Itaú BBA - MEXICO – Sharp current account balance improvement in 2Q19

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MEXICO – Sharp current account balance improvement in 2Q19

agosto 23, 2019

Narrower current account was supported by an improvement in the trade balance

Current account deficit (CAD) narrowed in 2Q19, supported by an improvement in the trade balance. The current account balance posted a surplus of USD 5.1 billion or 1.6% of GDP in 2Q19 – narrower than median market expectations (a deficit of USD 2.0 billion, as per Bloomberg) - taking the 4-quarter rolling deficit to a low 0.9% of GDP (from a deficit of 1.6% of GDP in 1Q19). The 2Q19 CAD (also using 4-quarter-rolling figures) was the result of an improvement of the trade and services balance (-1.0% of GDP in 2Q19, from a -1.8% of GDP in 1Q19), while primary income and secondary income (mainly remittances from the US) balances remained practically unchanged at -2.6% and 2.7% of GDP, respectively. The improvement in the trade and services balances was mainly the result of a deceleration in non-oil imports, which reflects weakness in internal demand. At the margin, our seasonally-adjusted measure of the current account balance in 2Q19 improved to a surplus of 0.8% of GDP in 2Q19, from a deficit of 1.0% of GDP in the previous quarter.

On the funding side, net direct investment deteriorated further in the 2Q19, although it was still enough to cover the CAD. Using 4-quarter rolling figures, net direct investment deteriorated to 1.8% of GDP in 2Q19 (from 2.1% of GDP in 1Q19), but still comfortably enough to cover the CAD (-0.9% of GDP). Likewise, also using 4-quarter rolling figures, net portfolio flows deteriorated to 0.6% of GDP in 2Q19 (from 1.0% of GDP in 1Q19), which resulted from Mexicans divesting 0.3% of GDP abroad, while foreigners invested 0.3% of GDP in the country. We note foreign investment in domestic government bonds decreased to 0% of GDP in 2Q19 (from 0.5% in 1Q19), also on a 4-quarter rolling basis.   

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. On the funding side, data for 2Q19 shows a deterioration in financing conditions (as net direct investment fell), even though the level of net direct investment remains adequate to fully finance the external deficit.

Julio Ruiz

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