ECONOMY-BRAZIL: Trade Deficit – the Only Bad News

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Nov 2 2000 (IPS) - Brazil reported Wednesday a trade deficit for the month of October — the largest posted since February 1999, in the wake of the crash of the local currency, the real.

The trade deficit stood at 523 million dollars last month, with 5.16 billion dollars in imports compared to 4.6 billion dollars in exports, under-secretary of Foreign Trade Ivan Ramalho reported Wednesday in Brasilia.

Brazil’s neighbours, especially its partners in South America’s leading trade bloc, the Southern Common Market (Mercosur) — Argentina, Paraguay, Uruguay and associates Chile and Bolivia — pay special attention to what happens here, as a mild cold in the region’s largest economy can cause pneumonia in its smaller neighbours.

Argentina, for example, has not yet fully emerged from the crisis it fell into as a result of the January 1999 collapse of the Brazilian real, which shook the entire Mercosur.

Although the cumulative trade balance so far this year continues to post a 194 million dollar surplus, authorities admit that a deficit will be registered for the year overall.

Thus, the 200 million dollar deficit projected by Secretary of Foreign Trade Lytha Spindola now sounds optimistic, taking into account the 15.7 percent growth of imports in October and 18.9 percent growth in September, with respect to the corresponding months last year.

Exports, meanwhile, rose just 7.8 percent in October and 12.8 percent in September with respect to the same months in 1999.

In September, imports exceeded exports by 320 million dollars, the year’s first large trade deficit.

Since then, imports have continued to outstrip exports in a previously unforeseen manner, and Jose Augusto de Castro, the director of Brazil’s Foreign Trade Association, which represents exporters, warned that the deficit could swell to 400 million dollars by yearend.

However, the trade deficit is the Brazilian economy’s only really worrisome indicator, since the fiscal accounts, inflation and Gross Domestic Product (GDP) growth are all in line with the targets agreed with the International Monetary Fund.

Nevertheless, economists caution that Brazil’s external accounts still leave the country vulnerable to international turmoil. In particular, analysts are concerned about the future of Argentina, the second-largest member of Mercosur, pointing out that if that economy takes a turn for the worse, repercussions will be felt throughout the region.

The Brazilian government initially projected a trade surplus of 4.4 billion dollars this year, although that figure was later corrected downwards to 2.8 billion dollars after the weaker-than- expected performance posted in the first half of the year.

But the outlook is actually even worse than indicated by the official figures, because several airplanes purchased abroad and later returned by a company in severe financial difficulties, Vasp (Viación Aerea de Sao Paulo), were counted as exports.

Leaving aside that deal, which represented revenues — actually a refund — of 453 million dollars, the annualised balance of trade would already be negative for Brazil.

The normal growth of imports in the last part of the year, driven up by holiday shopping and the Christmas bonus paid to wage- earners, means no modification of the tendency towards a deficit can be expected.

The soaring oil prices contributed to the growing imbalance of trade, as Brazil continues to import around 25 percent of the oil it uses, despite the expansion of domestic production of petroleum.

From January to September, purchases of fuel and petroleum by- products totalled 4.5 billion dollars, 1.6 billion more than in the same period of 1999.

But imports of electronic components played the biggest role in the imbalance of trade, due to the explosive growth in the number of fixed and mobile telephones since the privatisation of Brazil’s telecommunications sector in July 1998. Despite the incentives provided to local companies, domestic production can no longer keep up with demand.

The trade deficit in the telecommunications sector has already climbed to nearly 6.8 billion dollars this year, similar to the 1999 figure, according to the Ministry of Development, Industry and Commerce.

And that trend is only expected to grow in the next few years, with new mobile telephone companies moving into the market. The number of telephone lines should rise more than threefold by 2005, on 1998 levels, with a total number of 58 million phone lines by then, the Ministry of Communications projects.

Along with the new phone lines, hand-sets and other equipment will be replaced en masse, given the fast advance of technology in that area.

Another factor contributing to the imbalance of trade in Brazil and other developing countries, particularly the nations of South America, is the 34.7 percent fall of the Euro against the dollar since January 1999, the Centre of Studies on Foreign Trade, a business think-tank, pointed out.

The Euro depreciated more than the real, thus reducing the competitiveness of Brazilian products in the European Union, the country’s chief market abroad. That led to around two billion dollars in lost exports for Brazil, said De Castro, the director of Brazil’s Foreign Trade Association.

All of these negative factors will keep Brazil from reducing its dependence on external financing, which has been provided by direct foreign investment of nearly 30 billion dollars a year.

One concern is the possibility of the trade deficit hindering this year’s economic rebound, and standing in the way of reaching the projected four percent GDP growth for next year.