Itaú BBA - CHILE – Large current account surplus in 2Q20

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CHILE – Large current account surplus in 2Q20

August 18, 2020

Lower oil prices, weaker domestic demand and a mining export increase favored the trade balance in 2Q20

As internal demand plunges, and exports of goods remained upbeat (aided by mining), the correction of external imbalances is unfolding at a swifter-than-expected pace. The current account balance recorded a larger-than-expected USD 1.2 billion surplus in 2Q20, while the 1Q20 balance was revised up by USD 0.7 billion on the back of a larger trade of goods surplus. The 2Q20 current account surplus, the first since 1Q15, was a significant USD 4.3 billion swing from the deficit recorded one year earlier. The surprise to us was close to USD 0.8 billion. For the rolling-year, the current account deficit narrowed to USD 5 billion (2.0% of GDP), from USD 10.9 billion (3.9% of GDP) in 2019. At the margin, the correction was larger, as the current account balance moved to a surplus of 2.1% of GDP (SA) in 2Q20, from 1.5% deficit in the previous quarter, according to our own estimates.



Lower oil prices, weaker domestic demand and a mining export increase favored the trade balance in 2Q20. Trade of goods recorded a USD 4.9 billion surplus, as the import fall (-27.2% YoY) surpassed the reduction in exports (-2.4%). Additionally, the surplus was around USD 0.9 billion larger 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 1.2 billion, and the income deficit narrowed a mild USD 0.3 billion to USD 2.8 billion. Going forward, we expect the large trade balance prints to moderate somewhat as domestic measures (10% pension withdrawals and middle-class transfers) would likely improve import demand.
 
Foreign direct investment to the country remained solid in the quarter, but a significant outflow of portfolio investments unfolded. Gross foreign direct investment into Chile was USD 3.4 billion in 2Q20 (USD 4.0 billion in 2Q19 and USD 6.2 billion in 1Q20). Meanwhile, Chilean investment abroad also dropped by around USD 0.5 billion to USD 0.9 billion. Portfolio investment recorded a net outflow (USD 3.6 billion), reverting the USD 1.2 billion inflow recorded one year ago as pension funds moved to global equities amid a significant stock market recovery. Developments in 2Q20 mean net direct investment is sufficient to finance the CAD over the rolling-year period for the first time since 2Q18. Finally, external debt increased 3pp to 85.9% of GDP.



We expect a current-account surplus of 0.5% of GDP this year (3.9% deficit last year), boosted by improving copper prices and a global economic recovery, amid weak internal demand. The upside surprise and revisions to 1Q20 mean the surplus this year could be even larger.

Miguel Ricaurte
Vittorio Peretti 



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