The Brazilian Balance of Payments

The combination of a strong exchange rate, and the demands of an economy in

significant growth have caused the current account of the balance of payments to worsen
in the first quarter of 2010. This means that Brazil’s trade balance, which has been
positive since 2001, is threatened for the first time as the surplus of exports less imports
for the first quarter of 2010 was only US$ 892 million. The trade surplus for the whole of
2009 was US$ 25.6 billion, and in 2008 it was US$ 24.8 billion. 2010 exports show a
25.8% increase over 2009, due primarily to higher prices for agricultural commodities,
but imports show a 36.0% increase.

Other transactions in the current account show a deficit in the services and revenue
category for the first three months of 2010 of US$ 13.8 billion, up from a deficit of US$
8.9 billion in 2009. Unilateral transfers were also down from US$ 3.4 billion in 2009, to
US$ 786 million in 2010.

Thus, the current account was worse in the first quarter of 2010 (deficit of US$ 12.1
billion) as compared with the similar period in 2009 (US$ 4.9 billion).

#'s in US$ millions

Trade
Exports 39, 230
Imports 38, 337
Balance 892

Services & Revenues

Income 9, 409
Expense 23, 232
Balance - 13, 823

Unilateral 786
Transfers

C/A Balance - 12, 931

The change in Brazil’s situation of having a significant positive trade balance, in the
recent past, to now having a neutral position, with a likely tendency to become a negative
balance is a logical function of the strong real, and the high consumer demand which is
driving economic growth. While the numbers above indicate a cause for concern, a
country with little difficulty in raising financing, and foreign reserves of US$ 243 million
can deal with a problem of the current dimension. Also, the Government took the
expected action yesterday of increasing its Selic rate from 8.75% to 9.5% in a first action
to acknowledge that Brazil’s primary financial problem is no longer economic growth,
but rather inflation (Consumer Inflation [IPCA] is running at an annual rate of 8.25% in
2010 as compared with 4.3% in 2009 and 5.9% in 2008.
In the first quarter of 2010, Brazil raised US$ 19.37 billion from the following sources:

Source of financing US$ Millions

Capital Account $ 239
Direct Investment -$ 271
Portfolio Investments $ 8,774
Derivatives -$26
Other Investments $ 10,655
Total $ 19,371
Source: Banco Central do Brazil

Thus, with a current account deficit of US$ 21.1 billion, and financing of US$ 19.37
billion, foreign reserves increased by US$ 6.2 billion (difference of US$ 1.1 billion
represents errors and omissions). If we were looking for weaknesses, we might note that
US$ 8,774 million in portfolio investments are the most liquid, and could disappear
rapidly, but the context today is currently not one of panic and crisis.