Itaú BBA - CHILE – Current account balance correction in 1Q20

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CHILE – Current account balance correction in 1Q20

May 18, 2020

Going forward, the expectation of a rising trade surplus, given a domestic demand implosion, would support a swift CAD narrowing

The current account balance recorded a larger-than-expected USD 1.0 billion deficit in 1Q20. Still, there was a significant improvement of USD 0.9 billion relative to 1Q19, mainly explained by a larger surplus in the balance of traded goods, while the primary deficit remained broadly stable from last year. For the rolling-year, the current account deficit narrowed to USD 10 billion (3.7% of GDP), from USD 10.9 billion (3.9% of GDP) in 2019. At the margin, the correction was larger, as the CAD narrowed to 2.7% of GDP (SA, annualized) in 1Q20 from 3.5% in the previous quarter, according to our own estimates, driven by falling imports.

Lower oil prices and weaker domestic demand favored the trade balance at the beginning of the year. Trade of goods recorded a USD 2.8 billion surplus, as the import fall (-14.1% YoY) surpassed the reduction in exports (-7.5%). Nevertheless, the surplus was around USD 0.5 billion smaller than that indicated by earlier trade data, with the revision concentrated in exports. Meanwhile, the deficit in the trade of services was broadly stable at USD 1.1 billion, and the income deficit narrowed a mild USD 0.1 billion to USD 2.7 billion. Going forward, we expect large trade balance prints, as the domestic demand implosion keeps import growth depressed, while favoring a catch up of the service balance. Lower expected profits from FDI in Chile would also lead to a narrowing of the income deficit. 

Foreign direct investment to the country improved significantly before the pandemic. Foreign direct investment into Chile was USD 6.4 billion in 1Q20, the largest since 3Q15 (USD 2.4 billion in 1Q19), lifted by increased capital participation in transport, industrial, and commercial firms. Meanwhile, Chilean investment abroad increased more modestly from last year (+USD 0.6 billion), to USD 1.9 billion. Portfolio investment also recorded a net inflow (USD 2.9 billion), reverting the USD 2.6 billion outflow recorded one year ago as government debt issuance continued in the first quarter of the year to finance its stimulus package. While, developments in 1Q20 meant net direct investment was sufficient to finance the CAD in the quarter, a shortfall of USD 3.1 billion persists for the rolling-year. Finally, external debt increased 9pp to 82.9% of GDP, despite falling in nominal value (due to lower government and corporate bond values), on the back of exchange rate weakening. 

We expect the current account balance to improve significantly this year, after recording a 3.9% deficit in 2019. A larger trade surplus, given our expectation that the contraction in domestic demand and lower average oil prices would dominate the effect of weaker global demand and copper prices, would be the key driver of the correction to a near-balanced position this year.

Miguel Ricaurte
Vittorio Peretti

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