Itaú BBA - COLOMBIA – The current account deficit narrowed in 3Q17

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COLOMBIA – The current account deficit narrowed in 3Q17

December 12, 2017

The CAD narrowing will allow for an expansionary monetary policy in the months ahead.

A USD 2.6 billion current account deficit was recorded in 3Q17, slightly higher than our USD 2.3 billion estimate, but lower than the USD 3.6 billion recorded one year ago. The rolling four-quarter deficit narrowed to USD 11.1 billion (3.7% of GDP), from the USD 12.4 billion deficit in 2016 (4.4% of GDP). At the margin, our own seasonal adjustment shows an even lower deficit 2.9% of GDP, from 3.6% in 2Q17 and 4.6% in 1Q17.

The main force behind the improvement in the quarter was the performance of the trade for goods and services, which recorded a USD 2.5 billion deficit, narrower than the USD 3.4 billion deficit in 3Q16. Higher energy prices, improved quantities exported, as well as a low base of comparison given the transportation strike last year, explain the improvement. Hence, the rolling-4Q balance of goods and services improved to a USD 10.7 billion deficit, below the USD 13.1 billion deficit in 2016 (USD -11.7 billion in the previous quarter). Meanwhile, the income deficit continued to widen as it recorded USD 1.8 billion, from the USD 1.5 billion deficit in the same quarter, last year. The resulting 4Q- income deficit widened to USD 6.8 billion from USD 5.1 billion at the close of last year.

Foreign direct investment showed a significant improvement from last year. Direct investment into Colombia jumped to USD 4.9 billion in 3Q17 (USD 2.2 billion in 3Q16). The bulk of the investment in the quarter was in the transportation sector and is likely explained by investment in airplanes by the main airline company. The oil sector made up only 10% of total FDI in 3Q17, far below the 48% peak registered in 2010. Overall, direct investment in the rolling-4Q period was USD 13.4 billion (4.4% of GDP). Net foreign direct investment improved to USD 8.6 billion over the rolling-4Q period, but still fell short of fully funding the current account deficit in the same time span. Meanwhile, portfolio investment inched up to USD 8.2 billion over the four quarters, but was still lower than the USD 8.9 billion recorded in 2016.

We expect the current account deficit to come in at 3.7% of GDP this year (below the 4.4% recorded in 2016). Weak internal demand, improved terms of trade compared to last year, and higher quantum of exports will aid in the recovery. Before the 3Q data release, the central bank had highlighted improving external accounts as part of the justification to proceed with a rate cuts. Hence, the latest development will aid the board’s move into expansionary monetary policy in the months ahead (we see the policy rate ending the cycle at 4.0%, 75 basis points below its current level).

 

Miguel Ricaurte
Vittorio Peretti



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