Itaú BBA - CHILE – A sharp widening of the current account deficit in 2018

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CHILE – A sharp widening of the current account deficit in 2018

March 18, 2019

As domestic demand continues to expand at a decent pace, we expect the current account deficit to remain wide

The consolidating domestic demand recovery and the rising income deficit led to a sharp widening of the current account deficit. The current account deficit in the final quarter of 2018 came in at USD 3.6 billion, far larger than our USD 2.3 billion call (Bloomberg market consensus USD 2.4 billion). As a result, the current account deficit in 2018 was 3.1% of GDP (USD 9.2 billion), a marked widening from the upwardly revised deficit recorded in 2017 (now 2.1% of GDP from 1.5% initially). The revision to the 2017 deficit (by USD 1.8 billion) was led by a smaller trade surplus and a larger income deficit than initially estimated. Our own seasonal adjustment shows that at the margin the current account deficit widened further (to 4.8% of GDP, annualized), compare d to -2.7% in 3Q18. Meanwhile, financing the deficit is more complicated as inflows of direct investment only gradually increased from 2017, while portfolio flows into Chile nearly halved last year amid the risk-off sentiment sweeping across global markets.

Despite some recovery of copper prices and falling oil prices during 4Q18, the trade surplus of goods was milder than expected. Hence, the trade balance for goods and services recorded its second consecutive deficit (USD 745 million; USD 1.6 billion surplus in 4Q17) following seven quarters of surplus. Exports of goods contracted 0.1% yoy (+1.5% in 3Q18), while imports remained robust and broadly stable at 13.6%, led by investment related materials. Meanwhile, repatriation of profits from foreign direct investments sustained an elevated income balance deficit (USD 3.2 billion) and drove the total deficit in the quarter. Foreign direct investment was weak in 4Q18 and unable to finance the current account deficit. The FDI inflow was USD 1.3 billion (USD 1.6 billion one year e arlier), while net direct investment (that is, excluding Chilean investments abroad) was close to zero. On the other hand, net portfolio inflows were robust (USD 4.1 billion), as Chileans repatriated funds from abroad, while foreigners invested USD 1.9 billion in Chile.   

The widening of the current account deficit from 2.1% of GDP in 2017 (USD 6.0 billion) to 3.1% last year (USD 9.2 billion) was led by the shrinking (by 0.9% of GDP to USD 4.7 billion) of the trade balance for goods. Meanwhile, the trade deficit for services increased by USD 0.6 billion to USD 4.0 billion and the income deficit rose to USD 12.2 billion (USD 11.4 billion in 2017). Net direct investment (at USD 4.1 billion in 2018, from USD 0.7 billion in 2017) failed to fully finance the current account deficit, while net portfolio investment came in at USD 1.5 billion.  

As the domestic demand continues to expand at a decent pace, we expect the current account deficit to remain wide, around 3% of GDP this year.

 

Miguel Ricaurte
Vittorio Peretti



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