A USD 2.5 billion current account deficit was registered in the second quarter of the year (3.0% of GDP), narrowing USD 2.4 billion from 2Q22. The deficit was smaller than the Bloomberg market consensus of USD 3.0 billion, and closer to our USD 2.8 billion call. A narrowing of the trade and services deficit, along with a lower income deficit, led to an overall narrowing in 2Q23. As a result, the rolling-4Q current account deficit fell to 5.0% of GDP (USD 16.8 billion) from 5.7% of GDP (USD 19.4 billion) in 1Q23 and 6.3% of GDP (USD 21.6 billion) in 4Q22. At the margin, our own seasonal adjustment shows the annualized deficit sits at 3.4% of GDP in 2Q23, down from 4.2% as of 1Q23 (5.3% in 4Q22). FDI into Colombia continues to recover, leading to net-FDI flows into Colombia financing 94% of the rolling-4Q CAD. We expect a further narrowing of the CAD this year, driven by our call for an expected softening of domestic demand, in turn, driven by a prolonged period of monetary policy tightening.
The USD 2.4 billion narrowing of the CAD in 2Q23 from last year was the result of a lower income deficit and a narrower services deficit, while exports of goods remains weak. Exports contracted 21.8% yoy during 2Q23 (1.7% drop in 1Q23) amid lower commodities exports, while imports fell 20.7% yoy (-11.2% in 1Q23) dragged by consumption, intermediate and capital goods. The goods trade deficit fell USD 0.2 billion from 2Q22 to USD 1.7 billion. Meanwhile, the services deficit narrowed by USD 0.8 billion, and transfers remain broadly stable at USD 3.0 billion. Moreover, due to lower estimated profits by foreign entities with operations in Colombia, the income deficit narrowed by USD 1.2 billion to USD 3.4 billion.
Net foreign direct investment increased significantly in 2Q23, driven by flows directed mainly to mining, financial and manufacturing sectors. Direct investment into Colombia came in at USD 5.3 billion in 2Q23, USD 0.2 billion above one year earlier, and USD 0.9 billion above the quarterly FDI average during 2022. Net direct investment reached USD 5.5 billion (USD 3.7 billion in 2Q22). Over one year, net direct investment reached USD 15.9 billion resulting in a solid 94% coverage of the rolling-year CAD (65.0% in 2022). Foreign portfolio investment inflows increased to USD 1.2 billion over the rolling year (USD 2.9 billion in 2022).
The CAD has been narrowing amid a significant slowdown in imports, amid a restrictive monetary policy, and a moderating income deficit. Even though twin deficits are still large, inflation has been moderating, along with more anchored inflation expectations, leading us to expect rate cuts in the 4Q23. We expect the current account deficit to narrow to 4.2% of GDP by the end of this year (6.2% in 2022), with a downside bias given the downside surprise in 2Q23.