While a larger-than-expected current account deficit was recorded in 2Q23, the narrowing of Chile’s external imbalances continued. During 2Q23, the current account posted a USD 2.75 billion deficit, above the Bloomberg consensus of a USD 1.6 billion deficit, while closer to our USD 2.4 billion call. The bulk of the surprise to us came from a larger income deficit. The 2Q23 CAD was still a significant USD 6.4 billion narrowing from 2Q22. As a result, the rolling-4Q current account deficit fell to 4.5% of GDP, down from 6.6% as of March (and 9% last year). At the margin, the deficit sits at a lower 2.6% of GDP (SA, annualized; from 0.7% in 1Q). In turn, the improvement in the financing breakdown continued with net FDI into Chile recovering.
A narrower trade surplus for goods, a sticky services deficit and high income deficit led to a return to a current account deficit in the quarter. The 1Q23 current account surplus was revised up from USD 0.8 billion to USD 1.7 billion due to a lower income deficit. During 2Q23, softening exports (-6% YoY; +10.6% in 1Q23) led to a smaller trade surplus as the pull from lithium prices eases, while the drag from consumer goods imports moderated. Overall, the rolling-4Q trade surplus of goods reached USD 13.7 billion (USD 3.8 billion in 2022), while the services deficit fell more mildly to USD 12.2 billion (USD 14.8 billion in 4Q), aided by lower shipping fees, and recovering tourism. The income deficit came in at USD 15.6 billion, down a tick from USD 16.5 billion in 2022 as high copper prices support profitability of foreign investments in Chile.
FDI dynamics support a more sustainable financing mix. Around 60% of the rolling-4Q CAD as of June (4.5% of GDP) was financed through net FDI (30% in 2022). The direct investment component reached a USD 4.0 billion net inflow in 2Q23 (USD 2.2 billion in 1Q23), given capital injections and loans in the non-financial sector. Over the rolling-4Q, net direct investment reached USD 8.1 billion (in line with 2022). Portfolio investment registered a large net outflow in 2Q (USD 3.5 billion; led by pension funds increasing foreign exposure). Net portfolio investment during the rolling-year stood at an outflow of USD 26 million (USD 8.4 billion inflow in 2022; USD 33.8 billion inflow in 2021). The stock of external debt decreased between 2Q22 (USD 230 billion; 67.7% of GDP) and 2Q23 (USD 229 billion; 67.6% of GDP), and well below the recent cycle high of 84.5% as of September last year.
The domestic demand adjustment, global oil price correction, roughly stable copper exports and normalizing global transportation fees will support a swift correction of external imbalances. We expect the CAD this year to narrow to 3.8% of GDP (9.0% last year), amid a large trade surplus call.