Itaú BBA - How did current account adjustment take place in emerging market countries?

Macro Vision

< Back

How did current account adjustment take place in emerging market countries?

January 9, 2018

Contracting activity is meaningful to explain current account adjustment in Brazil, Peru, South Africa, Turkey and Russia.

Please open the attached pdf to read the full report 

Between 2013 and 2017, there was a widespread improvement in the current accounts of emerging market countries (with some exceptions in Asia).

Current account adjustment was sharper in countries that experienced greater exchange-rate depreciation in real terms, suggesting that some of the improvement is structural.

Will the improvement in activity in emerging economies compromise their current account adjustment? To answer this question, we ran an analysis to separate structural factors (exchange rates and the terms of trade) from cyclical factors (activity) in the adjustment of current accounts in emerging market countries.

Results show that contracting activity is meaningful to explain current account adjustment in Brazil, Peru, South Africa, Turkey and Russia. However, even in these countries, some of the adjustment was structural. Hence, their current accounts will be in a better state compared with 2013, notwithstanding the pickup in economic activity.

Widespread improvement in current accounts in emerging countries 

The aggregate current account of emerging market countries[1] improved significantly between 2013 and 2017, reaching a low of 0.2% of GDP in late 2013 and stabilizing at 1.1% of GDP in 3Q17.

The improvement was more intense in Latin America and CEEMEA. In Latin America, the adjustment started in 2015 (from -3.5% of GDP in 2Q15 to -1.4% of GDP in 3Q17), and in CEEMEA it began in 2013 (from -1.2% of GDP in 4Q13 to 0.0% in 3Q17). In Asia, where countries have surpluses, the current account is at the same level as in 2013 (2% of GDP).

In a sample of 16 emerging market countries, current account improvements were broad-based (12 countries). The average adjustment equals 2.4% of GDP. The sharpest adjustment took place in Brazil, where the deficit narrowed from 4.2% in 2014 to 0.6% in 2017 (in the four quarters through September). 

In Asia, current accounts deteriorated in four countries: China, South Korea, Malaysia (all of which still have surpluses), and the Philippines, where the current account balance reversed from a surplus of 3.8% of GDP in 2014 to a deficit of 0.2% of GDP in 2017.

Current account adjustment was sharper in countries that experienced greater real exchange-rate depreciation 

Current account adjustment between 2013 and 2017 was larger in countries that experienced greater depreciation in their exchange rates in real terms (considering a two-year lag, as the impact of the exchange rate takes a while to be translated into current account figures), as was Brazil’s case. This correlation suggests that some of the current account improvement in these nations was structural. 

Breakdown of the current account into structural and cyclical drivers

To find out how much of the current account adjustment was structural (exchange rate and the terms of trade) or driven by cyclical factors (activity), we ran an econometric analysis with panel data (see regression in the appendix).

Results show that the cyclical part (contracting activity) was relevant in Brazil, Peru, South Africa, Turkey and Russia. In Brazil’s case, the improvement of 3.6% of GDP is explained as follows: 2.1% by the cyclical part and 1.5% by structural factors (exchange rate and the terms of trade). Even in these countries, part of the adjustment was structural, in particular, due to exchange depreciation; hence their current accounts will be in a better position than in 2013, notwithstanding the pickup in activity. Evidently, the shifts in the exchange rates can be reversed and significant appreciations could undo their current account adjustments.

In countries such as Colombia, Chile and Mexico, the econometric analysis shows that the adjustment was mainly structural. 

The table below shows the breakdown of current account adjustments into cyclical and structural factors, as well as forecasts for 2018 based on the estimated model, which does not match our forecasts.
 

Guilherme Martins
Laura Pitta

 


[1] We considered 21 countries: China, India, South Korea, Taiwan, Thailand, Indonesia, Philippines, Singapore, Malaysia, Argentina, Brazil, Mexico, Colombia, Chile, Peru, Russia, Poland, Hungary, Czech Republic, Turkey and South Africa.
 

Please open the attached pdf to read the full report 



< Back