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Financing of the CAD is favorable.
2023/12/01 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

A USD 1.7 billion current account deficit was registered in the third quarter of the year, equivalent to 1.7% of GDP, and the smallest deficit since 2017. The deficit was well below the Bloomberg market consensus of USD 3.1 billion, while closer to our USD 2.4 billion call.  A narrowing of the trade and services deficit, along with higher transfers led to the overall narrowing in 3Q23.  As a result, the rolling-4Q current account deficit fell to 3.4% of GDP (USD 11.8 billion) from 4.9% of GDP (USD 16.3 billion) in 2Q23 and 5.5% of GDP (USD 18.9 billion) in 1Q23. At the margin, our own seasonal adjustment shows the annualized deficit sits at 1.7% of GDP in 3Q23, 1.4pp down from 3.1% as of 2Q23 (3.9% in 1Q23).  


The USD 4.5 billion narrowing of the CAD in 3Q23 from last year came on the back of a lower income deficit and a narrower services deficit.  Exports contracted 15.6% yoy during 3Q23 (21.5% drop  in 2Q23), dragged by coal exports, while imports fell more deeply (down 25%  yoy; -20.7% in 2Q23) amid weakness in demand for all of consumer, intermediate and capital goods imports.  Overall, the goods trade deficit narrowed USD 2.4 billion from 3Q22 to USD 1.3 billion. Meanwhile, the services deficit narrowed by USD 0.7 billion to reach USD 0.2 billion, while transfers reached USD 3.4 billion.  Moreover, the income deficit narrowed by USD 1.2 billion to USD 3.6 billion as the weakening economic activity likely affects profitability of foreign investment in Colombia. 


Financing of the CAD is favorable. Direct investment into Colombia came in at USD 3.4 billion in 3Q23, USD 0.3 above one year earlier.  Net direct investment reached USD 3.0 billion resulting in USD 15.8 billion for the rolling year, achieving a 133% coverage of the CAD (65% in 2022).  


The CAD has narrowed significantly, amid a stronger COP and a tight monetary policy dampening domestic demand dynamics. We  expect the current account deficit to narrow to 3.5% of GDP by the end of this year, with risks tilted to a swifter adjustment.