Itaú BBA - COLOMBIA – Current account deficit narrows in 1Q20

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COLOMBIA – Current account deficit narrows in 1Q20

Junho 2, 2020

Falling internal demand and a weaker currency will likely lead to a gradual CAD narrowing this year

A shrinking income deficit, as FDI profits falter amid low oil prices and weakened domestic demand, led to a current account deficit narrowing in 1Q20. A USD 2.7 billion current account deficit was recorded in the first quarter of the year, USD 0.8 billion smaller than last year. As a result, the rolling-4Q current account deficit edged down to 4.2% of GDP, from 4.3% last year. At the margin, our own seasonal adjustment shows CAD narrowing more swiftly to 3.5%, from 4.6% in 4Q19. The narrowing of the current account deficit reduces Colombia’s external imbalances and provides further room for the central bank to proceed with monetary policy easing in an effort to mitigate the effects of the coronavirus shock.

The smallest 1Q income deficit since 2016 drove the current account correction. The income deficit of USD 1.9 billion in 1Q20 led to the rolling-4Q deficit narrowing from USD 10.2 billion in 2019, to USD 9.5 billion as of 1Q20. Falling oil prices explain the bulk of the correction as FDI profit from oil and mining operations declined. Meanwhile, a deteriorated energy trade balance explains the slight widening of the trade and services deficit to USD 2.9 billion in 1Q20, from USD 2.7 billion in 1Q19. In the quarter, exports of goods and services shrunk 8.9% yoy (6.6% down in 4Q19), as lower prices and decelerating global demand affected commodity exports. Imports dropped 6.3% yoy (5.0% fall previously), dragged down by capital goods. For the rolling-4Q, the trade deficit of goods and services marginally widened to USD 12.4 billion from USD 12.3 billion in 2019. Meanwhile, the rolling-4Q transfers surplus rose from USD 8.7 billion in 2019 to USD 9.0 billion as of 1Q20. 

Meanwhile, financing of the current account deficit remains healthy. Foreign direct investment into Colombia picked up USD 0.2 billon from 1Q19 to reach USD 3.6 billion, fully funding the current account deficit. The bulk of the investment in the quarter (30.7%) went to oil and mining, while the electricity sector received 18.6% of total FDI. The rolling-4Q balance of direct investment into Colombia came in at USD 14.8 billion (4.8% of GDP, up 0.3pp from 2019). Net direct investment moderated USD 0.2 billion to USD 11.1 billion in the rolling year, covering 86% of the current account deficit. Meanwhile, direct portfolio investment posted an outflow of USD 0.9 billion for the rolling year, down from the USD 0.2 billion inflow recorded last year.

Low oil prices mean Colombia’s external imbalances are likely to persist. However, falling internal demand and a weaker currency will likely lead to a gradual CAD narrowing to 3.3% of GDP this year (1.0pp down from 2019). 

Miguel Ricaurte
Carolina Monzón

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