Surplus of goods and services balance does not avert current account deficit at year-end

  • Kristofers Pone
    Kristofers Pone
    Economist, Latvijas Banka
Current account deficit totalled 1.0% of GDP in 2018
Photo by: Shutterstock

Regardless of the weakening external demand and a decline in exports of agricultural products, the goods and services balance recorded a minimum surplus in the fourth quarter of 2018. This was largely supported by a sustainable services trade balance and slower growing imports of goods.

However, investors' profits from their foreign direct investment contributed to the deficit of the primary income account. This led to the overall current account balance deficit of 75.5 million euro or 0.9% of gross domestic product (GDP) in the fourth quarter.

Current account deficit totalled 283 million euro or 1.0% of GDP in 2018.

The deficit of goods balance (–7.1% of GDP) seen in the fourth quarter was lower than the annual average. However, this was driven by less steep drop in the growth rate of exports than that of imports. The trends of exports of goods already observed in the past continued in the fourth quarter. Exports of wood were a primary driver behind growth. The above exports continued to expand evenly and strongly throughout the year, but a decline in the export value of agricultural products which increased notably in the fourth quarter contributed negatively to growth. It is exports of machinery and electrical equipment as well as products of the chemical industry that should be distinguished among other commodity groups. Following a weaker performance in the third quarter, exports of machinery and electrical equipment recorded significant annual growth of 11.8% in the last three months of 2018. The increase in the value of exports of products of the chemical industry reached 13.8% at year-end. In the fourth quarter, the trends that had emerged in the course of the year driven by both sustainable domestic consumption and investment activity were observed also in imports of goods. The growth rate of imports value fell marginally since the previous quarter due to the large quantities of mineral product imports in the preceding period affected also by rising global oil prices. Other large commodity groups providing positive contribution, i.e. transport vehicles, base metals, wood, etc., remained unchanged.

The balance of services recorded a sustainable surplus of 7.3% in the fourth quarter, leading to a surplus of goods and services balance. The key factors that characterised services exports in the fourth quarter were a fall in exports of financial services and a decline in the growth rate of transportation services. Expansion of transportation services exports was better than expected in the previous quarters on account of protracted repairs taking place in Russian ports located on the Baltic Sea as well as due to continuous rapid growth of air transportation services. However, the fourth quarter saw the value of air transportation services decrease and the pace of the provision of sea and rail transportation services slow down; therefore, the short-term upswing might come to an end in the coming quarters. Services imports are also characterised by the past trends, i.e. the major part of the increase in growth is attributable to imports of information and communication technologies and business services. However, exports of the above services exceed their imports one-and-a-half times. Although the increase in the growth rate of services imports was sharper than that in exports (9.0% and 4.5% respectively) in the fourth quarter, the value of exports in absolute terms was almost twice the value of services imports, leading to a surplus of the balance of services.

In the fourth quarter, the primary and secondary income accounts played a crucial role in the current account balance. Although the secondary income account recorded a surplus resulting from inflows of the European Union funds and a positive balance of personal transfers, profits of foreign investors' companies which were partially paid out in dividends and partially reinvested in businesses contributed to a significantly higher deficit in the primary income account.

The amount of both assets and liabilities contracted in the financial account of the balance of payments in the fourth quarter; in net terms this meant inflows of funding amounting to 398 million euro. The decline in liabilities witnessed in the fourth quarter was driven by a fall in deposits by foreign customers. Thus, the decreasing trend in deposits by foreign customers of credit institutions also continued, and consequently credit institutions' assets necessary for deposit withdrawals also shrank accordingly. A fall in short-term government deposits and a rise in long-term debt securities of monetary financial institutions should be mentioned among other important asset flows. Foreign direct investment reached 380 million euro or 4.8% of GDP in net terms in the fourth quarter. The largest inflows were registered from Russia, Luxembourg and Sweden in sectors like financial activities, real estate activities, professional services and trade.

APA: Pone, K. (2022, 14. aug.). Surplus of goods and services balance does not avert current account deficit at year-end. Taken from https://www.macroeconomics.lv/node/4428
MLA: Pone, Kristofers. "Surplus of goods and services balance does not avert current account deficit at year-end" www.macroeconomics.lv. Tīmeklis. 14.08.2022. <https://www.macroeconomics.lv/node/4428>.

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