3QFY12 BoP shows first major deficit post Lehman crisis :: Motilal Oswal

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


3QFY12 BoP shows first major deficit post Lehman crisis
FY12 CAD/GDP to touch nearly 4%; INR may remain weak
 RBI's data release on balance of payments indicate significant deterioration
in India's external sector situation.
 3QFY12 trade volume degrew marginally, while trade deficit expanded
to the highest ever in any quarter.
 Near static invisible surplus translated that to highest ever current account
deficit (CAD). The keenly watched CAD/GDP ratio reached its second
highest level ever to -4.4%, reflecting rapid deterioration from half of
that level during 3QFY11.
 Near halving of capital flow resulted in an overall BoP deficit of USD11b
which had to be met by drawdown on forex reserves.
 While the situation possibly improved somewhat in 4QFY12, the YTD (Apr-Dec FY12) picture suggests FY12 would possibly
end with highest ever trade and current account deficit of ~10% and ~4%, respectively.
 The scenario is unlikely to improve much in FY13 due to multiple headwinds including weaknesses in west, high oil prices,
etc.
 Rising dependence on capital flows to bridge CAD coupled with uncertain domestic investment climate point to INR
remaining weak in the near term.

Trade gap and reduced capital inflow causes first major BoP deficit in 12
quarters
 Export growth slows down to 8%: Merchandise (goods) trade scaled down to
USD190b in 3QFY12 from the peak of USD196b in 2Q. While exports growth slowed
down to a mere 7.9% (v/s a robust 47.2% in 2Q), import growth was resilient at
22.2% (v/s 35.4% in 2Q).
 Trade deficit at USD48b, highest ever: As a result, trade deficit widened to its
highest ever quarterly level of USD48b, i.e. USD4b higher than the previous highest
level of 2QFY12, and USD9b higher than the Lehman quarter high in 2QFY09. Also,
trade deficit as percentage of GDP at 10.8% inched closer to the Lehman quarter
high of 13.0% and 11.7% of 3QFY09. Excluding these two instances, trade deficit as
% of GDP is highest ever since 1QFY00, the earliest quarter for which data is
available.
 CAD at USD20b, again highest ever: Net invisible surplus was placed at USD28b.
This is marginally higher than previous peak of USD27b achieved as far back as
2QFY09 (i.e. Lehman quarter). Since then invisibles haven’t really grown. Thus,
expanded trade deficit directly resulted into higher current account deficit (CAD)
which at USD20b was the highest level ever. CAD has deteriorated successively
during the first three quarters of FY12 – from USD16b in 1Q to USD18b in 2Q and
USD20b in 3Q. 3QFY12 CAD/GDP ratio jumped to the second highest level ever of
4.4% (a notch lower than the all-time high of 4.5% in 2QFY11). The ratio has nearly
doubled vis-à-vis 2.2% in 3QFY11, and moved up by 1% of GDP from 1QFY12 level
of 3.5% of GDP.

USD11b BoP deficit: As a further downside, 3QFY12 net capital flow nearly halved
to USD8b v/s USD17b in 2Q. This was inadequate to bridge CAD, resulting in anoverall BoP deficit of USD11b for the quarter. This was the first significant overall
BoP deficit since USD17b of 3QFY09 and USD5b in 2QFY09. Overall BoP was
marginally deficit even a quarter back.
 YTD CAD at 4% of GDP: YTD, trade and current account deficit are at 9.9% and 4.0%
of GDP, respectively, their highest level ever. While the crisis year of FY09 indeed
saw trade deficit closer to this level of 9.8%, CAD was far more manageable at only
2.3% due to significant invisible surplus. The previous highest CAD/GDP ratio was
3.0% in the crisis year of FY91


Invisibles and capital accounts also show major weaknesses
 Invisibles in static mode: Among invisibles, trade in services, factor income and
remittances are in a static mode for fairly long period of time. Only software
services and private transfers displayed moderate growth largely nullified by
increased factor payments on foreign investments in India.


 FDI up, portfolio investments down: Within the capital account, FDI to India revived
while outbound FDI remained low. This improved net FDI flows to India. However,
portfolio flows came to a trickle while debt flows barring NRI deposits floundered
too.
 USD13b reserves drawdown: This necessitated a drawdown of USD13b during
3QFY12 from forex reserves. However, overall BoP surplus in 1HFY12 limited the
Apr-Dec FY12 forex drawdown to USD7b. In contrast, there was a accretion of
USD11b in the forex kitty during the corresponding period of the previous year.
 Net investment position steady: The secular decline in net investment position (a
comprehensive measure of foreigners claims over India vis-à-vis India’s claims on
abroad) has somewhat been steadied in the last two quarters. This primarily
reflects the slowdown in foreign capital inflow. Notably, India’s investment largely
comprised official reserves and outbound FDIs, and Indians invest less in foreign
financial instruments.
 Share of debt liabilities on the rise: The composition of liabilities were more
even between FDI, FII and debt, with debt comprising the biggest chunk. However,
the equity investments have been treated at face value and their outstanding
value could be much higher having implications for greater servicing cost in future.
Of late, foreigners have slowed down both FDI and FII investments while Indians
continue to venture abroad, may be in part a reflection of uncertain domestic
investment climate. This is also reflected in the higher share of debt flows in
3QFY12.


External debt at USD335b, 19% of GDP
 External debt at 19% of GDP: Reflecting the higher inflow of debt in BoP, India’s
external debt too increased. However, it remained steady as a percentage of GDP
at 19%.
 Share of short-term debt creeping up: The official debt comprised nearly a quarter
of total outstanding debt with the rest comprising private debt. However, while
official debt mostly comprised long-term debt, the private sector debt had a higher
proportion of short-term debt. Overall short-term debt as a percent of total debt
however, remained limited to 23.3% during 3QFY12, though the ratio increased
from 19.3% in FY09. Past trend suggests that during periods of crisis, the longer
term debt in the nature of external commercial borrowing may face sudden stop
while NRI deposits may face withdrawal pressure.


External sector outlook deteriorates further, see CAD/GDP at 4.0% for FY12
and FY13
 Jan-Feb 2012 trade deficit high, but reserves stable: The recent trade data reflect
continued high trade deficit of USD15b in Jan-12 and Feb-12. However, there has
been some revival of foreign investment flows including FDI, FII and NRI deposits
in first two months of CY12. 4QFY12 also saw a marginal decline of USD1b in forex
reserves. Thus, while trade deficit remained high, overall balance of payments
was perhaps evenly poised during 4QFY12.
 Widening CAD reflects multiple headwinds: These include (i) lower growth
prospect in the west, (ii) high and still uncertain oil prices, (iii) disagreement
regarding tariff regime and trade disputes, (iv) higher servicing cost of foreign

investment in India, and (v) push to import-led industrial revival proposed by the
Union Budget. Countering this would be higher tariff on gold imports that stood
staggering at nearly USD55b in FY12 or two-thirds of India’s CAD.
 Expect FY12 and FY13 CAD/GDP of 4%: We have revised CAD/GDP for FY12 to 3.9%
of GDP from 3.5% estimated earlier. We also place our FY13 CAD/GDP estimate at
4%.
 Risks to foreign capital inflows: This leaves Indian external position vulnerable to
volatility in capital flows. While uncertain investment climate weighs on foreign
capital flows, debt flows too may slow down if India faces any rating action on
account of challenging fiscal situation. NRI deposits too may slow if the scope of
interest rate arbitrage reduces on RBI rate cuts.
 Expect INR to remain weak: Rising dependence on capital flows to bridge CAD
coupled with uncertain domestic investment climate point to INR remaining weak
in the near term.