Large Current Account Deficits Remain in SA, Colombia Bucking EM Trend
The Institute of International Finance, IIF, says that its Balance of Payments Nowcast framework, which tracks emerging market (EM) external accounts in real time, suggests that current account deficits in EM will be generally moderate, except in South Africa and Colombia.
The Institute said it remains cautious about the EM outlook as it sees the Fed’s dovish shift as potentially destabilising and worry about positioning overhangs.
In the Institute`s Economic Views, lingering sizeable external debt amortization is an additional source of risk in parts of EM that it quantifies.
However, IIF notes that unlike current accounts, external amortization rarely shrinks significantly in the near term.
In countries like Turkey, where amortization is especially large, external risk will persist despite a sharp improvement in the current account.
In South Africa’s case, both the current account deficit and amortization will continue to be high, while reserve buffers are limited.
An additional source of external funding pressure we are watching closely in Turkey and Argentina is resident capital flight, IIF stated.
“Unlike 2017-18, our “live” tracking of EM current accounts and their reaction to commodity prices does not point to egregious current account deficits.
In India, where last year we expressed some concern about external imbalances, we think that import growth will be sluggish in the context of an activity slowdown due to a reduced credit supply from shadow banks.
“In contrast, we are concerned about Colombia’s persistent current account deficits driven largely by structural forces.
“Non-oil exports reacted modestly to a large real depreciation and import compression turned out to be temporary”, IIF revealed.
It added that South Africa’s current account deficit will also remain wide, in part because interest payments on high external debt will offset a benign trade balance.
IIF said external debt amortization projections to its current account Nowcasts to get a full picture of EM gross external financing needs.
Despite generally moderate current account deficits, gross external financing needs remain fairly large in a few countries.
Turkey is the most pronounced example. Despite a sharp current account correction, external risk remains elevated due to very high amortization.
Relative to reserve buffers, gross external financing needs are especially high in Turkey and South Africa.
In other countries, reserves levels are comfortable.
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“In Turkey and Argentina, we are increasingly focused on an additional source of external funding pressure unrelated to debt amortization.
“We project current accounts in both countries to improve drastically due to import compression, but see domestic capital flight as an increasing source of risk, especially in Argentina.
“In both countries, we are tracking domestic deposit dollarization closely as it is a good high-frequency proxy for capital flight.
“Our balance of payment Nowcast paints a fairly benign current account picture across EM.
“South Africa’s and Colombia’s deficits will remain high, but several other countries will see stable or shrinking deficits”, IIF added.
It said however, external debt amortization is not falling much across EM and is large in countries like Turkey and South Africa, relative to reserve buffers.
“This is one of the reasons why we think the EM outlook is mixed”, IIF said.
In the cases of Turkey and Argentina, domestic capital flight could add to pressure from debt amortization in downside scenarios.
Large Current Account Deficits Remain in SA, Colombia Bucking EM Trend
