Vittorio Peretti & Carolina Monzón
2/12/2022
A rising income deficit amid higher oil prices, along with a still large trade deficit, led to another large external imbalance in 3Q22, reflecting Colombia’s vulnerability to external shocks. The USD 6.2 billion deficit in 3Q22 (7.2% of GDP), was USD 1.4 billion larger than in 3Q21, while falling between the Bloomberg market consensus of USD 5.8 billion and our USD 7.2 billion call. The deficit was pulled by higher profits from foreign investment in Colombia. As a result, the rolling-4Q current account deficit increased to 6.5% of GDP (USD 22.4 billion), well above the 5.7% in 2021. At the margin, our own seasonal adjustment shows the annualized deficit at 6.8% of GDP in 3Q22 from 6.4% as of 2Q22. A large CAD along with high inflation and activity still surprising to the upside consolidates our view that another 100bp rate hike to 12% is appropriate later this month.
Despite the favorable terms of trade scenario, the trade deficit of goods was wide as domestic demand remained upbeat and oil volumes soften. Compared to 3Q21, the trade deficit for goods was broadly stable at USD 3.6 billion (USD 1.8 billion in 2Q22), as the 42.4% YoY increase of exports (73% in 2Q22) was countered by a 31.1% gain in imports (40% in 2Q22). Nevertheless, higher profits from foreign investments in Colombia, especially in the extractive sector, led to a larger income deficit (up USD 2.4 billion from 3Q21 to USD 4.7 billion). The transfer surplus improved by USD 0.3 billion to USD 3.1 billion. Overall, the rolling-4Q balance of goods and services narrowed to a deficit of USD 18.8 billion, from USD 20.0 billion deficit in 2021. The transfer surplus reached USD 12.1 billion, USD 1.4 billion larger than the USD 10.8 billion recorded in 2021. Nevertheless, the income deficit widened significantly to USD 15.8 billion, up from USD 8.7 billion in 2021.
Foreign direct investment eased from recent quarters. Direct investment into Colombia came in at USD 3.3 billion in 3Q22, similar to levels one year earlier, while below the USD 5.1 billion average in the previous two quarters. Net direct investment reached USD 3.1 billion (50% coverage of CAD in 3Q22; USD 2.5 billion in 3Q21). Over one year, net direct investment reached USD 11.8 billion (53% coverage of the rolling-year CAD; 45% in 2021). Foreign portfolio investment inflows moderated to USD 5.3 billion over the rolling year (USD 8.3 billion in 2021), likely weakened by tightening external financial conditions.
The current account deficit will end the year at a high level. We expect a current account deficit of 6.5% of GDP for 2022. The expected slowdown of domestic demand and COP weakness would result in a gradual CAD moderation to 4.8% of GDP next year.
Andrés Pérez M.
Vittorio Peretti
Carolina Monzón