June’s Record Current Accounts Deficit

By Jewellord T. Nem Singh, Contributing Reporter

RIO DE JANEIRO – Brazil has registered a deficit of USD$23.76 billion in its current accounts for June, corresponding to 2.47 percent of the country’s GDP. At a time of general economic optimism in the country this is the worst performance in its balance of payments since 1947 and a consequence of the deficit of USD$7.6 billion in services and incomes.

The negative record is three times the equivalent accumulated in the first six months of 2009, whilst in June alone the current account deficit was at USD$5.18 billion. In comparison Central Bank data showed only a USD$575 million deficit recorded for June of last year.

“This is not new. The deficit was already foreseen and can be attributed to the success of Brazil in relation to other countries. It is the price of success”, Minister of Finance Guido Mantega counter-argued.

The current account is one of two components of the balance of payments, and registers the balance of trade (exports minus imports), net factor income (such as investments, remittances, dividends and interest), and net transfer payments (like foreign aid).

Now at the end of the second quarter of 2010, multinational companies have started sending their dividends home and in particular to Europe, indicating this could in fact be seen a sign of the market performing better. The negative deficit can also be attributed to Brazil’s increase in imports as a result of the strengthening of the Brazilian economy, while the growth of incomes has resulted in more Brazilians taking trips abroad, further expanding the negative result. Traveling abroad in June alone engendered expenses of up to USD$1.3 billion, which left a net deficit of around USD$909 million.

The strength of the Brazilian economy is affecting its capacity to export, in addition to the increased imports of goods, growing consumer power, and the outgoing dividends of multinational companies towards their mother companies.

If Brazil wants to get rid of the deficit, it needs its exports to be more competitive and decrease imports, typically through conventional trade instruments such as import restrictions, quotas or duties.  Increasing domestic savings, particularly reductions on foreign borrowing of the national government, as well as adjusting domestic savings, are more subtle yet effective tools to enhance export competitiveness.

“To not have the deficit, Brazil could not grow by seven percent, but only two percent” Mantega was keen to add, highlighting that the deficit is a victim of the economy’s success. According to his Ministry’s figures the deficit will likely close at between USD$45 billion and USD$48 billion, or equivalent to 2.33 percent of the GDP, by the end of the year. In addition the trade balance surplus is expected to reach USD$15 billion, more than the previous estimate of USD$13 billion by the Central Bank.