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Business News/ Opinion / Bright spots for India
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Bright spots for India

The perfect world for some Asean countries might just be over

Graphic: Ahmed Raza Khan/MintPremium
Graphic: Ahmed Raza Khan/Mint

On a day when one got up from the bed and, straight off the bat, read the news of about one-third of India’s top corporations are technically bankrupt, it seems to make little sense to write about India’s bright spots. Schadenfreude is never a substitute for improving things on the ground. However, investors make relative judgements all the time. India’s troubles have been well flagged in recent months. What is interesting is that other countries are following in India’s footsteps and investors are beginning to take note.

For quite some time now, it had become routine for sell-side investment strategists to flag the Asean region as a haven for investors. Their economies were growing, their inflation appeared well-behaved, their currencies were rising in value against the US dollar, their current accounts were roughly in balance, their banks were lending and their companies had good financials.

It was almost a perfect world for some Asean countries in a long time. In particular, investors favoured Thailand, Indonesia and the Philippines. Since India and China had disappointed big, Asia-based strategists had to keep peddling the wares of South-East Asia. They chose to overlook the fact that prices of financial assets had gone up substantially in these markets in the last two years. Stocks in these countries had fully priced in all the good news. Currencies had become overvalued and bank credit growth was well in excess of nominal GDP growth. They ignored it because these countries started with a low base credit to gross domestic product ratio.

They ignored too the International Monetary Fund stricture that a low base did not ensure nations against a credit boom turning into a bust, if credit outstanding in the economy rose too much, too quickly. Being starved for days does not make overeating a wise decision.

Several warning shots have rung out in recent weeks. First, Indonesia had to raise interest rates by about 75 basis points in two months—by 25 basis points in June (from 5.75% to 6%) and by 50 basis points in July (from 6% to 6.5%). That has not yet reversed the recent trend of the foreign exchange market demanding more rupiah for every US dollar.

The dollar to rupiah exchange rate is now at 10,280.0, up from about 9,400 a year ago. The current account deficit has swung from a surplus of around $2.9 billion in the second quarter of 2009 to a deficit of $5.9 billion in the three months ended March. The Jakarta Composite Index of stocks topped out in May and has since fallen 10%.

The next domino to fall was Thailand. Prime Minister Yingluck Shinawatra rode her luck and common sense for a while. Thai stocks and the economy boomed. Her rice subsidy programme (buying rice from Thai farmers at twice the market price) has begun to prove very costly fiscally and otherwise. In its assessment of economic conditions in July, the Bank of Thailand lowered its economic growth forecast for 2013 from 5.1% to 4.2%.

The Thai currency is overvalued, reflected in a current account that has turned into a deficit as dramatically as Indonesia’s has, from a surplus of around $8.4 billion in the first quarter of 2009 to a deficit of around $2.8 billion in the second quarter of 2013. The Stock Exchange of Thailand index topped out at around 1,643 points in May and is off 12% from that peak. The dollar has strengthened by 9% against the Thai baht since mid-April. The dollar to baht exchange rate has strengthened from 28.67 to 31.21.

On 30 July, Fitch Ratings downgraded Malaysia’s rating outlook to negative, citing weak prospects for budget reform and fiscal consolidation after the government’s weak showing in the general election held in May. One US dollar fetches 3.25 Malaysian ringgit now, compared with around 2.96 in mid-May. The Malaysian stock index has not declined much from its recent peak, but it is only a matter of time. Malaysian current account surplus was $12.48 billion in the second quarter of 2008 but has declined to $2.12 billion in the first quarter of 2013.

The Chinese economy might appear to have come out of jail with its string of decent numbers for July. However, the credit creation machinery has not been shut down. In China, as in India, talk remains a substitute for action. China’s bank lending growth was up an annual 30% and, in the seven months to July, it rose by 7% compared with the same period last year. Total social financing (TSF), which includes credit created by so-called shadow banking firms was up 24% year-to-date in July from the cumulative total in the first seven months of 2012. This growth rate matches with the five-year compounded annual growth rate in TSF of 23.9%. We should record here that, according to Fitch Ratings, TSF as calculated by the People’s Bank of China understates actual credit creation. China’s credit juggernaut keeps rolling on even as it makes less and less impact on growth.

Lastly, it is worth noting that in the US, an index of homebuilders’ stocks is down 31% from a peak in May. If we recall correctly, homebuilders led US stocks down in 2007. An encore awaits.

V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

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Published: 12 Aug 2013, 06:49 PM IST
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