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CAD financing is healthy.
02/06/2023 | Vittorio Peretti & Carolina Monzón

A USD 3.4 billion current account deficit was registered in the first quarter of the year (4.2% of GDP), narrowing USD 2.0 billion from 1Q22. The deficit was smaller than the Bloomberg market consensus of USD 4.4 billion, and our USD 4.2 billion call. The income deficit remains elevated, but a narrower trade and services deficit led to the overall narrowing in 1Q23. As a result, the rolling-4Q current account deficit fell to 5.7% of GDP (USD 19.3 billion) from 6.2% of GDP (USD 21.3 billion) in 2022. At the margin, our own seasonal adjustment shows the annualized deficit at 4.2% of GDP in 1Q23, down from 5.3% as of 4Q22. The CAD adjustment is unfolding amid tight monetary policy, a weaker COP, high inflation and gradually softening domestic demand. Nevertheless, still large twin deficits, and double-digit inflation limit rate cuts this year.

Weakening imports and lower transportation costs supported better external accounts. Exports contracted 2.3% yoy during 1Q23 amid lower oil prices, but imports fell 11.2% yoy (-1.9%% in 4Q22) dragged by intermediate and capital goods. The goods trade deficit fell USD 1.6 billion from 1Q22 to USD 1.9 billion. Meanwhile, the services deficit narrowed by USD 1.0 billion, and transfers remained broadly stable at USD 3.1 billion. Nevertheless, high profits from foreign investments in Colombia led to a widening of the income deficit by USD 0.6 billion to USD 4.1 billion. The rolling-4Q balance of goods and services narrowed significantly to a USD 13.7 billion (USD 16.3 billion deficit in 2022), offsetting the income deficit widening to USD 17.8 billion (17.3 billion in 2022 and 8.7 billion in 2021).


Net foreign direct investment remained broadly stable in 1Q23, with flows directed mainly to oil, financial and manufacturing sectors. Direct investment into Colombia came in at USD 4.3 billion in 1Q23, USD 0.5 billion down over one year, but in line with the quarterly FDI average during 2022. Net direct investment reached USD 3.6 billion (USD 3.5 billion in 1Q22), financing all of the CAD in 1Q23. Over one year, net direct investment reached USD 13.5 billion (70% coverage of the rolling-year CAD; 63.4% in 2022). Foreign portfolio investment inflows increased to USD 3.1 billion over the rolling year (USD 2.9 billion in 2022).


We expect the current account deficit to narrow to 4.4% of GDP this year, driven by a domestic demand slowdown.