Historic export levels achieved in first half of year

The first half of the year witnessed a stark devaluation of the domestic currency, with the dollar appreciating more than 15% against the real. Despite this, the commercial exchange flow was remarkably robust. From January to June, Brazilian exporters generated a record $158.4 billion, marking the highest nominal figure for this period since 1982, when the Central Bank started keeping records.

The disparity between the soaring export revenues and the significant depreciation of the real against the dollar during this period can be attributed to substantial dollar outflows via imports and a notably poor performance in the financial account. Overall, the foreign exchange flow registered a positive $11.63 billion, albeit lower than figures recorded in comparable periods of previous years. Additionally, a high-risk premium due to fiscal uncertainties has adversely impacted the real.

Andrea Damico, chief economist at Buysidebrazil, notes that “a surge in exporter flow in the first half of the year is typically driven by the seasonality of harvests.” However, she also highlights a significant uptick in import volumes. “The import figures aren’t confined to one sector but are broadly elevated, aligning with increased incomes among Brazilians, likely bolstering consumption,” she explains.

The chart below provides a historical overview of Brazilian container exports in the first five months of 2024 and its comparison with the same months since 2021. The data comes from DataLiner, Datamar’s market intelligence platform:

Brazilian Exports via Containers | Jan-May 2021 – Jan-May 2024 | TEUs

Source: DataLiner (click here to request a demo)

Data from the Central Bank reveals that from January to June, while export inflows soared to record highs, import outflows also spiked, reaching the second-highest record at $115.9 billion. “An indicator of how consumer spending boosts imports is the rise in small purchases of up to $50. Before the pandemic, these transactions totaled around $2 billion annually, but now they hover around $10 billion,” explains Ms. Damico.

Ms. Damico further notes that the outflow of crypto-assets previously impacted the trade balance, particularly since June, when the monetary authority classified the purchase of digital assets as imports. “However, with the Central Bank’s recent rule changes, these transactions will now affect the financial account rather than the trade account, though they will still influence the exchange rate. This segment alone could reach $20 billion by 2024 if it maintains its current trajectory.”

Another significant outflow source is the financial account, which encompasses withdrawals from the Brazilian stock market and bond markets, as well as transactions linked to streaming services and online sports betting. “These sectors are growing and constrict the positive dollar flow,” Ms. Damico adds. “It’s important to note that it’s not only foreign investors pulling out funds; local players are also withdrawing significant amounts. From January to May, Brazilian withdrawals amounted to $10.6 billion.”

Despite seeming contradictory, the robust inflow of capital through exports may indeed be linked to the protracted and intense depreciation of the real against the dollar. Exporters, facing a higher dollar, identify an opportunity to enhance profits by repatriating capital.

Data from Buysidebrazil indicates a decrease in the funds that exporters left abroad during the first half of this year compared to last year. From January to June 2023, the gap between the amounts exported and the amounts brought back was $20 billion, whereas this year, the difference narrowed to $9 billion.

“However, we must approach these figures cautiously,” advises Ms. Damico. “The Central Bank has recently clarified that the funds remaining abroad are often allocated towards meeting overseas obligations. It’s challenging to anticipate a substantial repatriation of these funds that could significantly bolster the exchange rate.”

In the June Inflation Report, the Central Bank addressed the exchange rate gap—the discrepancy between the exchange rate at which funds are shipped and the rate at which they are contracted—highlighting that funds retained abroad have been utilized to fulfill foreign currency obligations, such as covering imports, services, debt repayments, and payments of profits, dividends, or interest. Consequently, the Bank indicated that the recent patterns in this differential “do not imply that exporters have hoarded substantial resources abroad that might be repatriated in the future.”

“Given this analysis, it’s conceivable that the buffer of funds left abroad, which diminished in the first half of the year, could expand again, potentially restricting the dollar inflow from exporters in the upcoming semester,” observes Ms. Damico.

However, it’s important to recognize that the spike in risk premiums on domestic assets significantly influenced the real’s depreciation during the first half of the year. “The recent downturn in the exchange rate was primarily driven by heightened concerns about inflation risks becoming unanchored and the management of fiscal policy,” notes Bruno Martins, senior economist at BTG Pactual.

“When the risk increases, investors demand higher returns to compensate for exposure to a country and its currency. Demanding higher returns equates to buying the currency at a lower price, leading to depreciation of the exchange rate,” explains Mr. Martins. He adds that a robust and favorable trade balance may have helped mitigate the rise in the risk premium, but he emphasizes, “that alone is not sufficient.”

According to BTG Pactual’s Mr. Martins, if the government successfully reassures investors of its commitment to the fiscal framework’s limits, it could lead to a reduction in the risk premium, potentially strengthening the real. “In the last two weeks, mere promises and a speech more attuned to the scale of the adjustment significantly reduced the risk. However, it’s still not enough; we need more concrete actions.”

Mr. Martins further suggests that the easing of the risk premium might enhance the exchange rate in the latter half of the year, as the trade flow may become less favorable, and financial flows might worsen. “In my view, this is the critical point. The flow won’t be the main driver for the appreciation of the real, but rather the elimination of the risk premium will be,” he concludes.

Ms. Damico, from Buysidebrazil, notes a slowdown in the commercial exchange rate and expresses skepticism about any reversal in the negative trends of the financial account for the latter half of the year. “Traditionally, the trade balance is weaker in the second half due to the seasonal dip in exports. Now, we’re also seeing a surge in imports,” she explains. “This means that the trade account won’t be the lifeline it has been in the past to counterbalance the financial account’s outflows.” Buysidebrazil forecasts the dollar will stabilize at R$5.40 by year-end.

Translation: Todd Harkin

Source: Valor International

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