Commodity Prices, Terms of Trade and the Real Exchange Rate
In 2019, Brazil’s current account deficit was US$65 billion, while in 2021 it reached only US$24.5 billion. Our projections for 2022 indicate there should be a small surplus. The greatest contribution to this result will come from the balance of trade, whose surplus will benefit from the rising international commodity prices. Historically, cycles of elevation of the CRB commodity price index have led to cycles of gains in the terms of trade and appreciation of the real exchange rate. However, the current situation is marked by rising global inflation, which has led to atypical growth in the dollar prices of Brazilian imports. This pattern, combined with the decline in the prices of iron ore, which has large weight in the country’s exports, has recently provoked a decrease in the terms of trade. How fleeting will this behavior be? A priori, there is no obvious response, thus requiring careful and frequent monitoring. As known, in the short run there is a positive correlation between the nominal exchange rate and the real exchange rate (which is a relative price between tradables, which are flexible, and non-tradables, which are rigid). Since the start of the year due to the capital inflows the nominal exchange rate has been appreciating together with the observed real exchange rate, but the decline in the terms of trade has been leading to depreciation of the equilibrium real exchange rate estimated by our model. The outlook for a surplus in the current account (a decline in the net external liability) this year suggests continuing appreciation of the equilibrium real exchange rate. However, this result also depends on the evolution of the terms of trade, which has become harder to predict against the present backdrop of the global economy.
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