This Letter IEDI analyzes the results of Brazilian external accounts in 2022, a year still under adverse effects of the pandemic, but which also saw new challenges emerge. As discussed by the IEDI on other occasions, multilateral organizations have classified 2022 as a year of “triple crisis” in the world economy: COVID-19, war in Ukraine and extreme weather events. 

All this worsened with the increase in interest rates by the monetary authorities of advanced economies (EA) and emerging markets and developing economies (EMDE), resulting in a slowdown of the global economy, as analyzed in Letter IEDI n. 1181. According to the IMF's most recent estimate, released at the end of Jan'23, global GDP growth was +3.4% in 2022 against +6.1% in 2021. 

The deficit in Brazil's current account totaled US$55,668 million in 2022, 20% higher than in 2021, but still lower than the level recorded in 2019, prior to the crisis caused by the COVID-19 pandemic. As a percentage of GDP, it rose from 1.74% in 2021 to 2.92% in 2022. 

Despite this increase, the current account deficit was financed even more easily than in the previous year by the flows of Foreign Direct Investment (FDI), the most stable type of external capital, as the FDI indicator as a % of GDP increased from 2.89% to 4.76% in the same period.

It should be noted that this performance of the current account reflects the interaction of both external and domestic factors: 

•  From the outside, the pace of global trade expansion halved (from +10.4% in 2021 to +5.4% in 2022), the war in Ukraine boosted energy and agricultural commodity prices in the first half of the year, and China's zero COVID-19 policy continued to cause disruptions to global value chains. 

•  On the domestic side, the Brazilian economy decelerated, with GDP growth going from +5% in 2021 to +2.9% in 2022, according to the IBGE. The increase in interest rates by the BCB, but also the international environment itself, contributed to this. 

The net effect of these factors was the increase in the current account deficit because the 22% growth of the trade surplus in goods, based on the rise in commodity prices, was not sufficient to offset the higher deficit in the services account (+48.4%) and in primary incomes (+8.3%). 

The trade surplus reached $44.4 billion. External sales and purchases advanced at a similar pace: +19.9% and +19.6%, respectively. Faced with the loss of dynamism of world trade volumes and of domestic economic activity, the quantum exported increased 4.8% and the quantum imported only +2.6%. Thus, the price effect prevailed in our trade flows.

The services deficit, which totaled about US$40 billion in 2022, grew due to transport services, whose record deficit of US$19.4 billion was caused by the increase in freight expenses with the disruptions in global value chains and the rising fuel prices. 

Regarding primary incomes, the deficit reached US$63.9 billion due to the increase in remittances of interest, profits and investment associated with FDI and portfolio investment. The nominal appreciation of the real in 2022 may have stimulated transnational companies and portfolio investors to make these remittances to enjoy the more favorable exchange rate. 

It is worth mentioning that the real was one of the few currencies that “swam against the current” in 2022, registering the highest appreciation (+5.1%) among the currencies of the main emerging market economies (EME), as already pointed out by the IEDI Highlight on Oct 11, 2022, due to the high level of the base interest rate (Selic) in Brazil, well above other emerging economies.

On the financial side of our external accounts, there was net inflow of US$58,439 million in 2022, which meant an increase of 16.5% compared to the figure recorded in 2021. In this case, too, however, it was lower than in 2019, that is, before the pandemic. 

In the financial account, the FDI, as mentioned above, but also “other investments in the country” resulted in a net inflow of capital, while “portfolio investments in the country” registered net outflow.

FDI performed excellently in 2022, reaching US$90.6 billion, practically double the 2021 result. “Equity capital” increased 48.2% in relation to 2021 and accounted for 77% of the total. 

The services sector was the main beneficiary of FDI last year, with emphasis on financial services and “electricity, gas and other utilities.” The industry came second, under the leadership of the automotive sector. 

Another type of FDI, the "intercompany operations" also contributed to the 2022 expansion. Net inflow of funds in this category reached US$21.1 billion in 2022, the highest since 2016. This may have been stimulated by the high differential between domestic and foreign interest rates, which leads foreign companies of the same group to transfer funds to Brazilian subsidiaries to be invested here and earn domestic interest rates. 

“Other investments in the country” recorded net inward flow of US$34.8 billion, slightly lower than the 2021 figure. The main determinant of this result was the growth of “trade credits and advances.” By contrast, bank lending amounted to only $4.7 billion, a drop of 60% from 2021, associated with deteriorating global financial conditions starting in March, when the Fed began raising the U.S. benchmark interest rate.

The deterioration in global financial conditions also explains the net capital outflow of US$4.3 billion in the form of “portfolio investments in the country.” Investments in “fixed-payment securities abroad” had a net outward flow of US$10.1 billion in a context of increase in the cost of external debts for EMED. 

In the case of “fixed-payment securities in the country,” the net capital outflow was lower (US$4.5 billion), but volatility throughout the year was higher. Equity investments in the country also showed volatile behavior, but there was net inflow of US$9.5 billion.

For 2023, the outlook for Brazilian external accounts, taken from the scenario outlined by the IMF, is not very favorable. Let's see why. 

The global economy will lose pace for the second year in a row, with GDP growth falling from +3.4% in 2022 to +2.9% in 2023, according to the IMF. At the root of this is the rise in interest rates in developed and emerging countries, as well as the unfolding war in Ukraine.

The volume of world trade is expected to grow only 2.4% in 2023 against 5.4% in 2022 and energy and non-energy commodity prices are expected to fall 16.2% and 6.3%, respectively. It is a picture that does not favor our export performance. 

On the financial side, global conditions are improving, according to the IMF. The increased risk appetite of non-resident investors resulted in a strong recovery of portfolio investments in emerging economies in early 2023. 

The determinants of this change were the reopening of the Chinese economy with the abandonment of the zero COVID-19 policy and, mainly, the slowdown in global inflation, which led the “markets” to bet on a smoother pace (and even in a faster end) of the monetary tightening in the United States and other advanced economies. 

However, the Fund still foresees very volatile financial markets in 2023. This, together with the slowdown in the Brazilian economy, should contribute to the FDI flows, which are pro-cyclical, to not repeat the good performance of 2022.

The full text is available in Portuguese.