Itaú BBA - MEXICO - Current account deficit narrowed significantly in 4Q16

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MEXICO - Current account deficit narrowed significantly in 4Q16

February 24, 2017

We expect the CAD to continue narrowing in 2017, driven by the trade balance

The current account deficit narrowed significantly in 4Q16, on the back of an improving trade balance and a pick-up of remittances. Mexico’s current-account deficit came in at USD 3.4 billion in 4Q16 – closer to our forecast (USD 4.4 billion) than to the market consensus (USD 5.3 billion, as per Bloomberg) – which brought the four-quarter rolling deficitto USD 27.9 billion (2.7% of GDP) from USD 32 billion in 3Q16. At the margin, the narrowing was more significant, with the seasonally-adjusted deficit shrinking to 1.8% of GDP in 4Q16 (from 3.3% of GDP in 3Q16). 

Looking at the breakdown of the last four quarters, we note that: the trade deficit bottomed out; transfers are improving(driven by a more dynamic U.S. economy and, possibly, an anticipation of transfers due to fears of taxation on remittances); the services deficit is small and stable; and net income payments are not decreasing (even in dollar terms) in spite of a weaker exchange rate. The trade deficit narrowed to 1.3% of GDP in 4Q16 from 1.5% of GDP in 3Q16, with a large improvement in the non-energy deficit (now virtually zero, from 0.4% of GDP in 3Q16) partly offset by a deterioration of the energy deficit (1.3% of GDP, from 1.1% of GDP in 3Q16). Transfers picked up in 4Q16 to 2.6% of GDP (from 2.4% of GDP in 3Q16).        

On the funding side, foreign direct investment is now enough to finance almost the entire current account deficit, and portfolio flows have firmed upin 4Q16, in spite of the volatility experienced by Mexican markets in this period. Net direct investment stood at USD 4.9 billion in 4Q16 and the four-quarter rolling measure came in at USD 27.5 billion. Net portfolio investment recorded inflows of USD 16.3 billion in 4Q16 (with the four-quarter rolling measure increasing from net inflows of USD 22.4 billion in 3Q16 to 30.7 billion in 4Q16). Moreover, there were inflows into domestic government bonds in 4Q16 (USD 4.1 billion) which marks two consecutive quarters of inflows (after three consecutive quarters of outflows). Nevertheless, over four quarters, foreign investment in domestic government bonds is stillslightlynegative (USD 1.5 billion).  

We expect the current-account deficit to narrow – from 2.7% of GDP in 2016 to 2.3% in 2017– as the economy experiences a rebalancing in its sources of growth (with weaker domestic demand partly offset by firmer exports). The slower growth of domestic demand coupled with a very weak real exchange rate will likely affect imports. On the other hand, we expect manufacturing exports to remain strong, supportedby the pick-up of US industrial output and a competitive exchange rate, as long as protectionism doesn’t materialize.From a funding perspective, we still see the situation as fragile in spite of the benign financial account data reported in 4Q16. To be sure, the threatof protectionism will likely be adrag on foreign direct investmentthis year, while higher U.S. treasury yields could have negative implications on portfolio inflows (even considering the sizable rate hikes implemented by the central bank).


Alexander Müller 



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