Capital flight from Brazil has not yet impacted local currency significantly, but it is restricting gains
10/11/2024
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U.S. dollar outflows from Brazil through the country’s financial account totaled $52.4 billion between January and September, marking the second-largest outflow for the period in history. The negative financial flow this year is on track to become the worst ever, surpassing 2020, when the capital flight was significant due to the pandemic’s impact.
In addition to higher U.S. interest rates and the appeal of its stock market driven by artificial intelligence companies, which have affected emerging markets, Brazil faced more structural outflows linked to Brazilian investments abroad, spending on crypto assets, and sports betting.
These dollar outflows through the financial account have curbed the gains the Brazilian real could have achieved from strong export inflows. For now, the net balance of the foreign exchange flow remains positive, preventing pressure on the local currency. However, this could change by the end of the year.
While there is still one quarter remaining, a reversal of robust outflows seems unlikely. If another $2 billion leaves between October and December, the financial flow this year would become the largest outflow in history, surpassing the 2020 record.
Historical data shows that the last months of the year, particularly December, are marked by a consistent withdrawal of dollars from the country, driven by multinational remittances to their headquarters and dividend payments abroad.
“We are likely to see a larger financial outflow this year than in 2020 because, at the end of that year, there was a sense that the pandemic was coming to an end—which we later saw wasn’t the case—and that led to an inflow of dollars in November, which helped offset the negative flow of the period,” said Iana Ferrão, an economist at BTG Pactual. “In November 2020, there was a $5.5 billion inflow through the financial account, and in December, there was a relatively low outflow of almost $5 billion for that month.”
Data from Brazil’s Central Bank shows that in the last quarter of 2020 the financial account in contracted foreign exchange was negative by $291 million. However, it’s worth noting that the historical average for the fourth-quarter foreign exchange flow is an outflow of $5.2 billion through the capital account, dating back to 1982, when the Central Bank’s historical series began. Looking at more recent figures, the outlook is even worse: in the last three years (post-pandemic stress periods), there was an average outflow of $11.2 billion from the financial account in the last quarter.
“The months of November and December are characterized by stronger capital outflows through the financial account, so this outflow we’ve seen so far is likely to continue,” said Andrea Damico, CEO and chief economist at consulting firm Buysidebrazil. “At this time of year, we typically face two pressures: there’s the more cyclical outflow driven by year-end seasonality, but also a more structural outflow that has been growing in recent years, linked to Brazilian investments abroad, spending on streaming, sports betting, and crypto.”
As reported by Valor, the pace of dollar outflows from Brazil due to crypto asset purchases and sports betting has recently drawn the attention of market participants. There is growing concern that this capital flight could affect not only Brazil’s external accounts but also the local currency, which is already being held back by capital outflows.
Warren Investimentos Chief Strategist Sérgio Goldenstein noted that for now the overall foreign exchange flow is positive from January to September, indicating that despite the strong outflow from the financial account, the commercial account has seen higher inflows. “Obviously, if the financial outflow had been weaker, the real would be stronger,” he said. “Looking at the overall picture, for now, the foreign exchange flow hasn’t hurt the exchange rate, because it’s positive by around $6 billion.”
The issue is that the buffer provided by the commercial flow to Brazil’s real could shrink by year-end, also due to seasonality. It’s common for dollar inflows from exports to be more concentrated in the first half of the year, when most soybeans are shipped. As a result, if the negative trend in the financial account continues, weaker inflows through the commercial account expected in the last quarter could push the 2024 foreign exchange flow toward one of the most negative in history, explained Ms. Ferrão of BTG Pactual.
“The commercial flow, which has been supporting the foreign exchange flow, is likely to weaken by year-end due to seasonality and lower commodity prices compared to last year,” Ms. Ferrão said. “Given the difficulty in estimating the financial flow, unless there is a significant increase in foreign direct investment and portfolio investment, we could see a substantial outflow of dollars in this last quarter, which may put pressure on the exchange rate.”
There are expectations of capital inflows through portfolio investments, particularly in fixed income, due to the prospect of a higher Selic rate in Brazil and the monetary easing in the U.S., which would widen the interest rate differential between the two countries.
“Central Bank data shows that August saw more positive dollar inflows through portfolio investments, with $2.6 billion coming in, mostly concentrated in debt securities,” said Mr. Goldenstein from Warren. “For now, it’s just an initial positive sign. We’ll have to see if this trend continues. In theory, with lower U.S. interest rates, there should be some reallocation to Brazil, but it will happen gradually—it won’t all come at the end of this year. The U.S. overnight rate will remain high, even with cuts.”
Ms. Damico from Buysidebrazil added that with lower U.S. interest rates, the search for risk assets grows, which also tends to benefit emerging markets and, therefore, the Brazilian stock market. But like Mr. Goldenstein, she doesn’t expect an immediate inflow of dollars into Brazil. “Structurally, there are factors that could support foreign portfolio inflows, but it’s not automatic—it won’t all happen by the end of the year. It will come gradually,” she said.
On the other hand, a factor that could exacerbate dollar outflows from Brazil at the end of this year is related to dividend payments and the domestic economy’s strength. With stronger economic activity and a tight labor market in Brazil, companies tend to see higher earnings, which, in theory, would increase the amount paid in dividends abroad. However, Mr. Goldenstein pointed out that the Brazilian real’s decline throughout the year means that Brazilian companies’ earnings will translate into lower dollar amounts by year-end. “There could be a decline in capital outflows due to the depreciation of the Brazilian real, but the flow won’t be much different from what we saw last year,” he said.
*By Arthur Cagliari — São Paulo
Source: Valor International