Contrary to expectations, Brazil’s terms of trade fall even with rising prices abroad
07/08/2022
The expected boost that the rise in commodity prices would give to the Brazilian trade balance in 2022 did not materialize, nor does it show signs that it may happen throughout the rest of the year. Although the prices of products exported by Brazil have grown steadily, the movement happened along with a jump in proportion in the prices of products the country imports.
As a result, the terms of trade, or the ratio between the prices of goods sold abroad and those bought from abroad, fell 9.1% in the first five months of this year compared to the same period last year. Compared to the most recent peak, in June 2021, there was a drop of 13.5%.
In the first months of the year, the combination of a still favorable environment abroad and the war between Russia and Ukraine led the government and investors to adopt an optimistic attitude in relation to Brazilian external accounts, particularly in relation to the trade balance. This optimism rested not exactly on an advance in the volume of products sold, or a depreciation of the exchange rate, but mainly on the improvement of the terms of trade, a scenario similar to that experienced during the commodities boom of 2010.
“A few months ago, the discourse of the government and of most of the market was that there would be a big explosion in the terms of trade, combined with a greater growth in export volumes than in imports. Putting the two together, we would have a gigantic balance. It is visible that the picture today has changed a lot, but many still have a rather benign view,” says Livio Ribeiro, partner at BRCG and associate researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV).
In June, the trade balance recorded a surplus of $8.8 billion, down 15.4% compared to the same month in 2021. In the year to date, the balance is at $34.5 billion, down 8.2% over the same period last year, reported the Secretariat of Foreign Trade (Secex).
After the data, the Ministry of Economy cut its projection for the trade surplus to $81.5 billion from $111.6 billion. The opposite movement was made by the Central Bank, which raised the balance for 2022 to $86 billion from $83 billion in its latest Quarterly Inflation Report (RTI), released last week.
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Paula Magalhaes — Foto: Claudio Belli/Valor
One characteristic that differentiates the current commodities boom from other recent moments is precisely the behavior of the price of imports, says Paula Magalhães, chief economist at AC Pastore. “It never happened that import prices went up like that, in general they are more stable. So people always had in mind that moments of rising commodity prices necessarily meant an improvement in the terms of trade,” she says.
According to calculations from the Foundation of Foreign Trade Study Center (Funcex), the price of goods exported by Brazil grew 21.3% in May, compared to the same period in 2021. The price of imported goods, on the other hand, advanced 34.9% in the period.
Looking ahead, the outlook is not good either. First because the surprise activity in Brazil – which may still be boosted by further fiscal stimulus – also means a greater appetite for imports than previously expected. Secondly, because the turnaround in monetary policy by major central banks is likely to put a brake on the global economy.
“Due to the acceleration of import prices, the sharp deterioration in the terms of trade, the [upward] revision of the national economic activity scenario and [downward] revision of the global one, we project a trade surplus in 2022 of $62 billion,” says Funcex’s economist Daiane Santos.
*By Marcelo Osakabe — São Paulo
Source: Valor International