The current account deficit in 4Q08 amounted to EUR 1.940mn, hence practically unchanged with respect to 4Q07 and broadly matching our expectations. Pressures on the merchandise account eased, as the deficit increased only 1.1% y/y (EUR 2.5bn), broadly in line with the trade balance figures, as exports declined by 5.3% y/y and imports fell 2.1% y/y. The service account performed better than expected, as the surplus increased by 40% y/y (EUR 470mn), supported by stronger inflows (+14.8% y/y) driven by tourist activity. The income account showed a rather strong deterioration, as the deficit increased by a robust 116% y/y (EUR 218mn), driven by weaker inflows (-12.5% y/y) and expected higher outflows (18.9% y/y). Current transfers presented little surprise, remaining practically flat and recording a minor 3.3% surplus increase to EUR 271mn. The FY08 figures were in line with expectations, as the deficit landed a notch below the expected 9.5% of GDP. The outlook for 2009 regarding the current account imbalances remains favorable overall. The merchandise account is set to offer some relief in 2009. Despite the contraction on the export side, falling domestic demand in combination with lower need for export related imports should support trade balance deficit contraction in 2009. The service account remains the greatest risk, as the tourist sector outlook is still quite unclear. While we are expecting a mild decline in the double-digit region, a more negative performance cannot be ruled out. The income account is also expected to widen, given the increased cost of debt refinancing and higher profit repatriation. Overall, we see the C/A comfortably below 8% of GDP, with clear pressures in the case of a stronger narrowing of the C/A deficit. A stronger than expected economic contraction (easing the pressure on the trade balance) and no negative surprise from the service account performance would support C/A deficit narrowing to below 7% of GDP.
On the financing account, FDI inflows (EUR 679mn) recorded a minor decline on the annual level (-6.4% y/y), despite hefty inflow related to MOL’s acquisition of an additional stake in INA. Hence, on the annual level, FDI inflows were 20% lower. Thus, FDI C/A deficit coverage declined from 113% to 66%. Portfolio investments (EUR -615mn) were negative, mainly as a result of asset purchases, while other investments were 22% higher in 4Q (EUR 1,144mn), showing the expected pressures on debt-creating financing. Given the insufficient financing account surplus, pressure on FX reserves has been present, resulting in a EUR 740mn decline. We continue to anticipate risks on the financing side, given the declining FDI inflows and the questionable ability to attract significant debt-creating inflows to cover the C/A gap in 2009. Hence, pressure on FX reserves in 2009 is likely to remain, with stability largely dependent on the external environment and refinancing options - especially those for the corporate sector.
