FOREIGN TRADE INDICATOR - ICOMEX Icomex of June, regarding May 2017 Edition 2 June 20, 2017 Trade balance continues to improve: the extractive industry was the highlight in the increased volume of exports in May Trade balance surplus recorded another monthly historical record in May (US$ 7.6 billion) and accumulated this year (US$ 29 billion). Once again, commodities explain the dynamic of Brazilian exports since the first decade of 2000s. Imports recorded increase in all usage categories, except for capital goods, according to Lia Valls Pereira. In terms of value, exports recorded increase of 13% and imports of 9% in May 2017/2016. Exports of soy, iron ore and oil correspond to 20%, 8.3% and 5.5% of the total exported in May. A highlight is the significant 103% growth in the value of oil sales, in the comparison between May 2017 and May 2016. As for the manufacturing industry, the highlight was the export of automobiles, which correspond to 3.1% of the total exports in May, recording a 60% increase compared to May 2016. As for imports, results in terms of value recorded increase in all usage categories, except for capital goods - 17% decrease in May 2017/2016. The good performance of exports in the comparison between cumulative results this year, until May, and 2016 was led by increase in prices (13%), followed by positive variation (9%) in the volume of exports. Using the same parameters for imports prices dropped 1.6%, and volume increased 13%. The following analysis according to sectors and usage categories emphasizes the main differences regarding the general result. Chart 1: Variation (%) of price (US$) and volume indicators IBRE/FGV
1) Aggregate indicators of volume and price In the comparison of May between 2017 and 2016, the increased volume of exports was 12.6% and prices went up 5.5% (Chart 1). What could be the reasons? In May, two among the main three exports recorded a 10.5% increase (soy grain) and 50% (crude oil) in terms of amount exported, while the volume of iron ore decreased 1.4%. Other important export items recorded significant increase in terms of volume, such as: automobiles (fifth in the rank of main important exports), with 50% growth; orange juice, with 153% increase; and corn with 1000% variation. Among the main commodities, oil recorded the highest prices (35.4%), followed by iron ore (19.2%), flat laminates (16%) and orange juice (13%). Therefore, among the main exports, increase was relatively higher in terms of volume than prices in May. However, variation in the prices of exports continued to be higher compared to volume, accumulated until May. As for imports, monthly variation regarding volume compared between May 2017 and 2016 was 6.2%, and 3.2% for prices (Chart 1). Import growth trends have clear indications to go down, though this trend is less strong for exports (Chart 2). Such result is consistent with lower GDP forecasts, compared to the expectations early this year. An important reminder is that the behavior of imports is strongly influenced by the level of activity. The behavior of exports and imports Chart 2: Month-to-month variation (%) of indicators for exports and imports in 2017 and 2016 implies that expected negative impact from net balance of exports on GDP in 2017 may not take place. 2
2) Exchange terms and real effective exchange rate: commodities and noncommodities Exchange terms dropped 3% between May and April, however they continue to grow compared to 2016, with 15% increase compared to cumulative results until May, and 2.3% in May 2017 when compared to May 2016 (Chart 3). Improved exchange terms and the growth in trade surplus, along with the reduction of Brazil risk, were an influence to the appreciation of real effective exchange rate as of March 2016. Between May 2017 and 2016, the appreciation of real effective exchange rate was 12%. Political Chart 3: Exchange terms and real real effective exchange rate indicator: quarterly moving average Source: Brazilian Central Bank and SECEX/MDIC. By: IBRE/FGV. turbulence in mid-march influenced the depreciation of 3% between May and April, though. What can be expected? Better exchange terms are related to the favorable behavior of export prices of commodities, with accumulated 23.4% variation between January/May 2017 and the same period of 2016 (Chart 4). However, in the monthly comparison of May 2017/2016, the prices of commodities went up 7.9%, less than the significant results recorded in terms of monthly variation from January to April. According to some analyses, this is an indication that the slight boom in the prices of commodities would be weaker. In Chart 4: Variation (%) of price (US$) and volume indicators for the exports of commodities and non-commodities terms of volume, some previously mentioned exported commodities (oil, soy, laminates and corn) explain the 13% growth in the volume of exports, based on the monthly comparison. 3
The performance of exported non-commodities in terms of volume depends on the world demand and exchange rate, besides domestic market conditions. When it comes down to Brazil, the recession along with world demand in the process of recovery is one of the aspects that explain the increase volume of exports, despite the real exchange rate appreciation from mid-2016. 