Fynsa
Once again, following the publication of third-quarter data, the current account deficit has caused concern among experts. This time, contrary to expectations, it reached 9.9% of GDP, the highest level in recent years. However, in addition to concerns about the size of the deficit, we noticed a high degree of uncertainty about what this deficit meant. The purpose of this article is to explain a little bit about what it is.
The first thing is to understand what we are talking about when we refer to a country's current account. No, we are not referring to the account held by the finance minister, from which he draws checks to pay for fiscal spending. That is not what we mean. Although there are several ways to define it, in macroeconomics we refer to the current account as the item that shows the difference between national savings and total investment. Since investment requires savings in order to be made, the difference that may arise is basically covered by external savings. Furthermore, by reformulating the equation, we can conclude that the current account deficit is basically the difference between national production and domestic demand.
The fact that our economy is generating a significant deficit means that the country is unable to produce what consumers and businesses consume and invest, so we have to ask the world to help us with the difference.
With this in mind, let's look at why this deficit has increased so much. It is important to mention that the biggest factor has been the decline in national savings. The measures that the government had to take to address the harmful effects of the pandemic on family incomes, combined with withdrawals from pension funds, significantly increased consumption by both families and the government. In short, we are now consuming what we had planned to consume in the future. In addition, the value of the products we export has not increased to the same extent as those we import (known as terms of trade), compounded by other effects of the post-pandemic recovery (such as transportation costs).
However, experts are concerned about how permanent this deficit may become. Simply put, if we consistently spend more than we generate, at some point we will have to pay the bill, and it will not be pleasant. In this regard, there are certain elements that allow us to project that this deficit should normalize, since most of the factors that caused it were temporary and are now receding. First, the economy is in the midst of a slowdown, which is reflected in the contraction of consumption and investment. Second, the exchange rate has adjusted and, through depreciation, has made imported goods relatively more expensive and encouraged local producers to produce more to sell in foreign markets. Finally, factors such as high transportation costs have moderated significantly, so much so that certain routes have already returned to pre-pandemic levels.
All in all, the deficit should moderate over the coming quarters, as the economy and its institutions have made the necessary adjustments. This should lead to a decline to more sustainable levels, which are projected to be around 4% of GDP by the end of next year.
