Itaú BBA - MEXICO – Low current account deficit in 3Q18

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MEXICO – Low current account deficit in 3Q18

November 23, 2018

Net FDI deteriorated, but CAD is fully funded by FDI

Although the rolling four-quarter current account deficit (CAD) stood unchanged in 3Q18, there was a deterioration at the margin. The CAD came in at USD 5.1 billion in 3Q18 (1.6% of GDP, unchanged from the 3Q17) – wider than median market expectations (USD 4.4 billion, as per Bloomberg). Looking at the breakdown, with respect to the 3Q17, the deterioration of net income balance (-0.4 pp) was compensated by an improvement in trade (0.2 pp) and service (0.1 pp) accounts and transfers (mainly remittances from the U.S.) with 0.1 pp. With rolling 4-quarter figures, current account deficit stood at 1.6% of GDP in the 3Q18 (practically unchanged from the 2Q18). However, at the margin, our seasonally-adjusted measure of the CAD deteriorated to 1.6% of GDP in the 3Q18 (from a deficit of 1.3% in the 2Q18).

On the funding side, net  foreign direct investment (FDI) and portfolio inflows deteriorated. Rolling 4-quarter net direct investment fell to USD 22.3 billion (1.8% of GDP) in 3Q18, from USD 27.6 billion (2.3% of GDP) in 2Q18, which was still enough to cover the CAD. Likewise, rolling 4-quarter net portfolio investments also fell (0.9% of GDP in the 3Q18, from 1.1% of GDP in the 2Q18).

We expect the CAD of 1.4% of GDP in 2018 as manufacturing exports recover, while internal demand expands at a moderate pace. In all, the data shows that Mexico is facing a scenario of greater uncertainty over domestic policies departing from strong fundamentals, which should provide a buffer for asset prices. 

Julio Ruiz

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