3) Disaggregate indicators according to economic activity The extractive industry is the leader of increased prices and volume of exports, considering the monthly comparison (May 2017/2016) and cumulative results until May (Chart 5). Such results are due to the behavior of oil and iron ore sales, which recorded low figures in the series of prices and volume in 2015/16. A highlight is the good performance in terms of exported volume in the manufacturing industry, compared to cumulative results until Chart 5: Variation (%) of price (US$) and volume indicators according to economic activity for exports May. Recovery in the automotive industry sales (including tractors, cargo vehicles and intermediate goods) was one of the reasons for such result. Chart 6 shows the behavior of imports according to economic activity. In the analysis of volume variation accumulated this year, the manufacturing industry recorded the highest result (18.6%) in terms of import growth and price decrease (minus 5.5%). In the monthly comparison, the agricultural sector is leading the way up (11.6%), followed by the manufacturing industry (10.4%), and extractive industry (10.1%). Increased imports in the agricultural sector is related to the growth in exports within this sector in Chart 6: Variation (%) of price (US$) and volume indicators according to economic activity for imports May (see Chart 5), which involves the purchase of intermediate goods, such as fertilizers, with limited supply in the domestic market. 4
Good performance of exports in the extractive industry must influence the domestic output, mainly concentrated in the oil and mining sector. The manufacturing industry is comprised of several sectors, and the improvement in the automotive industry do not leverage this group of sectors, except for those within the direct production chain, such as auto parts and components. There is no response for the level of impact from exports in the automotive industry on the total output of the manufacturing industry, taking in consideration the changes occurred since 1990. As for agriculture, exports are the result of a good crop. Chart 7: Variation (%) of price (US$) and volume indicators of exports in the manufacturing industry according to usage categories Disaggregate indicators according to usage categories in the manufacturing industry Indicators according to usage categories in the manufacturing industry are the highlight. As for the increase in exports, whether in terms of monthly comparison or accumulated this year until May, variations in the volume of exported durable goods are close to 50% (Chart 7). This is a result of automotive industry, as explained before. Capital goods are the second in rank, including tractors and cargo vehicles. Most of these items are exported to Argentina. Therefore, this growth can be partially explained by the improved economic conditions in that country, after a long period of almost stagnated activity. In order to keep this dynamic, though, Brazil must export to other Latin American markets, our main importers. As for imports, prices recorded decrease in all categories, in terms of monthly comparison and accumulated this year, except for non-durable consumer goods. In the analysis regarding the volume of imports, all variations are positive, whether in the monthly comparison or cumulative. In the comparison of cumulative rate this year, the highlight is for imported intermediate goods Chart 8: Variation (%) of price (US$) and volume indicators of imports in the manufacturing industry according to usage categories 5
(25.4%), followed by semi-durable goods (18.3%). In the monthly comparison between May 2017 and 2016, leading the way up were semi-durable goods (38%), followed by durable consumer goods (19.7%), and intermediate goods (12.2%). The performance of intermediate goods in imports is a mystery for the manufacturing industry analysts. How can the results that indicate growth in the purchase of imported intermediate goods - associated to the level of activity - be conciliated with indicators that recorded decrease or slight recovery in the manufacturing industry? An indicator of volume of imported intermediate goods was calculated for the manufacturing industry, excluding items for the agricultural sector. In the comparison of cumulative results of this year, until May, a 20% growth is still intriguing. In the monthly comparison between May 2017 and 2016, a 3% decrease was recorded. What is the conclusion? I) Favorable expectations regarding economic growth? II) Anticipation of purchases in face of possible stronger real currency appreciation? III) Hasn't the real currency depreciation in 2015/2016 during an economic recession period changed the purchase of intermediate goods for the companies operating during currency appreciation since the middle of the first decade of 2000s? Would the facts above explain the increase in imported intermediate goods in the comparison of cumulative results this year? Drop in purchases of intermediate goods in May probably reflects the reversed trends in expectations (item i). 5. Final notes In terms of trade balance, the foreign sector remains as one of the favorable aspects in the analysis of macroeconomic conjuncture. Analysts estimate surpluses between US$ 55 and US$ 60 billion. However, when analyzing the foreign trade as one of the channels to economic growth in Brazil, results require to be classified as positive. The country continues to be dependent on exported commodities and it is necessary to analyze how to create tools that mitigate the effects of volatile demand and prices of such goods. Methodology Fischer's index is used in the calculation of price indicators. As for volumes, an implicit formula has been used: volume indicator is obtained by the division of trade flow price change by price indicator. Indicators were obtained based on the use of outliers. 6
Foreign Trade - FGV IBRE Brazilian Institute of Economics IBRE's Director: Luiz Guilherme Schymura de Oliveira Superintendent of Public Statistics Aloisio Campelo Jr. National Accounts Department Coordinator: Claudio Monteiro Considera Research Coordinator: Lia Valls Pereira Technical Team: André Luiz Silva de Souza Juliana Carvalho da Cunha Mayara Santiago da Silva Fatima Tavares Alves 7