Itaú BBA - CHILE – Current account deficit widened in 2019

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CHILE – Current account deficit widened in 2019

Março 18, 2020

We expect a weaker domestic demand and lower energy prices to lead to a narrowing of external imbalance this year.

The 4Q19 current account deficit of USD 2.4 billion was broadly in line with our expectation and USD 1.7 billion narrower than in 4Q18. The narrowing at the end of the year was due to a rise of the trade surplus for goods as imports floundered amid the rise in domestic uncertainty (net change: USD 0.8 billion), while the income deficit related to FDI shrunk by USD 0.6 billion. Still, the current account deficit for 2019 widened 0.3pp from 2018 to 3.9% (the highest since 2013). While FDI inflows fully finance the CAD, coverage drops to around a third when considering net FDI. Government debt issuance abroad explains most of the remaining financing. Our own seasonal adjustment shows the deficit in the quarter was 3.5% of GDP.

The narrowing of the income deficit during 2019 was insufficient to improve the current account balance. Lower dividend payments to foreign direct investment in Chile were behind the narrower income deficit (USD 11.3 billion vs USD 12.8 billion in 2018). However, the balance of goods and services last year recorded a larger deficit (up USD 0.8 billion) as the exports of goods declined 7.1% (+9.3% in 2018), while services fell 4.3% (+0.5% in 2018). Additionally, the USD 1.4 billion transfer surplus was down USD 1.0 billion from 2018 and the smallest since 2016.

Although foreign direct investment into Chile was broadly stable in the final quarter of the year, it was up by around 1.6pp from 2018 to reach 4.3% of GDP. Nevertheless, net FDI for last year sat at 1.3% of GDP (down 1.1pp from 2018), failing to cover the CAD. Meanwhile, foreign portfolio investment in Chile increased 2.2pp from 2018 to reach 4.2% of GDP last year following government debt issuance in the final quarter of the year.

We expect a weaker domestic demand and lower energy prices to lead to a narrowing of external imbalance this year. Nevertheless, lower copper prices and weaker global growth imply the correction pace is likely to be slower than we were previously anticipating (0.9% of GDP).

 

Miguel Ricaurte
Vittorio Peretti

 



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