Current account surplus/deficit

Updated August 2018

A country’s current account is an overall measure of whether that country is a net lender to the rest of the world (the account is in deficit), or a net borrower (the account is in surplus).

The current account consists of three elements. First, there’s the trade balance: the total value of exports (of both goods and services) minus imports. Second is net transfers, such as remittances sent home by migrant workers, or international development spending. The third is net investment income – the difference between the money the country earns on overseas investments and what it pays out to investors overseas.

To make up any difference, the country will have to sell assets; encourage foreign investment; or borrow more. In theory, if a country is running an expanding deficit, demand for its currency will fall (and thus so will its value), making imports more expensive and exports cheaper, which should improve the trade balance over time and thus narrow or close the deficit.

Deficits really only become a problem when the rest of the world loses faith in the ability of a country to fund the balance. This can lead to much-needed foreign investment fleeing the country, which in turn worsens the deficit and causes the currency to weaken. This in turn pushes up inflation – weakening the economy – and makes it harder to repay any foreign-currency- denominated debt.

Both developed and emerging- market nations regularly run current-account deficits (the UK has run a deficit for many decades now). But emerging markets – partly due to their more fragile institutions, and partly due to the fact that more “hot” (speculative) money tends to flow their way in the good times – tend to be far more vulnerable to rapid losses of confidence.