoids more dramatic effects, seen in other crises caused by oil shocks in the 1970s and 1990s. The most immediate sign appears in the exchange rate.

The jump in oil prices – a barrel of Brent, traded in London, reached US$140 per barrel at the beginning of the month – tends to increase the flow of dollars to exporting countries.

COMPENSATIONS

Thus, even if more expensive oil puts even more pressure on inflation and hinders economic growth, the falling exchange rate, or a rise below what one would expect in times of war, can soften new inflationary pressures. And this has been happening in Brazil.

“Brazil, historically, has always been a net importer of fuel and derivatives. When oil rose, it resulted in more inflation and less economic growth,” says Bráulio Borges, senior economist at LCA Consultores. “Now, Brazil is at a moment when the rise in oil prices improves export revenues and favors the appreciation of the exchange rate.”

High interest rates aid this process, recalls André Perfeito, chief economist at brokerage Necton. In 2021, exports of raw materials such as soybeans, oil, and iron ore had already guaranteed a record trade surplus, but the exchange rate did not provide the expected relief.

In explaining the detachment, many analysts highlighted political and fiscal risks. Perfeito points out that in March 2021, the basic interest rate was 2% a year. Today it is 11.75%. “Brazil exports two things: commodities and interest rates,” he says, in a symbolic reference to the attraction of global financial investors who seek gains superior to those of markets worldwide.

With information from Estadão Conteúdo