Wednesday, April 3, 2013

3QFY13 CAD/GDP spikes to record high of 6.7% External debt rises; See CAD/GDP at 4.8% in FY13, 3.9% in FY14

The Balance of Payments (BoP) data release for 3QFY13 confirmed the significant deterioration in current account deficit (CAD) - a record high both in absolute value (USD33b) as well as a percentage of GDP (6.7%). This is caused by declining exports coupled with sharp increase in imports and static invisibles surplus.

- However, buoyant capital flows especially FII investment and debt flows matched the higher CAD, minimizing recourse to forex reserves or large adjustment in INR.

- Apr-Dec 2012 CAD stood at 5.4%. Again, significantly higher capital flows permitted RBI to stabilize the INR without a significant dip in forex reserves.

- Net international investment position (net external liability of the country) continued to deteriorate and stood at USD282b. The share of debt in overall liabilities increased and now stands at 52%.

- External debt too at USD376b witnessed steady increase and inched up to 20.6% of GDP. ECB flows continued apace in long-term debt while trade credit increased sharply within short-term credit.

- Both CAD/GDP and external debt to GDP have taken a knock due to moderate decline in nominal GDP in USD terms on account of 14% depreciation in INR.

- We believe CAD/GDP is on course to be contained at our estimate of 4.8% of GDP in FY13. The recent trade data, export promotion measures, free trade agreements and relatively stable INR suggest CAD/GDP should improve in FY14 to 3.9%.

BoP stress reaches its peak in 3QFY13