Economists say current account deficit is underestimated because of the use of digital currencies as payment methods

10/04/2024

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The rapid outflow of U.S. dollars from Brazil due to purchases of crypto assets and sports betting, or “bets”, has caught the attention of economists and foreign exchange traders. Although it has not yet surpassed other capital inflows enough to pose an immediate threat to the country’s external accounts, there is growing concern in the market that, in the not-too-distant future, this outflow could affect both external accounts and the local currency, which is already feeling the strain from such outflows.

Central Bank data shows that the outflow of dollars through Brazil’s financial account remains high this year, amounting to around $48 billion through August, despite an improvement in capital flows into the Brazilian stock market in the early second half of the year. When analyzing the balance of payments, one notable factor is the growing outflow linked to crypto assets and recreational services (which include bets). Together, these categories reached $14.7 billion from January to August, equivalent to 30% of the net financial account result during that period.

“Although Brazil has low external vulnerability, there is no strong net inflow into the country,” said Iana Ferrão, an economist at BTG Pactual. The discrepancy between the dollar flows and the external accounts is related to how crypto assets are accounted for. The financial account captures these outflows, while the current account no longer includes them, following a methodological change by the Central Bank in line with International Monetary Fund guidelines.

“If you look at the overall balance of payments and factor in crypto assets, the net result is lower. However, the market tends to focus solely on the current account deficit and how it is financed by Foreign Direct Investment (FDI),” Ms. Ferrão explained.

Currently, dollar inflows from FDI into Brazil are sufficient to comfortably cover the current account deficit (which includes the trade balance, services, and primary and secondary income). However, if crypto assets are considered, the outlook changes. Central Bank data shows that in the 12 months ending in August, FDI inflows totaled $70.6 billion, more than enough to cover the $38.6 billion current account deficit. But if the current account deficit is combined with the outflow from crypto assets, the result would be a negative flow of $54.8 billion, reducing the buffer provided by FDI.

“It’s also important to consider that the current account deficit has increased due to higher imports, driven by a stronger economy. Although exports remain strong, the trade surplus is not as large as last year,” said Luís Afonso Fernandes Lima, head of research at Mapfre Investimentos. “The overall picture still looks good, but there’s definitely a problem.”

Mr. Lima added that it is difficult to pinpoint what drives the outflow of crypto assets. “There’s no way to predict what will happen. It’s not like public bonds, where interest rates play a key role. There are different factors at play. This adds uncertainty to the balance of payments and, consequently, to the exchange rate, which could become more volatile as a result.”

One explanation for the sharp increase in outflows related to cryptocurrencies is their use not only as investments but also as payment methods. “We know that some online betting companies and platforms facilitating international transfers, such as for card payments during travel, are using crypto assets for payments because the transactions are faster and cheaper,” said Ms. Ferrão from BTG.

A common example of such usage involves stablecoins, cryptocurrencies pegged to traditional currencies like the U.S. dollar. Pedro Guimarães, product leader at Ouribank, noted that companies have approached him to conduct foreign exchange operations using stablecoins instead of traditional methods. “The amount spent on cryptocurrencies in the capital account is too high to be attributed solely to speculation or dollarization with stablecoins. It could be related to other factors, such as the growth of the betting market or companies operating in Brazil but headquartered abroad,” he argued. “Some companies might be creating their own payment rails for international transactions using crypto.”

For Ms. Ferrão, if companies are using crypto assets for payments, whether through betting or international transfers, the current account deficit is likely underestimated. “These are capital flows entering through crypto assets that should be categorized as recreational services or travel.” Ms. Ferrão said that a potential indication of this underestimation is that the number of Brazilians traveling abroad has returned to pre-pandemic levels, while the balance of payments data for international travel remains far below pre-pandemic figures.

Other factors also help explain the discrepancy between the volume of dollars entering the country and the exchange rate. One key factor is that some capital entering through FDI may be hedged via derivatives, which could mitigate the impact of dollar inflows on the local currency. A major bank treasury executive, speaking anonymously, expressed concern about capital outflows through crypto and bets, particularly because the counterpart, the FDI, does not always support the currency.

“We know that many companies investing in Brazil hedge their capital in derivative markets. That’s why I’m skeptical about whether all this FDI is benefiting our currency,” he said. Since the exchange rate is formed first in the futures market and later transmitted to the spot market, hedging in derivatives may reduce the effect of dollar flows on the commercial dollar rate.

The executive also noted that while new regulations for online betting companies might reduce capital outflows from bets, the same is unlikely for cryptocurrencies. For now, there are no rules that could restrict this outflow, and many Brazilians are still unfamiliar with crypto assets. Therefore, he believes there is significant growth potential, as more people may gain access to digital currencies in the future.

However, not everyone sees capital outflows as a problem. Lívio Ribeiro, a partner at BRCG and associate researcher at FGV/Ibre, does not view the rise of crypto assets and online betting as a major issue, except in cases where illegal activities might be involved.

Mr. Ribeiro acknowledged that the trend of buying crypto assets and using online betting in Brazil is growing in the long term. However, he believes the main issue with bets is potential fund misappropriation, and with cryptocurrencies, the possible concealment of assets.

“Brazil stands out as a country where the middle and upper-middle classes are buying cryptocurrency instead of investing in fixed-income funds, for example. The question is whether the surge in crypto assets is purely due to Brazilian investment preferences or if it’s being used to hide the origin of funds,” Mr. Ribeiro concluded.

*By Arthur Cagliari, Ricardo Bomfim — São Paulo

Source: Valor International

https://valorinternational.globo.com/