The deterioration of the C/A balance was mostly expected due to the fast widening of the trade deficit by c.30% YoY in 2017. Behind the trade balance shortfall are: uncompetitive food industry, higher oil prices and a lower surplus in the auto sector likely due to the elimination of a car emission tax at the start of the year. The latter, which led to a surge in second-hand car imports, is likely to be reintroduced in some form this year. Second-hand car registration jumped by 75.2% YoY in 2017.
C/A covered by FDIs in 2017
from 129% in 2016
The surplus on the services side increased by a meagre 3.1% YoY in 2017, not keeping up with the widening trade gap for goods. Primary income was another important factor for the C/A deterioration widening by 12.7% to EUR-5bn. FDIs ticked up only by 1.4% YoY and are covering only c.71% of the C/A shortfall vs 129% in 2016. The capital account (C/A) inflows dropped sharply by c.48% to EUR2.2bn. The overall external position (C/A+KA+FDI) barely remained in positive territory at only EUR0.3bn.
External position (% of GDP)
We are comfortable with our projection for C/A widening peaking-out and expect the C/A at -2.8% of GDP in 2018 as we expect a slowdown in consumption. It is likely to be fully funded by FDIs. Our forecast does not include eventual new tranches for the defence system. Hence, it could come 0.3-0.4ppt of GDP wider, but still post a modest improvement from a year ago.