Brazil's current account deficit widens sharply in July

BRASILIA, Aug 26 (Reuters) - Brazil posted a wider-than-expected current account deficit in July, central bank data showed on Tuesday, further compounding a 12-month shortfall not covered by foreign direct investment (FDI), a sign of deteriorating external accounts.

Latin America's largest economy recorded a current account deficit of $7.1 billion in July, exceeding the $5.6 billion shortfall expected by economists in a Reuters poll, and marking the largest deficit for that month since 2019.

The outcome reflected a $1.4 billion increase in the deficit on factor payments and a $514 million reduction in the country's trade surplus, the central bank said.

As a result, the 12-month deficit was at 3.5% of GDP, from 3.43% in the previous month, and sharply higher than the 1.37% deficit a year earlier.

Foreign direct investment for July far surpassed expectations, coming in at $8.3 billion, versus the $5 billion forecast in the Reuters survey.

However, despite rising to 3.17% of GDP over 12 months from 3.14% in June, FDI still failed to cover the current account deficit and actually widened the gap, underscoring a weaker outlook for Brazil's external finances.

For years, FDI had been sufficient to cover Brazil's 12-month current account deficit, a situation that began to shift earlier this year. This was mainly due to a narrowing trade surplus as imports grew faster than exports in an economy that proved resilient despite a restrictive monetary policy aimed at taming inflation.

Because FDI reflects long-term investment in productive activities, it is viewed by markets as a higher-quality source of financing to bridge a country's external shortfall.