Itaú BBA - MEXICO – Narrower current account deficit in 1Q18; Solid momentum of exports in April

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MEXICO – Narrower current account deficit in 1Q18; Solid momentum of exports in April

May 25, 2018

Smaller net income payments and narrower trade deficit drove the improvement of the CAD

Mexico’s current account deficit (CAD) narrowed significantly in 1Q18, driven by a smaller net income deficit (reflecting lower profit remittances from foreign firms operating in Mexico, which more than offset higher interest payments on public sector securities) and a growing non-energy surplus (boosted by the pick-up of the U.S. economy). The CAD came in at USD 6.9 billion in 1Q18 – closer to our forecast (USD 7.9 billion) than to median market expectations (USD 4.7 billion, as per Bloomberg) – which reduced the rolling 4-quarter deficit to USD 15.9 billion (1.3% of GDP) from USD 19.4 billion in 4Q17 (1.7% of GDP, revised up from 1.6% of GDP). Looking at the breakdown, we note that the 0.4pp of GDP narrowing of the rolling 4-quarter CAD between 4Q17 and 1Q18 was accounted by lower net income payments (0.2pp), a smaller trade deficit (0.1pp), a slightly smaller services deficit (rounding up the variation to 0.1pp), and robust transfers (mainly remittances from the U.S., which stood unchanged at a sizable 2.4% of GDP). The rolling 4-quarter trade deficit narrowed to 0.8% of GDP in 1Q18 from 0.9% of GDP in 4Q17, with a growing non-energy surplus (0.7% of GDP, from 0.6% of GDP) partly offsetting a wide energy deficit (1.6% of GDP, unchanged from the previous quarter). Meanwhile, the rolling 4-quarter net income deficit narrowed to 2.2% of GDP (from 2.4% of GDP) during the same period. At the margin, our seasonally-adjusted measure of the CAD stood broadly unchanged at a moderate 1.5% of GDP.

On the funding side, NAFTA uncertainty likely had a negative effect on foreign direct investment and portfolio inflows have also retreated. Rolling 4-quarter net FDI decreased to USD 21.5 billion (1.8% of GDP) in 1Q18, from USD 25.6 billion (2.2% of GDP) in 4Q17, but still more than enough to cover the CAD. In contrast, rolling 4-quarter net portfolio investments were slightly larger (0.5% of GDP in 1Q18, from 0.4% of GDP in 4Q17). Nevertheless, the rolling 4-quarter measure of foreign investment in domestic government bonds recorded outflows (-0.3% of GDP in 1Q18, from nil in 4Q17). 

We have revised our current account deficit forecast for 2018 (to 1% of GDP, from 1.3% of GDP). The CAD will likely narrow a bit more, as manufacturing exports continue accelerating, while internal demand expands at a more moderate pace ahead. Regarding the funding of the CAD, we expect the uncertainties associated to NAFTA and the presidential elections to have a moderately negative effect on FDI and portfolio investments in coming quarters (with portfolio inflows facing an additional headwind stemming from more restrictive global financing conditions). 

On another note, Mexico’s rolling 12-month trade deficit widened a bit in April, although it continued showing benign dynamics at the margin. Mexico's trade balance posted a USD 289 million deficit in April, below median market expectations of a UDS 500 million surplus (as per Bloomberg). Thus, the rolling 12-month trade deficit widened to USD 11.2 billion in April (from USD 10 billion in March) with the energy deficit widening (to USD 19.2 billion, from USD 18.7 billion) and the non-energy surplus decreasing a little bit (to USD 8 billion, from USD 8.8 billion). At the margin, however, the trade deficit narrowed. The seasonally-adjusted 3-month annualized trade deficit narrowed to USD 7.2 billion in April (from USD 9 billion in March) driven by a wider non-energy surplus (USD 12.8 billion, from USD 9.4 billion) which offset a larger energy deficit (USD 20 billion, from USD 18.4 billion). 

The breakdown of the trade balance indicates that internal demand growth might be moderating in 2Q18. Although manufacturing exports had a month-over-month contraction in April, the trend is pretty strong and accelerating (16.2% qoq/saar, from 14.7% in March). In contrast, the momentum of non-oil imports moderated (9.6% qoq/saar, from 13.6% in March) with all components slowing down: consumer goods ex-oil (4.6% qoq/saar, from 11.2%), intermediate goods ex-oil (8.6% qoq/saar, from 11.6%), and capital goods (22.7% qoq/saar, from 31.3%). 


Alexander Müller

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