MexECON Blog

Third Quarter Current Account Deficit Narrows

Today, the MexECON Blog initiates coverage of Mexico's current account balance.  The current account is the broadest measure of a country's international transactions.  Along with data on how any deficit is financed (the financial account), this quarterly data series says a lot about how a country is doing economically.  Imbalances in the current account and financial account have been associated with past financial crises in a range of countries, so analyzing these data series can also help gauge a country's risk profile.

Banco de México recently reported that Mexico's third-quarter current account deficit came in at $1.849 billion, down 49.1% from the same period one year earlier.  The deficit narrowed in part because of a smaller merchandise trade deficit.  The country's third-quarter merchandise trade deficit fell to $2.202 billion, down 22.3% year-over-year, mostly because of fast export growth in recent quarters.  In contrast, Mexico's deficit in services expanded to $3.209 billion, up 15.4% year-over-year.  In spite of rising drug violence and the stronger peso, net tourism income expanded modestly, but that was offset by stronger purchases of foreign freight and insurance services.  Finally, Mexico continued to see a declining deficit in net income (mostly interest and dividends received minus interest and dividends paid).  The income deficit narrowed to $2.035 billion, down 41.0% year-over-year, with the improvement appearing to come from lower interest rates on Mexico's international debt.  Perhaps most important, positive net transfers into Mexico totaled $5.598 billion, enough to offset approximately three-fourths of the combined deficit from the first three subaccounts.  Mexico's net transfers consist mostly of remittances sent from Mexicans working in the United States to their families in Mexico.  Net transfers have been slowly recovering in response to a stabilizing labor market in the United States, and they were up 3.0% from the third quarter of 2009.

Of course, the current account deficit has to be financed, and the data shows that Mexico easily accomplished that task in the third quarter.  The country's third-quarter financial account surplus was down 12.0% year-over-year, but it still totaled a healthy $10.098 billion.  Net bank loans received and other miscellaneous financial income fell, but that was more than offset by investment flows.  Foreign direct investment (foreign investment in Mexican land, buildings, and other productive facilities) doubled from one year earlier, reaching $1.396 billion.  Even more important, foreign portfolio investment (foreign investment in Mexican stocks and bonds) rose 50.2% year-over-year, reaching $8.130 billion.  Because of the strong financial account surplus, Mexico's foreign reserves rose by $8.128 billion in the quarter.

Comment:  The narrowing of Mexico's current account deficit is a positive development, but further narrowing may be hard to come by.  Goods exports to the United States are widely expected to slow in response to weakening U.S. demand, while media stories about drug violence in Mexico may inhibit tourism and related service exports.  Moreover, remittances from Mexicans working in the United States may not rise much further until the U.S. labor market strengthens.  Another important lesson in the third-quarter balance-of-payments report is that net portfolio investment into Mexico has recently been very strong.  This probably reflects the relatively high interest rates available on Mexican bonds, the country's relative fiscal health, and this autumn's inclusion of Mexican bonds into a key global bond index.  In addition, the Mexican stock market has recently been reaching new record highs.  Strong capital inflows probably are one reason why the peso has been strong over the last year and a half.  If capital inflows continue to rise strongly, the peso is likely to retain its upward momentum.

Patrick Fearon, CFA
Vice President, Fund Management

                                       Mexico's Current Account Deficit:
                                                Third Quarter of 2010

                                                          Billion US$
                                               Source:  Banco de México
Current Account 10Q3

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