Itaú BBA - CHILE - Smaller than expected current account balance deficit

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CHILE - Smaller than expected current account balance deficit

mayo 20, 2019

Financing the CAD remains complicated as inflows of direct investment stay low

In 1Q19, the current account balance came in below expectations, at USD 1.0 billion, but external vulnerability remains elevated. The rolling four-quarter current account balance deficit widened to 3.4% of GDP (from 3.1% in 2018), the widest since early 2014. Positively, the seasonally adjusted series show the deficit at a narrower 2.7% of GDP (4.8% in 4Q18), aided by an improving trade balance of goods and services and a narrower primary deficit at the margin. Meanwhile, financing the deficit remains complicated as inflows of direct investment stayed low. 

The trade balance of goods and services recorded the first surplus since 2Q18, while the income deficit was at the narrowest level since 1Q17. Compared to 1Q18, falling exports (partly due to lower copper prices, while weaker global growth likely reduced foreign demand of manufactured and agricultural goods) and flattish imports led to a smaller surplus of the trade balance of goods (USD 2.2 billion, from USD 3 billion one year earlier). Meanwhile, the service trade balance deficit came in just below USD 1 billion, a mild widening from last year. The reduction of the income balance deficit to USD 2.6 billion (USD 2.9 billion in 1Q18) could not compensate the weaker trade balance, leading to a wider current account deficit in the quarter (USD 1 billon, versus USD 0.3 billion deficit one year earlier). For the rolling year, the current account deficit rose USD 0.7 billion to USD 9.8 billion, explained by the deterioration of the trade balance. 

Net foreign direct investment remained weak in 1Q19 and unable to finance the current account deficit. The FDI inflow was USD 2.4 billion (USD 5.8 billion one year earlier), while net direct investment (that is, excluding Chilean investments abroad) was only USD 0.3 billion (USD 3.6 billion in 1Q18). On the other hand, portfolio inflows were broadly stable over one year, while Chileans repatriated some funds from abroad, resulting in a narrower net portfolio outflow of USD 2.3 billion (USD 5.7 billion in 1Q18). For the rolling year, net FDI narrowed to USD 1.3 billion as 1Q19 (USD 2.9 billion in 2018).

We expect the current-account deficit to remain wide and broadly stable this year at 3% of GDP. The effect of a slowing global activity would be most likely offset by a weakening domestic demand, so further widening is unlikely.

Miguel Ricaurte
Vittorio Peretti

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