Itaú BBA - COLOMBIA – Current account deficit correction continued in 3Q20, but to still-wide levels 

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COLOMBIA – Current account deficit correction continued in 3Q20, but to still-wide levels 

December 2, 2020

Despite soft domestic demand, weak terms-of-trade mean Colombia’s trade deficit correction is slow.

A shrinking income deficit amid low oil prices and weak internal demand led to a notable external imbalance correction in 3Q20. A USD 1.8 billion current account deficit was recorded in the third quarter of the year, smaller than the USD 4.2 billion recorded one year earlier and below both the Bloomberg market consensus and our expectation of a USD 2.2 billion deficit. Slumping exports (dragged by commodities) were more than offset by weakened domestic demand and reduced profits for foreign direct investment in Colombia. As a result, the rolling-4Q current account deficit declined to 3.4% of GDP, down from 4.1% in 2Q20 and 4.3% in 2019. At the margin, our own seasonal adjustment shows the deficit at 2.3% of GDP in 3Q20, from 2.6% in 2Q20. On the financial account, direct investment into Colombia continued to slump, failing to fully fund the deficit.



The smallest 3Q income deficit since 2004 drove the current account correction. The income deficit narrowed to USD 1.1 billion in 3Q20, from USD 2.5 billion 3Q19, amid lower dividend payments to foreign investment in Colombia as oil prices remained low and domestic activity fragile. Additionally, the trade deficit of goods was USD 0.8 billion smaller compared to 3Q19, as the import decline (22.6% yoy vs. 34.1% in 2Q20) more than offset the still-weak exports (down 20.9% yoy vs. 38.3% in 2Q20). Meanwhile, compared to 3Q19, the transfer surplus remained broadly stable at USD 2.4 billion, but recovered at the margin from the USD 1.7 billion dip during the peak of the pandemic squeeze in 2Q20. For the rolling-year, the CAD narrowed to USD 9.2 billion, compared to the USD 13.8 billion deficit in 2019, with around 4/5 of the narrowing linked to the reduced income deficit.
 

Net direct investment posted an outflow for first time since 2013. Foreign direct investment into Colombia fell to USD 0.6 billion, down USD 2.7 billion from 3Q19. Mining and oil activities registered significant disinvestments, but most sectors saw a moderation in investment too. Net direct investment covers 3/4 of the deficit (4/5 in 2019). Meanwhile, net portfolio inflows are at USD 1.5 billion over the last four quarters (compared to a mild outflow in 2019), linked to an increase in external public debt.
 

We expect a current account deficit of 3.2% of GDP in 2020, a gradual narrowing from 4.3% last year. Despite soft domestic demand, weak terms-of-trade mean Colombia’s trade deficit correction is slow, but the reduction of the income deficit is supporting a moderation of external imbalances.

Miguel Ricaurte
Carolina Monzón



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