Current-account adjustment continues apace
A post-devaluation adjustment in trade of goods and services continued to drive the improvement in the current account. The merchandise trade account posted a surplus of US$4.2bn, a turnaround from a deficit of US$1.7bn in the year-earlier period. This outturn was driven primarily by import compression—imports declined by a steep 28% amid extremely weak domestic demand—and to a lesser extent by export growth. Export receipts grew by 7% owing to improved export competitiveness, and also because of a recovery in agricultural and agro-industrial exports following severe drought in 2018. Adding to the goods trade adjustment, the services deficit narrowed by 43%, to US$1.5bn. Here too, the adjustment came more from the import side.
The overall improvement in the current account was limited by a wider primary-income deficit, which rose to US$5.3bn during the second quarter. Repatriation of profits and dividends fell by about 17%, to US$1.6bn, amid weak economic conditions. However, interest payments rose by almost 50%, to US$3.7bn, amid a growing debt-service burden.
Although the narrowing of the current-account deficit is positive, it was accompanied by a sharp 61% decline in the financial-account surplus, to US$3.3bn. Inward foreign direct investment fell by a dramatic 63%, to US$1bn, and is likely to remain subdued. There was also a large divestment of foreign portfolio capital (mostly related to bond sell-offs), amounting to US$4.5bn, compared with US$1.6bn in the year-earlier period. The overall financial account was bolstered by a US$10.8bn disbursement from the IMF as part of a US$57bn stand-by arrangement (SBA) with the government. Nonetheless, this did not prevent a decline in foreign reserves of US$2bn during the quarter.
Another planned disbursement of US$5.4bn for September is likely to be delayed until 2020, as IMF representatives have suggested that they will wait until the next government comes to power (as SBA conditions may be renegotiated). We currently assume that the IMF deal will stay in place and that the disbursement will eventually come through. Nevertheless, as the IMF lending arrangement runs out in 2021 and as capital inflows remain weak, reserves will continue to decline for the foreseeable future.
Impact on the forecast
We are likely to revise our forecasts to show a slightly stronger current-account adjustment in 2019 and 2020, but we will also revise down our forecasts for foreign capital inflows.