Itaú BBA - CHILE – Larger-than-expected current account deficit in 2Q19

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CHILE – Larger-than-expected current account deficit in 2Q19

agosto 19, 2019

As copper prices stay low and domestic demand remains weak, we see the CAD remaining wide

The current account recorded a larger-than-expected deficit in 2Q19. The USD 2.9 billion dollar deficit (Itaú: USD 2.1 billion; Bloomberg market consensus: USD 1.9 billon) was larger than the USD 2.2 billion recorded in 2Q18. The resulting rolling four quarter deficit widened to USD 10.4 billion (USD 9.2 billion in 2018 and USD 9.7 billion as of 1Q19), equal to 3.6% of GDP (3.1% in 2018). Our seasonally adjusted series sits wider at 3.8% of GDP, as both the trade and income balances deteriorated from 1Q19 (2.9% of GDP), but remains below the cycle peak of 4.8% of GDP in 4Q18. 

Due to the effects of the trade war between China and the U.S., the trade balance fell for the fifth consecutive quarter. Slowing global growth and lower average copper prices led exports of goods to shrink 9% yoy (from a 4.5% drop in 1Q19), while weak domestic growth resulted in imports falling by 7.2% (0% previously). As the trade balance for goods narrowed by 0.4 billion from last year, while the balance of services was broadly flat (at a deficit of USD 1.2 billion), a small trade deficit was recorded in 2Q19. Meanwhile, the income balance recorded a USD 3.0 billion deficit (narrowing from USD 3.4 billion one year before).

On the financial account, FDI posted a recovery coming in at USD 4.0 billion in 2Q19 (USD 2.6 billion outflow one year earlier), nearly matching the sum of inflows in the prior three quarters. Net FDI was USD 3.1 billion, fully financing the quarter CAD. However, for the rolling-year, CAD financing dynamics remain unfavorable, as the net FDI (which recorded a USD 2.6 billion inflow) only partially funded the external deficit (as has been the case since late 2016). 

As copper prices stay low and domestic demand remains weak, we see the current account deficit remaining wide, at around 3.2% of GDP this year (3.1% of GDP in 2018), with risks tilted to a larger deficit. The trade war intensification and global risk-off sentiment, amid the wide CAD, mean we do not expect a meaningful CLP appreciation ahead.

Miguel Ricaurte
Vittorio Peretti

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