Brazil’s external vulnerability is again in the spotlight and the subject of a heated debate. Some economists surveyed by Valor raised the yellow flag regarding the current-account deficit as a percentage of GDP, now closer to 4% — in spite of signs that the market is less pessimistic in the short term, forecasting an increase in foreign direct investment in 2014 to $59 billion from $55 billion, according to the latest Focus survey of the Central Bank. 

But there are economists already pointing to a more serious situation: they think this risk has increased, not only due to the rising current-account deficit, which has widened since December 2008, but also because of the lack of structural changes in the economy.

The fragility of the external sector has been recently pointed out by the credit rating agency Standard & Poor's. And data released last week by the Central Bank (BC), economists say, reinforce the idea of growing vulnerability. In the 12 months to February, the current account deficit was at 3.69% of GDP, the highest level since the 4.19% shortfall in 2001, before the currency crisis that began in the second half of 2002, and far above the 2.41% in December 2012.

The problem is not only that the deficit-to-GDP ratio is rising, but also because its expected improvement — that was on the horizon late last year — so far has not happened. In October, the perception was that the deficit, then at 3.59% of GDP, had reached its peak and would begin a process of deceleration, likely falling to around 2.5% of GDP by the end of 2014.

But several reasons had not even been anticipated by analysts. For example, the smaller impact of the real’s devaluation on Brazilian exports and problems posed by imports controls of manufactured goods in Argentina, one of Brazil’s largest trade partners.

"In our case, this deficit of almost 4% is serious. And the downgrade itself reflects this difficulty of financing. [Credit rating] Agencies only downgrade when they survey the market and realize that the world is charging more from Brazil. It [the rating agency] is always ex-post in this assessment," says Reinaldo Gonçalves, professor of the Institute of Economics of the Federal University of Rio de Janeiro (UFRJ).

For some economists, the deficit doesn’t improve because the country has some unresolved structural problems. Mr. Gonçalves, who has been for years analyzing the external vulnerability in four spheres — productive, financial, trade and technology — says that when analyzing both indicators of the current situation and indicators which involve the structure of the Brazilian economy, there is a "significant deepening" of vulnerability. 

In terms of structure, among other things, Mr. Gonçalves says the so-called “re-primarization” of the export basket is still ongoing as well as the loss of international competitiveness of Brazil’s industry, which keeps affecting the Brazilian trade balance’s performance: the deficit persists even after ten months of the real’s devaluation, with the dollar hovering around R$2.20 and R$2.30.

José Luis Oreiro, another UFRJ professor, says the external vulnerability is growing, especially because of the current account deficit. But this doesn’t mean there will be a crisis in the next weeks or months. “There is too much dependency on commodities, which makes us especially vulnerable to a growth slowdown in China. So, we’re in a situation in which this 4% deficit raised the yellow flag.”

Mr. Gonçalves points out that it’s important above all to look at the financial sphere of vulnerability, “our Achilles’ heel,” with particular attention to the net external liability. He calculates that Brazil’s total external liability is today at around $1.5 trillion. Of this amount, there are about $500 billion that are foreign direct investment. He discounts from the $1.5 trillion the FDI and the amount of international reserves, $362 billion, and reaches a net external liability, “without short-term coverage,” of approximately $650 billion.

“That’s why the world made the rating cut. In large part because of this liability. It’s not public debt or low growth. This has influence, but the problem is not Brazil growing less,” Mr. Gonçalves says.

Fernando Ferrari Filho, professor at the Federal University of Rio Grande do Sul, rules out a stronger currency stress, but agrees that the country is more fragile. “In current account, in 2010 the shortfall was $47.4 billion. Three years later, it was $81.4 billion. In this case, the fragility is increasing,” Mr. Ferrari Filho says. “But saying that the yellow flag for a currency crisis has been raised… we’re far from that.”

Luis Afonso Lima, president of Sobeet, a think tank on transnational companies and globalization, says the adoption of floating exchange rate and the piling up of foreign-exchange reserves are some factors that support the deficit and set the current moment apart from the second half of the 1990s. It’s important, however, to understand that the current deficit reflects low domestic savings, which suggests that there are strong indications of high consumer and government spending. And that, since the deficit increase has not been favoring productivity gains, external solvency may be compromised further ahead.

For Sobeet, it’s important to consider what may happen in the future when the increase in American interest rates, the Chinese slowdown and the higher aversion to risk of emerging nations reduce the international liquidity tide.