Itaú BBA - MEXICO – Current account deficit narrowed significantly in 2017

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MEXICO – Current account deficit narrowed significantly in 2017

February 23, 2018

The strength of the US economy is helping to narrow Mexico's CAD

Mexico’s current account deficit (CAD) narrowed significantly in 2017, given a record-high non-energy trade surplus (driven by the pick-up of the US economy), a smaller net income deficit (reflecting lower profit remittances from foreign firms operating in Mexico), and solid transfers (supported by stronger U.S. economy). In the fourth quarter of 2018, the CAD came in at USD 3.2 billion – in line with median market expectations (as per Bloomberg) and larger than our forecast (USD 1.4 billion) - which brought the annual deficit to USD 18.8 billion (1.6% of GDP), from USD 22.8 billion (2.1% of GDP) in 2016. At the margin, the seasonally-adjusted CAD narrowed to 1.6% of GDP in 4Q17 (from 1.8% of GDP in 3Q17) according to our estimations. 

Looking at the breakdown, we note that the 0.5pp of GDP narrowing of the CAD between 2016 and 2017 was accounted by a smaller trade deficit (0.3pp) and lower net income payments (0.3pp) while the services deficit remained unchanged  and transfers surplus decreased by 0.1pp (albeit still pretty big, at 2.4% of GDP). The trade deficit narrowed to 0.9% of GDP in 2017 from 1.2% of GDP in 2016, with a growing non-energy surplus (0.7% of GDP, from nil) offset by a deterioration of the energy deficit (1.6% of GDP, from 1.2% of GDP) during the same period. Meanwhile, the net income deficit narrowed to 2.4% of GDP (from 2.7% of GDP in 2016).

On the funding side, NAFTA uncertainty likely had a negative effect on foreign direct investment and portfolio investments, but - overall - the funding conditions of the balance of payments remain adequate. Net FDI decreased to USD 24.6 billion (2.1% of GDP) in 2017, from USD 28.2 billion (2.6% of GDP) in 2016, but still more than enough to cover the CAD. In contrast, net portfolio investments showed a more significant deterioration (0.3% of GDP in 2017, down from 2.9% of GDP in 2016). Foreign investment in domestic government bonds recorded small outflows, of USD 0.3 billion (from outflows of –USD 1.5 billion in 2016), in spite of higher domestic rates and the benign environment for emerging markets. Meanwhile, Mexican portfolio investment abroad picked-up to USD 19.8 billion in 2017 (from asset sales of USD 1.9 billion in 2016).

We have revised our current account deficit forecast for 2018 (to 1.3% of GDP, from 1.6% of GDP). The CAD will likely narrow a bit more, as manufacturing exports continue accelerating, while internal demand expands at a more moderate pace. Also, it is worth pointing out that the narrowing of the current account deficit also reflects a lower fiscal deficit, so Mexico’s fundamentals are improving.

Alexander Müller

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