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Preview of 4Q2010 balance of payments—
headlines to look better, but watch the fine print
The Reserve Bank of India will release balance of payments (BOP) data for 4Q2010 on March 31.
We expect the current account deficit to be lower at 2.2% of GDP (US$10.3 billion), compared to
a historic high of 4.1% of GDP (US$15.8 billion) in 3Q2010. Consensus expectations by
Bloomberg are at 2% of GDP (US$9.2 billion).
The BOP data for October-December 2010 will be keenly watched due to the record high previous
print. The potentially much lower print compared to our previous expectations (see India’s current
account problem, Asia Economics Flash, November 16, 2010) may provide some reassurance that
the external sector may not be as vulnerable as previously thought. Although we think this is a
positive development, we would caution against interpreting from this quarter’s print that the
current account deficit has been permanently reduced to a lower level or that external sector
vulnerabilities are no longer relevant.
We expect the positive development in the current account balance for 4Q2010 to be mainly due
to a significant improvement in merchandise trade. Goods exports have been surprisingly robust,
growing at 73% qoq; s.a. annualized as compared to decline of 9% qoq; s.a. annualized in the
3Q2010, based on monthly trade data. Meanwhile, import growth also increased but at a lower
rate at 17% qoq annualized in 4Q2010.
Although the product-wise breakdown of exports is available only with a lag, our micro-level
assessment of the fast growing gems and jewellery and textiles sectors seem to suggest that export
growth in recent months have primarily been driven by an increase in prices rather than volumes.
Hence, we still question the sustainability of the current surge in exports. There is also a key
question as to why the higher oil prices have not yet been reflected in import data, which should
have shown a much higher growth. There may be future revisions or the import data may capture
this with a lag. In either event, this could worsen the current account deficit.
We would look out for three other important pieces of information from the data release. First,
non-software services trade, which has gone into negative since 4Q2008. If this trend continues,
then the current account deficits may continue to be impacted negatively in 2011. Second, the
magnitude of inward remittances. In 3Q2010, these were at US$9 billion. In the October-
December quarter, remittances would have likely peaked, as tensions in the Middle East may lead
to lower remittances, at least in 1H2011. Third, the composition of capital inflows—especially
FDI, but also external commercial borrowings. This will tell us whether the funding profile of the
current account deficit is improving in favor of longer-term flows, or is it still being dominated by
short-term flows. Note that our concern with the current account deficit was not only with the
levels, but how is it being financed. Unless the financing changes in a material way, the risks to
the BOP may remain.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Preview of 4Q2010 balance of payments—
headlines to look better, but watch the fine print
The Reserve Bank of India will release balance of payments (BOP) data for 4Q2010 on March 31.
We expect the current account deficit to be lower at 2.2% of GDP (US$10.3 billion), compared to
a historic high of 4.1% of GDP (US$15.8 billion) in 3Q2010. Consensus expectations by
Bloomberg are at 2% of GDP (US$9.2 billion).
The BOP data for October-December 2010 will be keenly watched due to the record high previous
print. The potentially much lower print compared to our previous expectations (see India’s current
account problem, Asia Economics Flash, November 16, 2010) may provide some reassurance that
the external sector may not be as vulnerable as previously thought. Although we think this is a
positive development, we would caution against interpreting from this quarter’s print that the
current account deficit has been permanently reduced to a lower level or that external sector
vulnerabilities are no longer relevant.
We expect the positive development in the current account balance for 4Q2010 to be mainly due
to a significant improvement in merchandise trade. Goods exports have been surprisingly robust,
growing at 73% qoq; s.a. annualized as compared to decline of 9% qoq; s.a. annualized in the
3Q2010, based on monthly trade data. Meanwhile, import growth also increased but at a lower
rate at 17% qoq annualized in 4Q2010.
Although the product-wise breakdown of exports is available only with a lag, our micro-level
assessment of the fast growing gems and jewellery and textiles sectors seem to suggest that export
growth in recent months have primarily been driven by an increase in prices rather than volumes.
Hence, we still question the sustainability of the current surge in exports. There is also a key
question as to why the higher oil prices have not yet been reflected in import data, which should
have shown a much higher growth. There may be future revisions or the import data may capture
this with a lag. In either event, this could worsen the current account deficit.
We would look out for three other important pieces of information from the data release. First,
non-software services trade, which has gone into negative since 4Q2008. If this trend continues,
then the current account deficits may continue to be impacted negatively in 2011. Second, the
magnitude of inward remittances. In 3Q2010, these were at US$9 billion. In the October-
December quarter, remittances would have likely peaked, as tensions in the Middle East may lead
to lower remittances, at least in 1H2011. Third, the composition of capital inflows—especially
FDI, but also external commercial borrowings. This will tell us whether the funding profile of the
current account deficit is improving in favor of longer-term flows, or is it still being dominated by
short-term flows. Note that our concern with the current account deficit was not only with the
levels, but how is it being financed. Unless the financing changes in a material way, the risks to
the BOP may remain.
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