Itaú BBA - MEXICO – Zero current account deficit in 2Q20

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MEXICO – Zero current account deficit in 2Q20

August 25, 2020

Net portfolio flows and FDI deteriorated amid uncertainty surrounding the outbreak

The current account balance (CAB) deteriorated in 2Q20 at a high level. The current account balance stood close to zero in 2Q20, taking the 4-quarter rolling balance to 0% of GDP (from a surplus of 0.4% of GDP in 1Q20). The 1Q20 CAB (also using 4-quarter-rolling figures) was the result of a deterioration in the trade and services balance (-0.5% of GDP in 2Q20, from 0.2% of GDP in 1Q20), while the primary and secondary (mainly remittances from abroad) income balances improved slightly to a deficit 2.6% of GDP (from a deficit of  2.8% of GDP) and a surplus of 3.1% of GDP (from as surplus 3.0% of GDP), respectively. At the margin, our seasonally adjusted measure of the current account balance in 2Q20 deteriorated to a deficit of 1.1% of GDP (from a surplus of 0.9% of GDP in 1Q20).

On the funding side, net foreign direct investment and net portfolio flows deteriorated in 2Q20 amid uncertainty surrounding the outbreak. Using 4-quarter rolling figures, net direct investment stood at 1.5% of GDP, slightly below than the previous quarter (1.7% of GDP). In turn, also using 4-quarter rolling figures, net portfolio outflows stood at 0.2% of GDP in 2Q20 (from net inflows of 0.1% of GDP in 1Q20), which resulted from Mexicans investing 0.5% of GDP abroad (from 0.3% of GDP), while foreigners invested 0.3% of GDP (broadly unchanged from the last quarter). The deterioration in net portfolio flows reflect, in part, the preference of investors towards less risky assets amid the uncertainty due to the outbreak. In this context, foreigners divested from domestic government bonds 1.1% of GDP in 2Q20 (from a divestment of 0.7% of GDP in 1Q20), also on a 4-quarter rolling basis.  

We expect the current account balance to improve to a surplus of 0.2% of GDP (compared to a deficit of 0.2% in 2019). We expect external sales to recover at a faster pace than imports due to a better performance of domestic demand in the U.S. relative to Mexico (domestic demand in Mexico will likely be curved by a modest fiscal stimulus and prevailing uncertainty over economic policy direction) and the weaker peso. 

Julio Ruiz

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