Brazil - Current account balance is improving, but more BRL depreciation needed

Based on year-to-date releases until June, it is estimated that, the current account balance (CAB) could show an improvement of nearly 28% this year in dollar terms and could also improve slightly as ratio of GDP despite the expected decline in dollar GDP. At first glance this looks familiar to what happened in 1998-2003 when significant BRL depreciation led to a sharp improvement in the CAB even before commodity prices and global demand could strengthen it further. However, there is one important difference between these two episodes - while the previous correction was entirely led by rising exports helped by BRL depreciation - the small correction this time around is due to declining imports thanks to demand weakness back home.

Few more factors add to the challenges in improving CAB meaningfully this time around. First, given the lower share of manufacturing in exports this time, Brazil could find it difficult to raise exports in view of weak global demand for its key exports. Second, BRL would need to depreciate further and quite significantly to achieve the previous level of competitiveness. Finally, given strong pass-through concerns, it's not clear whether policymakers see this as a risk-free option for improving CAB, says Societe Generale.