Current account deficits in Chile and Colombia to remain high -Fitch Ratings

The Fitch Ratings agency said that the current account deficits of Chile and Colombia would remain high in 2022, which would be explained by the continued strong growth of imports, in addition to the increase in profits of companies in the commodities sector, it said in a statement on Tuesday.

The indicator for Chile would end this year with 6.2% of Gross Domestic Product (GDP) compared to the 6.4% projected in 2021. In the case of Colombia, it would be 5.6% of GDP compared to 5.7%, according to the analysis of the team led by Richard Francis.

It is a worsening of the projection, as it was initially expected to be 4.1% in Chile and 4.6% in Colombia due to “higher prices for commodity exports and lower imports”.

The expectation is that domestic demand will remain high in these countries, resulting in higher imports while commodity export prices remain volatile.

Fitch stresses that copper prices fell to pre-war levels in Ukraine, caused by the Russian invasion, and oil costs have “retreated from their peak”, so “profit remittances from private oil and mining companies remain another important factor”.

POLITICAL UNCERTAINTY

The firm asserts that political uncertainties are important, highlighting the new leftist government in Colombia, which is about to take office, and the upcoming referendum to decide on a new constitution in Chile.

It notes that these uncertainties, combined with a more challenging global context, could affect financial accounts through foreign direct investment and portfolio flows. Fitch notes that uncertainties will persist regardless of the outcome of the September 4 referendum in Chile.

“Gabriel Boric’s administration, which took office in March, has so far demonstrated fiscal pragmatism, pledging to raise taxes to address social spending pressures. But its ability to deliver on them remains unclear in the face of a divided Congress.”

Similarly, the bureau says that, in Colombia, the appointment of Finance Minister Jose Antonio Ocampo suggests a pragmatic approach.

Although President-elect Gustavo Petro has toned down his initial rhetoric, his proposal to halt new oil exploration influences investor confidence. It adds, “Details on tax and pension reforms are still unresolved.”

CURRENCY DEPRECIATION

With the Chilean peso (CLP) and Colombian peso (COP) coming under increased pressure in the last month as the dollar strengthens, Fitch says the depreciation should help ease external adjustment over time, even though it may “amplify existing macroeconomic challenges” by increasing inflation.

The agency warns that it also directly affects the debt-to-GDP ratio. “The currency composition of Colombia and Chile deteriorated during the Covid-19 pandemic as they increasingly relied on external debt to finance their large fiscal deficits.”

He notes that Chile’s foreign currency debt share rose to nearly 35% at the end of 2021 from 21% at the end of 2019, while Colombia’s rose to around 40% from approximately 34%.

“Central banks have been proactive, raising rates aggressively and helping to support policy credibility. But reserves have fallen, especially in Chile, from a peak of US$55 billion in October 2021 to US$45 billion in June 2022″.

The Central Bank of Chile, led by Rosanna Costa, opted to intervene in the foreign exchange market on July 14 with up to US$25 billion.

The measure is boosting the Chilean peso. But, according to Fitch, it will weaken external liquidity metrics. On top of this, Chile replaced its US$23.9 billion flexible credit line from the International Monetary Fund with a US$3.5 billion short-term credit line.

The bureau says that Colombia has not intervened so far, but its external liquidity metrics are more robust.

With information from Bloomberg