Perspective for the external accounts and exchange rate

BRAZIL ECONOMICS - Report 25 Nov 2019 by Affonso Pastore and Cristina Pinotti

With the decline of global growth and commodity prices, Brazil’s export performance has been weakening, reducing the trade surpluses. This portends a significant increase in the current account deficit in 2020. The decline in the terms of trade and increase of the accumulated current account deficit will lead to depreciation of the real exchange rate. In this scenario, it will require a strong capital inflow for the nominal exchange rate to appreciate. The “frustration” of Petrobras’ Transfer of Rights auction and the net outflows of investments by nonresidents in the fixed-income and stock markets do not suggest any such inflow is in the offing. We also do not envision the Central Bank intervening to stanch depreciation. At least so far, its sales in the spot market have been equal to the reverse swaps, making these interventions neutral with respect to the exchange rate. Therefore, the clearest trend on the horizon is that the Real will remain weak, with some bias toward depreciation.

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