We expect stronger manufacturing exports to narrow the trade deficit in coming months
Mexico’s rolling 12-month trade deficit widened in 3Q17, as a larger energy deficit offset a growing non-energy surplus. The trade balance posted a USD 1.9 billion deficit in September, surprising median market expectations (-USD 1.3 billion, as per Bloomberg) to the downside. As a result, the rolling 12-month trade deficit widened (to USD 9.9 billion in 3Q17, from USD 9 billion in 2Q17), with a larger energy deficit (USD 17.1 billion in 3Q17, from USD 15.6 billion in 2Q17) wiping out a growing non-energy surplus (USD 7.2 billion in 3Q17, from USD 6.6 billion in 2Q17).
At the margin, however, both the energy balance and the non-energy balance deteriorated.The three-month seasonally-adjusted and annualized deficit swelled to USD 15.4 billion in 3Q17 (from USD 7 billion in 2Q17). Looking at the breakdown, the same measure of the energy balance posted a whopping USD 20.1 billion deficit (USD 16.6 billion in 3Q17), in contrast with the non-energy surplus, at USD 4.6 billion (USD 9.6 billion in 2Q17). Manufacturing exports lost some traction in 3Q17 (4.7% qoq/saar, from 8.1% in 2Q17), while non-oil imports picked-up (11.1% qoq/saar, from 6% in 2Q17). Within non-oil imports, we note that imports of consumer goods (3.5% qoq/saar, 21.4% in the previous quarter) and capital goods (4.7% qoq/saar, 14.8%) moderated, while imports of intermediate goods – closely related to the value chains of ma nufacturing imports – gained strength (13.2% qoq/saar, 2.8%, previously).
We expect the 12-month trade deficit to resume a narrowing trend, reaching USD 7 billion in 2017. In our view, the driver will be stronger growth for manufacturing exports, attributable to a dynamic U.S. economy (the ISM manufacturing index continued climbing in September, reaching the highest level in thirteen years). Moreover, the weakness of investment – exacerbated by the uncertainty associated to the fate of NAFTA and the presidential elections (with the left candidate standing out as the front-runner) – will probably curb imports of capital goods (and thus non-oil imports). A risk to our forecast, however, is the widening of the energy deficit. The main culprit for this trend is the fall of oil output. But we also note that the stoppage of PEMEX’s largest refinery (Salina Cruz in the state of Oaxaca) which closed temporarily (due to a fire ac cident), and then in September because of the earthquakes, pressured oil imports.