TOPIC OF THE WEEK: Current account improvement in late 2023 signals less external pressure in 2024
The publication of current account data for the CCA economies for 3Q23 lends support to our view expressed in the previous CCA Weekly, in which we argued that the main deterioration of external positions in the region may be behind us. Improving CAs in 2022 were chiefly driven by copious net monetary inflows from Russia due to the conflict with Ukraine. They offset to a significant degree the widening trade deficits, which in turn were supported by strong regional growth. The normalization of these excess monetary transfers in early 2023 revealed the dominant role of trade balances in determining CA positions as they (trade balances) switched back to their more natural deficit state.
As a result, CAs ex-Azerbaijan snapped back to a deficit of 7.5 percent of GDP in 1Q23 and 4.8 percent of GDP in 2Q23 from the hefty surpluses of 10.0 percent of GDP in 3Q22 and 2.4 percent of GDP in 4Q23. This process has advanced further in 3Q23, with the CCA CA deficit excluding the oil-exporter Azerbaijan improving further to 1.4 percent of GDP. In other words, the transition to the normal deficit external position has now been accomplished as we forecast the regional CA ex-Azerbaijan to move from a surplus of 2.9 percent of GDP in 2022 to a deficit of 4.5 percent of GDP in 2023 and 3.8 percent of GDP in 2024.
The key takeaway is that internal economic dynamics, including our expectations that growth will be somewhat more muted this year, and external conditions, including the return of remittances to pre-2022 levels, will be consistent with a forecast of regional CAs whereby they stabilize this year at more standard deficit levels. At the same time, the switch back to deficits has weighed on FX reserves and resulted in a worrying deterioration of FX reserve import cover, which has now fallen to the lowest in a decade.
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