Letter IEDI n. 1134—Brazil's external accounts in 2021 and the effects of the war in Ukraine
Despite the progress made, the Brazilian economy ended 2021 still under the effect of the COVID-19 pandemic, not only from the point of view of its level of activity, but also in its relations with the rest of the world. This Letter IEDI analyzes the country's external accounts last year, signaling the advances and observing these were limited.
Our current transactions recorded a deficit of US$28,110 million in 2021, implying an expansion of 14.8% compared to 2020. Even so, last year's result was much lower than the levels recorded in the biennium prior to the crisis caused by the COVID-19 pandemic.
The influx of foreign resources via the capital and financial account, which finances the current account deficit (CAD), also did not return to pre-crisis values. It reached US$32,392 million in 2021, more than 3 times the value of 2020, but far from the US$63,988 million of 2019. Foreign direct investment (FDI), which is the most stable form of external capital, was more than enough to finance the CAD in 2021.
The deficit in the current account was a reflection of the recovery of the global and Brazilian economies after the COVID-19 shocks. The 66.8% growth of our goods and services trade surplus (US$19,027 million) was not enough to offset the larger deficit in primary incomes (remittances of interest, profits and dividends), which reached US$54,471 million (+31.9% compared to 2020). This resulted in a worsening of the CAD.
Net FDI inflow increased 23% to US$46,441 million. This result, however, can be considered disappointing. This is because, in addition to not having returned to 2019 levels, it was below the performance of global FDI. The growth of global FDI flows reached 77% in 2021 and even FDI directed only to developing countries registered a stronger rise than in the case of Brazil: +30%.
The recovery of foreign portfolio investments (FPI) was much more significant, totaling US$20,858 million, the largest figure since 2014. The greatest contribution to the rebounding of these investments came from non-residents' investment in our fixed income sovereign bonds stimulated by the increase in the domestic interest rate.
The "Other Investments in the country" category also registered a strong recovery, from a net capital outflow of US$20,826 million in 2020 to a net influx of US$36,061 million. These was associated with the strong growth of "trade credits and advances" in line with the recovery of foreign trade and with the net borrowing of bank loans stimulated by historically low interest rates in advanced economies.
Drawing perspectives for the performance of the Brazilian external sector in 2022 is a difficult task in the current international context. The projections of multilateral institutions for global economic growth in Jan'22 ranged from +4.1% for the World Bank, +4.4% for the IMF and +4.5% for the OECD (in Dec'21). With the outbreak of the war, these scenarios became overly optimistic.
There is no doubt that the conflict will strongly shake the recovery of the global economy from the COVID-19 pandemic, and may even lead to a double-dip, that is, a new recession in 2022. In Mar'22, the OECD expected a 1.0 percentage point drop in world GDP growth in 2022 and an additional increase in inflation of 2.5 p.p. due to the war (in Dec'21 the organization predicted +4.2%).
As in previous episodes of external shocks, the main channel of contagion to emerging market economies (EMEs) such as ours is the financial channel, that is, the deterioration of international financial conditions due to the rise in global investors' risk aversion and the resulting flight-to-quality movement, which results in higher spreads and higher costs of external funding.
However, in the case of the current shock, at least in these first moments, this channel manifested itself to a lesser extent than in the 2008 global financial crisis (GFC) and the COVID-19 crisis. In addition, the differences across EMEs was greater due to the impact of this shock on another channel of contagion: commodity prices.
The war caused a rise in commodity prices that benefits the EMDEs exporting these goods, such as Brazil, which have been relatively spared from financial contagion so far. In addition to the smaller increase in sovereign bond spreads, some global investors have announced targets to increase exposure in assets of these economies, including ours.
In the case of Brazil, in addition to its weight in the global production and export of commodities and its geographical distance from the epicenter of armed conflicts, the high domestic interest rate (Selic) vis-à-vis other countries is an additional attraction for global investors to offset losses with their investments in Russian financial assets.
However, this relatively favorable initial impact may not be lasting. The intensification and/or prolongation of the conflict may strengthen the financial channel, leading to an undifferentiated liquidation of assets issued by EMEs and a widespread exit of portfolio investments, as observed at the peak of the COVID-19 crisis in Mar'20 and in the 2008 GFC.
A strong slowdown or recession of the global economy in 2022 will result in a much more significant loss of pace of global trade than the IMF predicted in the Jan'22 scenario (from +9.3% in 2021 to +6% in 2022), which will have negative effects on the volume of Brazilian exports, affecting foreign sales of manufacturing goods mainly.
The question mark is whether the rise in commodity prices will be sufficient to more than offset the eventual lower volume of manufacturing exports, resulting in a rise or attenuating the fall in the total value of our exports in 2022.