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The CAD narrowing is unfolding swiftly.
18/04/2023 | Andrés Pérez, Vittorio Peretti & Ignacio Martinez

External imbalances are swiftly correcting in Chile as domestic demand adjusts amid tight monetary policy. During 1Q23, the current account posted a USD 0.75 billion surplus (above both the Bloomberg market consensus and our USD 0.3 billion deficit call), the first surplus since 2Q20. The 1Q surplus is a significant swing from the USD 5.5 billion deficit one year earlier. As imports slow, given weaker consumption prospects and correcting global energy prices, the trade surplus surged in the quarter to USD 7.6 billion (USD 6.5 billion higher than in 1Q22). Meanwhile, the income deficit remained elevated at USD 4.2 billion (USD 2.7 billion in 1Q22), as high copper prices support profitability of foreign investments in Chile, but is narrowing from recent deficit peaks of over USD 5.5 billion. There is also an improvement in the financing breakdown with net FDI into Chile recovering. Overall, the rolling-4Q current account deficit fell to 6.9% of GDP, down from 9% as of December (and 10% as of September). At the margin, the deficit fell even faster to 0.5% of GDP (SA, annualized; from 7% in 4Q). 



A rising goods surplus, and narrowing services deficit are supporting the CAD adjustment. A moderating upside pull from global energy prices (prices rose 7.1% yoy in 1Q; 29% in 4Q), and significant fall in consumer goods volumes (-34% yoy in 1Q vs -30% in 4Q22), along with mining export growth (mainly price-related lithium sales) aided a goods trade surplus of USD 7.6 billion (USD 1.1 billion surplus in 1Q22). Overall, the rolling-4Q trade surplus of goods reached USD 10.2 billion (USD 3.8 billion in 2022), while the services deficit fell to USD 13.6 billion (USD 14.8 billion in 4Q), driven by lower shipping fees, and recovering tourism. The income deficit came in at USD 18.1 billion, up from USD 16.5 billion in 2022.


Recovering FDI is leading to a more sustainable financing mix. The bulk of the rolling CAD as of 1Q23 (6.9% of GDP) was financed through net FDI (51%). The direct investment component reached a USD 3.2 billion net inflow in 1Q23, up from a USD 0.6 billion inflow one year earlier, given capital injections in the non-financial sector. Over the rolling-4Q, net direct investment reached USD 10.7 billion (USD 8.0 billion in 2022). Portfolio investment registered a large net outflow in 1Q (USD 2.4 billion; led by pension funds increasing foreign exposure). Net portfolio investment during the rolling-year stood at an inflow of USD 2.6 billion (USD 8.4 billion in 2022; USD 37.8 billion in 2021). The stock of external debt decreased between 1Q22 (USD 243 billion; 77.1% of GDP) and 1Q23 (USD 234 billion; 68.7% of GDP).


The ongoing domestic demand adjustment, high copper prices, lower global transportation fees and a significant trade surplus at the start of the year point to a significant CAD correction this year, to 3.8% of GDP, from 9.0% last year.