A Deficit That Surprised Everyone
Latin America’s largest economy started the year with a current account deficit that exceeded every forecast on the Street. The $8.36 billion gap reported Tuesday by the central bank blew past the Reuters consensus of $6.4 billion and topped even the most pessimistic estimate in the Broadcast survey, which ranged from $3 billion to $7.7 billion. The overshoot was driven primarily by a sharp deterioration in the primary income account, which swelled to a deficit of $8.31 billion — up from $7 billion a year earlier — as companies accelerated profit remittances abroad.
The trade balance offered a partial cushion. The goods surplus reached $3.52 billion, more than double the $1.4 billion recorded in January 2025, reflecting strong agricultural exports and moderating import growth. The services deficit narrowed to $3.97 billion from $4.55 billion a year earlier, helped by a weaker real that discouraged foreign travel and reduced digital services consumption.
FDI Saves the Story
The headline number looks alarming, but the financing side tells a different story. Foreign direct investment hit $8.17 billion in January, comfortably above the $7 billion consensus and up from $6.71 billion a year earlier. That means FDI alone nearly covered the entire current account gap — a ratio that investors and rating agencies watch closely as a measure of external vulnerability. Coface, the French credit insurer, noted in a recent assessment that while net FDI (at roughly 2.2 percent of GDP) can no longer fully cover the headline deficit, Brazil’s international reserves — which ensure over 15 months of import coverage — remain a critical external buffer.
Over the 12 months ending in January, the current account deficit fell to 2.92 percent of GDP — the lowest since November 2024 — while FDI stood at 3.42 percent of GDP, virtually unchanged from the 3.41 percent recorded for full-year 2025. International reserves reached $364.4 billion, up $6.1 billion from December, with no central bank intervention in the foreign exchange market during the month. The reserve accumulation came entirely from valuation changes and interest income.
The Year Ahead
The central bank projects a $60 billion full-year deficit for 2026, equivalent to 2.4 percent of GDP — a meaningful improvement from the $68.8 billion deficit (3.02 percent) recorded in 2025. The forecast assumes a $64 billion trade surplus, a $51 billion services gap, and $78 billion in primary income outflows. Leonardo Costa, economist at ASA, said the January figures point to a qualitative improvement in the external accounts, with the trade balance doing the heavy lifting.
Two Forces Pulling in Opposite Directions
The improvement in the external gap is paradoxically a byproduct of the economy’s pain. Brazil’s aggressive monetary tightening — with the Selic at 15 percent, the highest since 2006 — is cooling domestic demand, slowing imports, and compressing the trade deficit. BBVA Research expects GDP growth to decelerate to 1.7 percent in 2026, down from 2.2 percent in 2025, with household consumption losing steam as the labor market weakens and credit conditions remain tight. Market estimates place the year-end Selic at 12.25 percent, meaning the average rate will stay elevated throughout the year.
At the same time, Brazil’s trade patterns are shifting in ways that carry their own risks. Exports to China rose 36 percent year-on-year in the final quarter of 2025, while shipments to the United States fell 24 percent — deepening the country’s commercial dependence on Beijing just as geopolitical tensions over tariffs and technology intensify. With general government debt projected to hit 95 percent of GDP this year, an election in October, and a fiscal surplus target that few economists believe will be met, the external accounts may be the one part of Brazil’s macroeconomic picture that is actually getting better. Whether that lasts depends on whether the government can resist the spending pressures that election years inevitably bring.