Trade Deficit Remains Within Manageable Levels , Morgan Stanley Research

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Trade Deficit Remains Within 
Manageable Levels
Exports register strong growth: According to
provisional trade data released by the Ministry of
Commerce, seasonally adjusted exports were up 14.3%
MoM in February 2011 after declining 2.9% MoM in the
previous month. On a YoY basis, export growth (in dollar
terms) accelerated to 49.8%YoY in February compared
with 32.4% YoY in January 2011. The strong bounce in
exports reflects the recovery in G3 over the past six
months. Other countries in the region have seen a
similar rise in exports in the recent period.
Import growth also accelerated: According to
provisional data, seasonally adjusted imports rose
19.8% MoM in February 2011. On a YoY basis, imports
(in dollar terms) were up 21.2% YoY in February 2011
(provisional) compared with 13.1% YoY in the previous
month. Both oil and non-oil import growth (in dollar
terms) accelerated to 12.5% YoY and 31.3%YoY in
February (vs. -7.8% YoY and 23.8% YoY in January
2011).
December's trade deficit remains within
manageable levels: The trade deficit widened to
US$8.1 billion (5.7% of GDP annualized) in February
from US$8 billion in January 2011. The trade deficit has
narrowed steadily from a peak of US$11.8 billion deficit
(10.5% of GDP annualized) in December 2009. On a
3-month trailing basis, the deficit narrowed to 4.4% of
GDP, annualized in February, from 4.7% of GDP in
January 2011 and a high of 9.8% of GDP in December
2009.
Current account deficit should have narrowed in
QE-December 2010: We have highlighted for some
time that the trade and current account deficits would
narrow. We maintain our view that the current account
deficit peaked during the quarter ended September
2010 at 4.1% of GDP annualized. Based on the Oct-Dec
2010 trade data, we believe that the current account

deficit will narrow to about 2.5% of GDP annualized in the
quarter ended Dec 2010. In this context, our key concern is a
potential further rise in crude prices (Dubai light).
On macro stability risks, global commodity prices are
what concern us more: We believe that global commodity
prices are key to the inflation and current account deficit
outlook. If global commodity prices moderate quickly with
better supply response, it will help reduce inflation pressure
faster than expected and keep the current account deficit within
manageable levels. At the same time, any major further spike
in commodity prices will make inflation and current account
deficit management even more difficult, hurting growth, in our
view.