Itaú BBA - COLOMBIA – Wide trade deficit in October

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COLOMBIA – Wide trade deficit in October

December 18, 2020

The economic reopening and signs of a recovering labor market are supporting improved import dynamics.

A gradual import recovery, amid still weak exports, led to a large trade deficit in October. The USD 885 million trade deficit, USD 78 million larger than last year, was wider than our call and the Bloomberg market consensus (USD 818 million). While commodity exports remained weak at the start of 4Q20, improving non-commodity exports signal some consolidation of global demand. Meanwhile, the import decline in October was the mildest since the onset of the pandemic, but a double-digit drop continues to reflect the overall weakness of domestic demand. As a result, the rolling 12-month trade deficit was close to USD 10 billion, stable from 3Q20 and below the cycle peak of USD 11.5 billion as of April and the USD 10.8 billion in 2019. At the margin, the import improvement amid soft exports means the quarterly trade deficit widened to USD 9.6 billion (annualized), from USD 9.4 billion in 3Q20 and USD 8.3 billion in 2Q20.

The consolidation of the economic reopening and signs of a recovering labor market are supporting improved import dynamics. Imports (FOB) shrunk 15% YoY in October, moderating from a 17.3% contraction in September (40.8% peak fall in May). The moderation of the annual decline is due partly to recovering intermediate goods (down 13.5% decline vs. the 20% drop previously) as the agricultural component returned to growth. While the rate of decline for total consumer goods imports was broadly stable at 19.7%, the recent improvement of durable goods continued, in line with the expectation of a domestic demand recovery unfolding. Capital goods imports continued to shrink 11%. In the quarter ending in October, total imports retreated 20.3%, moderating from the 22.1% fall in 3Q20 and 34.3% decline in 2Q20, reaffirming that the worst of the shock has passed. At the margin, we estimate that imports increased 54.9% qoq/saar (73.7% decline in 2Q20).

Colombian exports remained weak in October, still dragged by shrinking coal and oil sales. Total exports contracted 21.0% YoY (down 17.1% in September). The weak dynamics were due to a 42.4% YoY drop of oil exports (similar drop in September) and a halving of coal sales. The former is mostly compromised by lower prices, while coal volumes were the key drag. Exports excluding traditional goods (oil, coal, coffee, and ferronickel), accounting for just over half of shipments abroad, increased 11.0% YoY, the highest growth rate since April 2018, reflecting some consolidation of global demand. In the quarter ending in October, exports fell 19.7% (20% fall in 3Q20; -40.5% in 2Q20), dragged by industrial commodity exports. At the margin, exports grew 32% qoq/saar, slowing from the 101% increase in 3Q20, as the recovery of oil and coffee sales lost momentum.

While domestic demand remains soft, weak terms-of-trade mean Colombia’s trade deficit correction is slow. Overall, we expect a current account deficit of 3.2% of GDP in 2020, a gradual narrowing from 4.3% last year. Some widening next year, to 3.6%, is expected as domestic activity recovers and FDI investment profitability resumes.

Miguel Ricaurte
Carolina Monzón

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