Itaú BBA - MEXICO – Current account deficit (CAD) narrowed in 1Q19

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MEXICO – Current account deficit (CAD) narrowed in 1Q19

mayo 24, 2019

Net direct investment deteriorated in the 1Q19, although it was still enough to cover the CAD

Current account deficit (CAD) narrowed in 1Q19. The CAD came in at USD 5.6 billion in 1Q19 – narrower than median market expectations (a deficit of USD 9.0 billion, as per Bloomberg), taking the 4-quarter rolling deficit to 1.4% of GDP (from a deficit of 1.8% of GDP in 4Q18). The 1Q19 CAD (also using 4-quarter-rolling figures) was the result of an improvement of the trade and services balance (-1.7% of GDP in 1Q19, from a -1.9% of GDP in 4Q18) and primary income balance (-2.4% of GDP, from -2.6% of GDP), while secondary income (mainly remittances from the US) remained practically unchanged at 2.7% of GDP. At the margin, our seasonally-adjusted measure of the CAD in 1Q19 improved to -0.6% of GDP in 1Q19, from -1.7% of GDP in the previous quarter.

On the funding side, net direct investment deteriorated in the 1Q19, although it was still enough to cover the CAD. Using 4-quarter rolling figures, net direct investment deteriorated to 2.0% of GDP in 1Q19 (from 2.2% of GDP in 4Q18), but still enough to cover the CAD (-1.4% of GDP). Moreover, also using 4-quarter rolling figures, net portfolio flows remained practically unchanged at 0.8% of GDP in the 1Q19, which resulted from Mexicans investing 0.2% of GDP abroad, while foreigners investing 0.9% of GDP in the country. We note foreign investment in domestic government bonds increased to 0.5% of GDP in 1Q19 (from 0.0% in 4Q18), also in a 4-quarter rolling basis.   

Looking ahead, we expect the current account deficit in Mexico to remain narrow. Although lower oil production and the deceleration of the U.S. economy will exert downward pressure on Mexico’s exports, internal demand is weakening (largely reflecting the effect of uncertainty over domestic policies and trade relations with the U..S on investment). On the funding side, data for 1Q19 shows difficult financing conditions (as direct investment was soft), even though the level of net direct investment remains adequate to fully finance the external deficit.     


Julio Ruiz
 



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