Fitch: EM Current Account Deficits on the Rise Again

July 17, 2017/Fitch Ratings

Fitch Ratings says in a new report that emerging markets (EMs) last year ran their first aggregate annual current account deficit (CAD) for 17 years – and their largest since 1998 (both in US dollars and as a percentage of GDP). The deterioration has been driven mainly by a drop in commodity prices, a narrowing in China’s surplus, and the effect of abundant global liquidity conditions. We forecast the aggregate EM CAD will widen further in 2017 to its highest level in US dollar terms since at least 1990.

The EM aggregate CAD in 2016 was moderate at USD38 billion (0.1% of GDP), although this represents a marked deterioration from a surplus of USD216 billion in 2013 at the time of the “taper tantrum” amid market concerns about EM external positions and monetary tightening by the US Federal Reserve.

However, within the EM total, current accounts have become more balanced since 2013 as the deterioration mainly reflects Gulf Cooperation Council (GCC) countries, which were previously running large surpluses, while many countries then running large CADs, such as all of the so-called “fragile five” (Brazil, India, Indonesia, South Africa and Turkey), have narrowed their deficits. The median CAD for Fitch-rated EMs rose to 3.3% of GDP in 2016 from 2.5% in 2013. We forecast 20 EM to run CADs of over 5% of GDP this year, with half of them in double-digits.

Fitch forecasts the aggregate EM CAD to widen to USD59 billion in 2017, USD106 billion in 2018 and USD143 billion in 2019. Deterioration is accounted for by a narrowing in China’s surplus and a moderate widening in CADs in Brazil, India and Turkey, offsetting an improvement in the Middle East and Africa on firmer oil prices. We expect the median EM CAD to improve slightly to 2.7% of GDP this year and 2.5% by 2019. Only a fifth of Fitch-rated EM will run a current account surplus (CAS) in 2017, down from a third in 2013 and nearly half in 2006.

Larger, high-profile EMs are not facing major strains financing CADs. Foreign exchange reserves have broadly stabilised at USD6.65 trillion at end-2016 (down from USD7.83 trillion at end-2013), capital inflows are positive (excluding China), and borrowing costs are low. Nevertheless, several countries, particularly commodity producers in the Middle East and Africa, are facing declining reserves and significant financing strains.

Moreover, EMs with weak fundamentals such as large external financing requirements, high levels of foreign-currency denominated debt and weak policy frameworks remain exposed to an adverse shift in global financial conditions such as a faster-than-expected rise in US interest rates and balance sheet run-off, tapering of quantitative easing by the ECB, appreciation of the US dollar, a shift towards greater protectionism, or sustained low commodity prices.

In contrast, Fitch estimates developed markets’ (DMs) aggregate CAS rose to USD338 billion last year, the highest since at least 1990, and versus a deficit of USD39 billion in 2011. The improvement has been driven mainly by retrenchment in the eurozone periphery as well as developed Asia, helped by the windfall from lower commodity prices. We forecast the DM CAS will narrow in 2017 and 2018, mainly reflecting a widening in the US CAD, despite President Trump’s “America First” policy.

The analysis is based on 110 Fitch-rated sovereigns, and uses IMF classification of EMs and DMs.

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