Trade Deficit Widens in April: Exports Decelerate, Gold Imports Rise - Morgan Stanley

Export growth decelerated on YoY basis in April:
According to trade data released by the Ministry of
Commerce, exports (in dollar terms) decelerated to
1.6% YoY in April vs. 7% YoY in March 2013. On a
seasonally adjusted basis, exports declined 2.8%
MoM in Ap-13 (same as last month). Even after the
decline in April on a seasonally adjusted cumulative
basis, exports have increased 15.5% from the trough
in Jul-12. The deceleration in export growth in YoY
terms is also consistent with the weaker export
growth reported earlier by Korea and Taiwan,
reflecting the soft patch in global growth that is
expected to prevail through 2Q. Our developed
markets (DM) economics team is expecting a gradual
recovery in domestic demand in the US and Europe
from 2H13; we believe that this will help improve
export growth from 3Q onward.
Import growth accelerated in April: On a YoY
basis, imports (in dollar terms) rose 10.9% in April vs.
a decline of 2.9% YoY the previous month. On a
seasonally adjusted basis, imports rose 1.7% MoM in
Apr-13 vs. a decline of 3.8% MoM in March. The rise
in imports in April was driven primarily by gold imports.
Gold imports rose 138% YoY to US$7.5bn in April vs.
a decline of 31% in March (US$ 3.1bn). Indeed,
imports ex gold declined 0.8% YoY in April vs. growth
of 1.3% in March. As we have been highlighting, we
believe that lower gold prices will not necessarily
translate to lower gold imports / trade deficit. The fall
in gold prices would have probably led to some
front-loading of gold imports, and this trend could
sustain in May as well, keeping gold imports high for
another month. However, we expect gold imports to
moderate from Jun-13. We believe that for a
systematic reduction in gold imports, moderation in
inflation expectations is key

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We look for inflation expectations, which are better
represented by CPI inflation, to moderate. We expect CPI,
which decelerated to 9.4% from the peak of 10.9% in February,
to moderate further to 6.5% by Mar-14.
Oil import rose 3.9% YoY to US$ 14.1bn in April vs. a decline
of 16.6% in March. We believe that the adjustment in
administered fuel prices leading to decelerating oil
consumption since Sep-12, coupled with softening of crude oil
prices, should help keep oil imports weak.
Non-oil imports growth accelerated to 14.9% in April vs. 5.4%
in Mar-13. However, non-oil non-gold imports declined 3.7%
in April vs. growth of 14.5% in March.
Trade deficit widened in April, trade deficit ex gold
declined in YoY terms: The trade deficit for April widened to
US$ 17.8bn (11.4% of GDP annualized) vs. US$ 10.3bn
(6.7% of GDP annualized) in March. However, trade deficit ex
gold declined by 6% YoY in April.
On a three-month trailing basis, the trade deficit narrowed to
9.2% of GDP, annualized in April, vs. 9.8% of GDP in March.
Current account deficit to narrow: We believe that the
current account deficit will narrow in F2014 vs. F2013. We
look for the F2014 current account deficit to narrow to 4% of
GDP vs. an all-time high of 5.1% of GDP in F2013.
We expect the following factors to help to narrow the deficit
over the next 12 months: 1) gradual improvement in external
demand from 2H13 to improve export growth; 2) recent
government efforts to cut fuel subsidy burden to help
moderate oil imports; 3) softening commodity prices; and 4)
moderation in CPI inflation, which will be critical to reduce gold
imports.