India has happier tale to tell than some of its neighbours
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IN two weeks recently Mukesh Ambani’s Reliance Industries raised a total of $1.75bn in the dollar bond market. Both the first $1bn 10-year transaction and the second 30-year deal were priced at what the company said were the lowest interest rates for an Asian corporate issuer - yields of 4.125pc and 4.875pc respectively. The costs were a fraction of what Reliance would pay in its home market of India if such long-term debt were available.
For years - and at an accelerated pace since the financial crisis - Asian companies have sought to take advantage of the low cost of capital in the US thanks to the generosity of the US Federal Reserve.
Today, however, Reliance and India itself are among the few Asian names to enjoy a warm reception in international capital markets. That is because India and some - though perhaps a minority - of its firms have a happier story to tell than most of their emerging market peers.
At the same time, deflation and disinflation make the real burden of debt much heavier and make it harder for monetary policy to be effective
The Indian balance of payments is improving, the current account and fiscal deficits are dropping, and inflation is coming down, much of this thanks to sliding oil prices. Where else could the central bank cut rates a quarter of a percentage point and see the currency strengthen, as has happened in India?
Meanwhile, everywhere else in Asian markets, concern is growing over heavy corporate debt loads, signs of deflation and weakening currencies. The growth of debt has been far greater than growth in nominal GDP for the region.
From 2007 to the end of 2014, the ratio of total debt to GDP has gone from 144pc to an estimated 205pc, a rise of more than 6 percentage points, according to Morgan Stanley. In the past 10 years, the investment bank’s study adds, the rise amounts to $2.2tn-2.5tn, with most of the claims taken in the past five years.
In the past regional corporate borrowing was not particularly high but it was productive. Also Asia had reasonable demographics and the prospect of improved productivity. But that past has become a mirror image of a present in which debt levels are high, productivity is not growing and demographics have worsened. Meanwhile, even as debt and investment levels increase, return on investment keeps dropping.
Two developments make the situation worse. First is the unexpected drop in demand from China. Trade has been virtually flat for several years. Growth in trade-dependent emerging markets was 4pc in 2014 - the worst since 2009, in spite of the accumulation of so much debt, according to data from JPMorgan. At the same time deflation and disinflation make the real burden of debt much heavier and make it harder for monetary policy to be effective.
In depth
Central banks: How the world’s central banks are addressing global economic uncertainty China and South Korea are worrisome. China’s debt to GDP has gone from 156pc in 2008 to 244pc in 2014, while South Korea’s is even higher at 254pc, though the speed at which it has grown is much lower. By contrast, India’s ratio is lower and has moved little, from 133pc in 2008 to 135pc last year.
As the central banks in Europe and Japan try to weaken their currencies through large asset purchases, and the dollar rises, Asian central banks are driving down the value of their currencies, making it even more challenging for them to repay their dollar debt.
Singapore just cut rates, while analysts expect more reductions from South Korea, Thailand, Malaysia and even China itself. (It is a sign of the times, though, that some analysts note that China cannot drive its currency down too much because of the size of its corporate dollar debt.)
Numerous hedge funds are short in many Asian emerging market currencies. Morgan Stanley is recommending going long on the US dollar against the Singapore dollar, the Thai baht and the South Korean won, and a long position in the Indian rupee against the Singapore dollar. This last trade would have been inconceivable 18 months ago.
It is easy to imagine worse to come. But any such scenario assumes that the Fed will indeed start raising rates. That was among the worst bets last year and may prove to be so again this year.
Published in Dawn, Economic & Business, February 16th, 2015
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