Friday, January 4, 2008

External Sector Performance in Brazil in 2008

In 2007, the Brazilian Real (BRL) registered a 20% nominal appreciation against the dollar (USD). Until November, the currency appreciation had not significantly impacted, on a permanent and significant basis, the export performance. However, by mid December the Central Bank of Brazil announced the 2007 trade performance and their forecasts for 2008. In 2007, the country registered a trade surplus of $40.1 billion, as a result of $160.6 billion in exports and $120.5 billion in imports. In comparison to 2006, the current account decreased 70% to reach a modest surplus of 0.4% of GDP in 2007. This scenario tends to get worst in 2008. The monetary authority, expects a smaller trade surplus ($30.1 billion) and an increase in the service account deficit (due to an increase in net remittances). In turn, the government forecasts a deficit of $3.5 billion in the current account for 2008. The Central Bank claims that the small deficit can be easily financed by the foreign direct investment expected to reach $26 billion in 2008. Therefore, the 2007 surplus in the balance of payment ($85 billion) tends to be much smaller in 2008 (around $30 billion).

We know that in flexible exchange rate regimes the surplus in the balance of payments implies an increase in a country’s international reserves. Hence, international reserves in Brazil went from $85.8 billion in 2006 to reach $177.7 billion in 2007. In part because the surplus in the balance of payments tends to be smaller, the monetary authority expects international reserves to reach $200 billion in 2008.

One can argue that the currency appreciation has helped the Central Bank to keep inflation in check and within the target of 4.5%. However, the monetary authority should implement alternative measures to foster exports given that it does not intend to depreciate the Brazilian Real or to close its capital account. One suggestion is to decrease the amount of taxes linked to exports and make the overall process easier as a way to incentive more companies to switch part of their production to the external sector.

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