Itaú BBA - CHILE – Current account deficit widens

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CHILE – Current account deficit widens

August 18, 2017

For 2017, we expect a current account deficit near the 1.4% in 2016, however, there is a growing risk of a higher deficit.

The current account deficit widened in 2Q17, as mining export volumes remain weak. The deficit came in at USD 1.5 billion in the second quarter of the year, larger than our USD 1.2 billion deficit forecast, the market’s USD 1.3 billion estimate, and the USD 1.0 billion deficit recorded in 2Q16. A weaker trade balance of goods and services, as well as a larger income balance deficit led the deterioration from 2Q16. The resulting rolling-4Q current account deficit rose to USD 5.6 billion (2.2% of GDP), from USD 3.6 billion in 2016 (1.4% of GDP). Our own seasonal adjustment shows the current account deficit moderated at the margin to 3.0% of GDP (from 3.4% in 1Q17). Meanwhile, foreign direct investment into Chile is moderating and net direct investment failed to fully fund the current account deficit. 

The trade balance is still feeling the aftereffects of the strike at the country’s largest mine in 1Q17. The trade balance of goods was USD 1.4 billion in 2Q17, down from USD 1.7 billion in 2Q16. Copper prices rose 21.9% from 2Q16, similar to the previous quarter, while volumes dropped 4.1% yoy, improving from the 18.1% decline in strike-affected 1Q17. Meanwhile, the income balance posted a deficit of USD 2.6 billion in 2Q17 (USD 2.1 billion one year ago). A larger income deficit was possibly led by improving mining profits for foreign companies as commodity prices recover, as well as a stronger exchange rate. Overall, the accumulated four-quarter trade balance of goods and services narrowed to USD 1.0 billion, from USD 2.1 billion in 2016, while the income deficit widened by USD 1.2 billion since 4Q16, to USD 8.3 billion.

Financing the current account deficit is getting harder. Foreign direct investment recorded an outflow of USD 0.3 billion, the worst quarterly direct investment into Chile on record, and down from the USD 2.7 billion investment in 2Q16. Net direct investment came in at USD -0.2 billion (USD +2.0 billion in 2Q16). On the other hand, 2Q17 foreign portfolio investment into Chile picked up to USD 3.8 billion, from USD 0.5 billion one year ago, consistent with the benign financial external conditions for emerging markets. Over the last four quarters, foreign direct investment into Chile fell to USD 7.9 billion, from USD 12.2 billion in 2016 and USD 20.5 billion in 2015. Hence net direct investment declined to USD 0.4 billion (USD 5.1 billion in 2016). Meanwhile, foreign portfolio investment in Chile also rose to USD 5.7 billion (USD 3.0 billion last year) in the year concluded in 2Q17.

We expect the current account deficit to retreat in the remainder of the year as internal demand stays weak, the effects of mining strike continue to fade, and copper prices remain high. Hence, we see Chile’s current account deficit around the 1.4% recorded in 2016. However, the most recent balance-of-payments data pose the risk of a higher deficit.

Miguel Ricaurte

Vittorio Peretti



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