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Favorable FDI dynamics consolidate a more sustainable financing mix.
2023/11/21 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Chile’s external imbalances continued to narrow in 3Q23, although by less than expected. During 3Q23, the current account posted a USD 4.5 billion deficit, above both the Bloomberg consensus and our call of USD 3.9 billion. The bulk of the surprise to us came from a smaller trade surplus for goods compared to the monthly tracking. Still, the 3Q23 CAD narrowed by USD 3.0 billion with respect to 3Q22. As a result, the rolling-4Q current account deficit fell from 4.7% of GDP to 3.5% (and 9% last year). At the margin, the deficit sits at 3.5% of GDP (SA, annualized; up from 3% in 2Q23). In turn, the improvement in the financing breakdown continued with recovery of net FDI into Chile consolidating.


A narrower trade surplus for goods, a sticky services deficit and high income deficit resulted in a larger CAD compared to the prior quarter. Revisions to the BoP show a larger current account deficit in 1H23 of USD 0.5 billion, mainly due to weaker trade dynamics. During 3Q23, soft exports (-6.7% YoY; similar decline in 2Q23) led to a smaller trade surplus (USD 1.9 billion versus USD 3.4 billion in 2Q23, but still an improvement from the deficit in 3Q22). Lithium exports fell by 41% (as prices retreat, and volumes falter). The double-digit import decline eased marginally, as the drag from consumer goods imports moderated, but capital goods purchases deteriorated. Overall, the rolling-4Q trade surplus of goods reached USD 15.5 billion (USD 3.8 billion in 2022), while the services deficit fell more mildly to USD 11.2 billion (USD 14.8 billion deficit in 2022), aided by lower shipping fees. The income deficit came in at USD 16.3 billion, down a tick from USD 16.5 billion in 2022 as high copper prices support profitability of foreign investments in Chile.


Favorable FDI dynamics consolidate a more sustainable financing mix. The rolling-4Q net FDI exceeded the CAD at 108%, the highest financing mix since 2015, and up sharply from the 30% in 2022. The direct investment component reached a USD 3.3 billion net inflow in 3Q23 (USD 2.6 billion in 3Q23), given capital injections and re-investment of profits. Over the rolling-4Q, net direct investment reached USD 12.2 billion (USD 13.3 billion in 2022). Portfolio investment registered a large net outflow in 3Q (USD 4.1 billion; led by public and private debt emission). Net portfolio investment during the rolling-year stood at an inflow of USD 4.9 million (USD 8.2 billion inflow in 2022). The stock of external debt was stable in nominal terms from 2Q22 (at USD 231 billion; 75.7% of GDP), below the recent cycle high of 84.5% as of September last year.


The adjustment in domestic demand and normalization of the service and income deficits are expected to support a correction of external imbalances. We expect a CAD of 3.6% of GDP (from 9.0% last year), while the weaker expected domestic demand recovery would lead to a 3.8% deficit next year.