Fynsa
Once again, following the release of third-quarter data, the current account deficit has raised concerns 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’ve noticed a great deal of uncertainty about what this deficit actually means. The purpose of this post is to explain a little bit about what it’s all about.
First, we need to understand what we mean when we refer to a country’s current account. No, we’re not referring to the account held by the finance minister from which he draws the checks used to pay for government spending. That’s not what we’re talking about. While 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 to take place, any resulting difference is essentially covered by foreign savings. Moreover, by reformulating the equation, we can conclude that the current account deficit is essentially the difference between national output and domestic demand.
The fact that our economy is, therefore, running a significant deficit means that the country is unable to produce what consumers and businesses consume and invest, so we have to ask the rest of the world to help us cover the shortfall.
With this in mind, let’s examine why this deficit has grown so much. It is worth noting that the main factor has been the decline in national savings. The measures the government had to take to address the harmful effects the pandemic had on household incomes, combined with withdrawals from pension funds, significantly increased consumption by both households and the government. In short, we are now consuming what we had planned to consume in the future. Additionally, the value of the goods we export has not increased to the same extent as those we import (known as terms of trade), compounded by other effects stemming from the post-pandemic recovery (such as transportation costs).
However, experts are concerned about how long-term this deficit might become. Simply put, if we consistently spend more than we earn, at some point we’ll have to foot the bill, and it won’t be pleasant. In this regard, there are certain factors that allow us to project that this deficit should gradually normalize, since most of the factors that caused it were temporary and are now subsiding. First, the economy is in the midst of a slowdown, as reflected in the contraction of consumption and investment. Second, the exchange rate has adjusted; through depreciation, it has made imported goods relatively more expensive and has encouraged local producers to increase output for sale 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 institutional framework 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.
