Falling prices, higher imports indicate reduced trade balance

Exports totaled $198.2 billion from January to July, a 2.4% growth compared to the same period in 2023. Imports grew even further, by 5.6%, totaling $148.6 billion, according to data from the Ministry of Development, Industry, Trade, and Services (MDIC).

In the first seven months of 2024, the trade balance posted a $49.5 billion surplus, 6.1% lower than the same period in 2023.

In a recent report, consultancy Capital Economics notes that the strong increase in Brazilian exports and the expansion of the trade surplus since 2019 have been key for the economy. However, that could change soon and fuel projections of an economic slowdown and increased dollar pressure over the real for the next two years, the consultancy points out.

“Brazil’s exports have excelled since the pre-pandemic era. Exports value in dollars last year was about 54% higher than in 2019, one of the largest increases seen in emerging markets,” the report says. According to this analysis, the scenario is a combination of prices—especially commodities—and volumes, which increased by almost 18% from 2019 to 2023.

The strong increase in exports and the drop in imports in 2023 led to a substantial trade surplus growth—to $98.9 billion at the year-end. The perspective, however, is of a slowdown to a $86.5 billion surplus this year, and $79 billion in 2025, says a projection by consultancy BRCG.

Capital Economics warns that “the growing dependence of Brazil’s exports on commodities bodes ill for the outlook ahead.” The consultancy believes that the drop in iron ore prices—down around 2% this year—has not yet seen an end, given the slowdown in the construction sector in China. Added to this scenario is the expected drop in oil prices, as global supply increases throughout the year.

“Brazil’s export boom will likely come to an end. Although the exports level remains historically high, it is no longer increasing on an annual basis,” said William Jackson, chief emerging markets economist at Capital Economics.

“We believe [export] levels will fall again. Our estimate is a 15% to 20% decrease in export value in dollars by the end of 2025, compared to the current level, based on our expectations of a drop in the prices of commodities exported by Brazil such as iron ore, oil, and soybeans.”

Mr. Jackson says the trade balance will depend on import behavior in the short term. “With strong domestic demand, driven by a tight job market, it is more likely that imports won’t fall and trade surplus will decrease,” he said.

The trend for imports next year is unknown, said Lívio Ribeiro, a partner at BRCG and associate researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV).

“Looking at 2025, we see two big debates. The first is about what will happen to exports. We see the Chinese economy experiencing setbacks but also an increase in oil exports,” he said. “However, the big question remains on imports. On the one hand, the economy has shown demand to exceed supply, which means increased imports. On the other hand, we have a complex issue in the fuel market.” Mr. Ribeiro questions how long Petrobras will be able to maintain the subsidy level in the domestic market, currently estimated at 20%.

He points out that, this year, the peak in the trade balance in 12 months was seen in February, when it reached $105 billion. In July, it reduced to $95.7 billion.

“We have seen some short-term surprises. The first one was a stronger-than-anticipated performance of exports, especially in terms of volumes,” he points out. “We also have some acceleration in imports.”

Part of that, according to Mr. Ribeiro, is due to the early import of consumer durable goods, such as electric vehicles from China, which made Brazil the world’s main Chinese EV importer.

Until the end of the year, the estimate is that the current situation will continue but for 2025 the scenario remains uncertain, said Lia Valls, an applied economics researcher at Ibre-FGV in charge of the Indicator of Foreign Trade (Icomex).

“We don’t expect much change in the short term. We have been anticipating smaller exports this year compared to last year, when we had different events, including large soybean exports to Argentina. Therefore, we have a higher basis for comparison,” Ms. Valls points out.

She notes that, in volume, exports rose 11.6% last month, compared to July 2023, according to data from the Secretariat of Foreign Trade (SECEX/MDIC). In the first seven months of the year, there was a 6.6% increase compared to the same period of 2023.

Last year, the increases were even stronger. In July 2023 compared to July 2022, the increase was 13.3%, according to data from Ibre-FGV’s Icomex. In the first seven months of last year, growth was 9%, compared to the same period in 2022.

Next year could see a slowdown but the variables remain uncertain, she says.

“It will mostly depend on the geopolitical situation. For example, the U.S. elections in November. Donald Trump enforces an open protectionism, which could affect the global trade, while Democrats emphasize friendshoring and nearshoring, indicating that they want to be closer to their allies,” she said.

The course of the Russia-Ukraine war is also an important element, as a worsening could impact the global energy market and lead to a new increase in Brazilian oil exports, she adds. A stronger slowdown in the Chinese economy could have a relevant impact on Brazilian shipments. Regionally, Ms. Valls points out that a prolonged recession in Argentina is a source of concern for Brazilian exports.

“The country is our main trading partner in the region and will certainly not recover next year,” she said. “That is bad because we cannot easily offset by selling what we exported to Argentina to other countries in South America.”

The fact that Brazilian exports are highly dependent on commodities makes the country vulnerable to events beyond its control, Mr. Jackson argues.

As an example, he cites weather events impacting agricultural production, OPEC+ decisions affecting oil supply and prices on the international market, and weakness in China’s real estate sector with side effects on metal prices.

Translation: Liliana Hage

Source: Valor International

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