Brazil’s crumbling trade balance suggests BRIC story needs rethink

Yikes.

Brazil’s current account deficit—current account is the broadest measure of trade flows, including not only goods but also services and investments—fell into record deficit territory in December, as exports fell 11% and services and income deficits also worsened.

While it’s true that the end of the year can do funny things to this data set, the trend in recent months has been decidedly toward a worse trade balance for the world’s sixth-largest economy. We already knew that Brazilian exports had a particularly rough year, with Brazil posting its lowest trade surplus in a decade at just $19.4 billion at the end of 2012, down from $29.8 billion in 2011. This is a commodities story for the most part. J.P. Morgan economists explain:

Most of the decline in surplus in 2012 came from a fall in exports to $243 billion from $256 billion in 2011 (or -5.2%). Commodity exports were the main factor behind the decline in overall exports, with iron ore exports declining $10 billion from 2011 (-26% OYA [over a year earlier]). Imports, on the other hand, declined only $3 billion from 2011 (or -1%), to $223 billion (from $226 billion in 2011).

So is the current account deficit a reason to worry? Well, over the short term, no. Put crudely, when countries run current account deficits they depend on foreign investment to help make up the shortfall. And Brazil appears to be having no problem attracting more investor inflows. Foreign direct investment was $5.4 billion in December, up from $4.6 billion in November. Indeed, some of the December deterioration of the current account balance seems to stem from end-of-year flows of cash to foreign investors.

But the record deficit also underscores how levered Brazil is to exports and why Brazil is in such a pickle when it comes to the strength of the currency. If the real gets too cheap, that adds fuel to Brazil’s inflation problem. (More about inflation here.) And if it gets too strong, that’s a problem for exports, as it makes Brazilian goods more expensive on the global markets.

It also shows how the oft-told story about sustainable commodity-driven expansion in large emerging markets—Brazil, Russia, India, China—may be in need of a rethink.