Itaú BBA - COLOMBIA – Current account deficit narrowing continues in 2Q20

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COLOMBIA – Current account deficit narrowing continues in 2Q20

September 2, 2020

Weak internal demand, recovering terms-of-trade, and a swifter global rebound will aid some further CAD narrowing

A shrinking income deficit amid weaker internal demand have led to a notable external imbalance correction in 2Q20. A USD 1.7 billion current account deficit was recorded in the second quarter of the year, smaller than the USD 2.8 billion recorded one year earlier and our USD 2.1 billion expectation (Bloomberg market consensus of USD 2.0 billion). An import slump and reduced income deficit more than offset the export collapse. In line with low oil prices and weak activity, FDI into Colombia declined by two-thirds from last year, financing 79% of the CAD in the quarter (failing to fully cover the deficit in a quarter for the first time since 1Q19). The rolling-4Q current account deficit narrowed to a still-wide USD 11.6 billion (4.0% of GDP) from the USD 13.7 billion deficit last year (4.3% of GDP and 4.1% as of 1Q20). At the margin, our own seasonal adjustment shows the deficit edged further down to 2.6% of GDP in 2Q20, from 3.3% in 1Q20, recording the lowest level since 4Q17. The narrower current account deficit correction would allow the central bank to maintain monetary stimulus for a prolonged period.

A sharp narrowing of the income deficit led the current account correction in 2Q20. Compared to 2Q19, the income deficit was USD 1.6 billion narrower as low oil prices and dampened domestic activity hampered the profitability of foreign companies operating in Colombia, especially in oil, transportation and communication sectors. This drop was partly offset by a smaller transfer surplus (USD 0.5 billion smaller) which is in line with downbeat global scenario that affects remittances to Colombia. The trade deficit remained broadly stable as the export decline of 39.3% yoy (-9.3% in 1Q20), primarily due to commodities, was partially countered by a 34% import drop (6.9% down in 1Q20). For the rolling-4Q, the trade deficit of goods and services was steady at USD 12.5 billion compared to 2019. Meanwhile, the rolling-4Q income defict dropped to USD 7.6 billion (USD 10.1 billion in 2019).

Foreign direct investment also fell. Overall, foreign direct investment into Colombia fell USD 2.8 billion from 2Q19 to reach USD 1.3 billion. Nevertheless, the rolling-4Q FDI into Colombia continues to roughly finance the CAD, while net direct investment covers 75% of the deficit (81% in 2019). Meanwhile, net portfolio inflows are elevated at USD 1.6 billion over the last four quarters (compared to a mild outflow in 2019), mainly due to a significant rise in external public debt in 2Q20 (USD 4.9 billion).

Weak internal demand, recovering terms-of-trade, and a swifter global rebound will aid some CAD narrowing this year. We expect a deficit of 3.3% this year from 4.3% in 2019.

Miguel Ricaurte
Carolina Monzón

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