Argentina's currentaccount deficit narrows sharply in Q1

Argentina's currentaccount deficit narrows sharply in Q1

According to the national statistics institute (INDEC), the current-account deficit narrowed by 88% year on year, to US$444m (0.1% of full-year GDP), in the first quarter of 2020.

The trade surplus widened by almost half in year-on-year terms, to US$3.8bn in the first quarter. Although goods exports declined by 7% year on year, goods imports contracted by a much sharper 19%. To its
advantage, Argentina's soft commodity exports have been somewhat insulated from the ongoing global recession. As China and other South-east Asian economies emerge more rapidly from the coronavirus
(Covid-19) crisis, we expect demand for Argentina's main primary exports to strengthen over the course of the year. By contrast, imports will decline further in the second quarter as a result of strict quarantine measures, with only a weak recovery in domestic demand materialising in the second half of the year.

The services deficit also narrowed by about half, to US$862m. Given that the travel deficit usually accounts for more than half of the total, we expect the services deficit in full-year 2020 to be much smaller than that of
recent years. The primary income deficit also narrowed, by 20% year on year, to US$3.7bn. Although profit remittances by corporations dropped sharply, interest payments by both the private and public sector
remained high. In the coming quarters, however, interest payments by the government to private external creditors will come to a halt. Even assuming a successful restructuring of debt, the government is unlikely to
resume coupon payments before 2021.

Financing the modest current-account deficit nonetheless proved to be challenging. Net foreign direct investment declined by more than half, to US$901m. Net portfolio investment came in at US$842m, compared with an outflow of US$362m in the year-earlier period. However, this result largely reflects the participation of foreign investors in local-law government debt swaps, as opposed to a broader swing in investor sentiment. Meanwhile, capital flight remained high in the context of extremely high economic uncertainty. The category of "other investment" (which includes currency, deposits and commercial advances) saw net outflows of US$2.1bn. As a result, foreign reserves continued on a downward trend, falling by US$1.1bn during the first quarter.

Impact on the forecast
The data were broadly in line with our expectations. An improvement in the current account will only partially ease balance-of-payments pressures in a context where capital flight is high

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