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No Relief Ahead for Brazilian Exports

Written by Armando Castelar.

Brazil ended 2014 with a trade deficit of USD$ 3.9 billion. A year earlier, market analysts had forecast a trade surplus of US$ 8.4 billion. As I explained then, this forecast failed to account for the drop in export prices, due to lower growth in emerging Asia and a stronger dollar, among other factors. And it has been export prices, not volumes, which have determined the dynamics of export values in the last ten years; in constant prices, exports have remained essentially flat throughout (Figure 1).

Figure 1: Export price and quantity indices (average 2006=100)

 Figure 1 export prices

Source: FUNCEX/IPEADATA. Note: Export prices in current US$.

Failure to foresee the fall in export prices forced market analysts to repeatedly lower their projections for total exports throughout the year, not only for 2014 but also for 2015 and 2016. For this year, in particular, the financial market’s forecast is now at US$234 bn, down US$86 bn from what it had projected two years ago (Figure 2). As I see it, these are still optimistic forecasts which fail to account for the additional drop in export prices likely to occur in 2015.

Figure 2: Exports: Evolution of Median Forecast by Market Analysts (US$ bn)

Source: Brazilian Central Bank.

In 2015, two key factors will weigh on Brazilian export prices: a new round of dollar strengthening and the further slowdown in China’s GDP growth. Both have been at play in the last three years, with the latter playing a dominant role. For 2015, though, I expect the stronger dollar to play a more prominent role. It is obviously difficult to say how much the dollar will gain in 2015, but even if it stays flat at its average level in December 2014, it would be up by 7.4% from its average value last year.

To observe the close historical relationship between the US dollar trade weighted index and Brazilian export prices, I’ve plotted them together on a graph. (Figure 3).

Figure 3: US Trade Weighted Index (DXY, 1973=100) and Brazilian Export Price Index (2006 = 100)

Sources: Fed St. Louis and FUNCEX/IPEADATA.

In Table 1 I do some sensitivity analysis for a projected fall in Brazilian export prices in 2015, given different assumptions regarding growth in China and the appreciation of the US dollar (based on the trade weighted index). The exercise relies on a simple econometric model relating quarterly YoY changes in export prices, the US dollar trade weighted index (DXY) and China’s GDP. Keep in mind that since Brazilian export prices fell during 2014, so even if there are no further declines at the margin average 2015 prices will be down compared to last year.

Table 1: Sensitivity Analysis for Drop in Export Prices Given Different Rates of Chinese Growth and US Dollar Appreciation

   

DXY

   

2,5%

5,0%

7,5%

10,0%

China

7,5%

-10%

-12%

-14%

-16%

7,0%

-13%

-16%

-18%

-20%

6,5%

-17%

-20%

-22%

-24%

In the best-case scenario considered in the sensitivity analysis, export prices will drop by 10%. In this scenario, export volumes would have to rise by 13% for the median forecast by market analysts for 2015 exports to come through. In other, more realistic scenarios, the expansion in export volumes required would approximate 20%, which is unlikely in the absence of a further sharp weakening of the real.

Obviously, these are projections based on past co-movements among certain variables, which need not hold true with exactness in the future. Still, the close relationship between the US dollar trade weighted index and Brazilian export prices should work as an alert to the challenges that Brazilian exporters may have to face in 2015. 

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