The Bell about External Account: Jul‐11 trade data is discomforting – Elixir Securities Limited

Karachi: Jul‐11 current account turns red on higher trade deficit

According to Elixir Securities, Jul‐11 current account posted a deficit of USD75mn (‐0.03% of GDP) against a surplus of USD396mn (+0.19% of GDP) in Jun‐11. Deterioration in current account was driven by USD225mn MoM increase in trade deficit, and USD265mn MoM decline in net current transfers, although remittances held ground in Jul‐11. Overall BOP remained in surplus, at USD75mn (+0.03% of GDP), though much lower than the surplus of USD1035mn (+0.49% of GDP) recorded in Jun‐11. Jul‐11 performance of both current account and BoP was much better when compared with Jul‐10.

Trade account deterioration occurred despite MoM decline in oil imports
Trade account worsened by USD225mn on MoM basis, with Jul‐11 trade deficit reaching USD1.12bn, up 26% MoM. Trade deficit was, however, still 12% lower on YoY basis. MoM rise in trade deficit was driven by 20% (USD521mn) contraction in exports while MoM contraction in imports was muted at 8%. Textile exports have started slowing down, falling 13% MoM, indicating signs of weakening on the back of lower product prices and global economic slowdown.

A discomforting factor in Jul‐11 import numbers was 16% MoM contraction in oil imports which fell to USD1.17bn, which almost equates Pakistan’s average monthly oil import bill at FY11 quantity and USD100/bbl oil price. Hence worsening Jul‐11 trade deficit was a muted headline number, as weak global economic outlook and lower cotton prices pose risk of further softening in textile exports while contraction in oil imports would require correction in oil prices below USD100/bbl.

Lower machinery import is not a healthy sign
Support to Jul‐11 trade account also came from 8% MoM and 33% YoY decline in machinery group imports which clocked in at USD283m – an unhealthy sign for growth outlook. Jul‐11 machinery imports were 13% lower than FY11 monthly average. Machinery group imports have remained below FY11 monthly average for the last six months, giving a clear indication of a downward trend in investment activity. Pakistan’s investment/GDP ratio slipped to 13.4% in FY11, as compared to an average of 20% during the 80’s, 18% during the 90’s and 18.5% during the 2000’s.

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