CHILE – Another larger-than-expected current account deficit in 2Q21

the rising income deficit, amid favorable mining conditions, points to a larger deficit ahead

Vittorio Peretti & Andrés Pérez 


The current account deficit widened further during 2Q21, driven by a rising income deficit and a narrowing trade surplus. The USD 2.6 billion current account deficit was larger than our expectation of a USD 1.1 billion deficit, and a significant swing from the USD 5.1 billion surplus one year ago (USD 1.8 billion deficit in 1Q21). The rolling-4Q current account balance turned from a 0.8% surplus as of 1Q21 to a 1.1% deficit, while the seasonally adjusted series (annualized) shows a wider deficit of 4.0% of GDP in 2Q21. During the quarter, net Direct Investment into Chile comfortably financed the CAD.

Robust mining exports and recovering industrial exports partly countered the sizable increase in imports. The trade balance for goods posted a USD 4.2 billion surplus, lower by 30% over one year as imports recover. Exports rose by 30.2% with respect to the previous year (similar to the gain in 1Q), mainly driven by mining exports, which grew by 54.9% year-on-year. Imports grew by an eye-popping 60.2% with respect to the previous year (+27.2% in 1Q), reflecting base effects and demand for durable consumption goods, amid the various liquidity injections, and greater oil prices. Capital goods imports increased by 38.2%, driven by the purchase of trucks and cargo vehicles. Meanwhile, exports of services rose by 3.1% with respect to the previous year. Service imports grew by 32.9% year-on-year driven by larger fees in international trade. The income deficit widened further to USD 4.9 billion, from USD 2.6 billion in 2Q20. The highest income deficit since 1Q11 is primarily reflecting rising profitability of foreign mining investments in Chile amid high copper prices. During 2Q21, FDI into Chile reached USD 4.9 billion (USD 2.1 billion in 2Q20), while net inflows totaled USD 3.4 billion, comfortably financing the CAD in the quarter. Meanwhile, portfolio investment had a net inflow of USD 11.7 billion (USD 2.5 billion outflow in 2Q20), reflecting the return of investments abroad (mainly in equity) by pension funds and the government (reducing assets), while liabilities increased due to the issuance of government and corporate bonds.

From a savings-investment perspective, the widening of the current account in 2Q21 may be explained by a larger decline in savings (18.5% of GDP, down from 21.5% in previous quarter) with respect to the fall in investment (21.8% of GDP, down from 23.8% in previous quarter).

Current account balance to widen further. Domestic demand, as reflected by the 2Q GDP print, continues to surprise on the upside, mainly driven by consumption, which is likely to be sustained in the short term due to the extension of fiscal transfers during Q4 and ongoing improvement in the labor market. Separately, the rising income deficit, amid favorable mining conditions, also points to a larger deficit. We expect a CAD of 2.3% of GDP this year, compared to the 1.4% surplus recorded in 2020, and larger than the 0.9% currently estimated by the central bank. The trade balance for August will be released on September 7, with the July print continuing to show a narrowing of the trade surplus. 

Vittorio Peretti
Andrés Pérez