Embarking on an economics discussion with Ruchir Sharma is a bit like golfing with Tiger Woods.

The 42-year-old managing director, chief global strategist and head of emerging markets at Morgan Stanley, the Wall Street firm, recently released The Rise and Fall of Nations, a sequel to his much lauded Breakout Nations.

In his latest book, which divides the world into BC and AC — before, and after, (global financial) crisis — he examines things from 10 parameters, including the level of a nation’s public debt (‘The Kiss of Debt’) and how far it has progressed in manufacturing.

The chief global strategist of Morgan Stanley talks about his new book, ‘The Kiss of Debt’ and gives his pick of Asian markets to watch

It gets interesting when he includes the quality of leadership and whether ‘good’ or bad billionaires dominate industry to judge the quality of a nation’s economic health.

Another unconventional idea he puts forth is the ‘hype watch’ — how popular media often get it wrong both ways on economies, either underestimating their chances, or overestimating the potential. In other words, hype portends disappointment.

In a 20-year span until 2010, Mr Sharma says, Time magazine covers that had an upbeat take on an economy proved wrong in two-thirds of the cases over the next five years.

A cover story in 2003 that dismissed Indonesia and other South-east Asian economies as ‘tigers no more’ — only, as it turned out, over the next five years these economies were part of a boom that saw emerging economies expand at 7pc per annum.

Newsweek, once Time’s great rival, isn’t spared either. In October 1989, it wrote a cover on Sony’s invasion of Hollywood as one more sign of Japan’s ‘inexorable rise’ — only to see the Japanese economy enter a two-decade slide within months.

Where in Asia should people be putting their money?

The model of exporting to prosperity is certainly over, Sharma believes. That means reducing the baseline for opportunities and dropping the ‘anchoring bias’ of investing only in economies that move at a trot of 7pc to 8pc.

Selective picks — and that might include countries like Vietnam, Bangladesh and Sri Lanka — not nebulous classes of economies, are clearly the answer.

Promising Nations

And one country he is eyeing is clearly the Philippines. President Rodrigo Duterte, he says, has a fine economics team and is continuing much of the good work initiated by his predecessor, Benigno Aquino III.

Sharma’s advice is to separate the politics from the economics, ‘for now’. Besides, he says, no nation scores consistently across all his 10 categories. If it is doing well on five or six factors, as the Philippines seems to be, take that as good enough.

Another Asian nation in his crosshairs is Indonesia, which, he thinks, is poised to turn a corner under President Joko Widodo. Morgan Stanley research, he says, suggests that Joko’s tax amnesty scheme is having unparalleled success.

“My team tells me that the current number is $230bn of assets declared. And that $7bn in taxes has been paid. This is the most successful scheme ever — anywhere in the world — in terms of assets declared.”

What of Singapore? The island state is facing headwinds from a multitude of factors, including poor demographics and slowing global trade. Sharma adds another one as well —Singapore is taking on the feel of an expensive place and that cannot be too good for itself as a competitive place.

Since 2010, long before most others, Sharma has sounded a bearish note on China. While several of his prognostications have indeed proved correct — there is no denying that economic expansion on the mainland has slowed considerably — Beijing seems to have managed to staunch the flight of capital and steadied the currency, two of last year’s big worries.

Sharma acknowledges that China has a good story in the digital space and that he thinks the mainland could continue to expand, but at a more moderate pace. But he also worries that China’s legacy issues are enormous and that its problems are only going to worsen.

One leading indicator is the pace of increase of China’s public debt, a warning also recently echoed by the Bank of International Settlements at Basel. It is one thing for a rich nation like Japan or the US to pile on debt, he says, another for a middle-income nation like China to do the same so rapidly.

In their anxiety to keep the growth engine ticking over, the authorities in Beijing may have started stuffing the one goose that was relatively healthy and protected from the rampages associated with state-owned enterprises — the housing market.

“There is a housing mania going on, with 70pc of lending this year having gone into the household and mortgage sector. That was the only sector that was not so leveraged. You are using every single resource to keep growth at a rate that is unrealistic,” Sharma says. And he adds a technical point — the amount of money circulating in China today, or M2 money supply, is 40pc more than in the US, although the latter is the much bigger economy.

These are warning signs, although there is no telling when things will come to a head. “The entire problem is that this is going to keep clogging the system with bad loans everywhere.”

At the peak of the US housing bubble, he says, it took three dollars of debt to create a dollar of gross domestic product growth. In China, it now takes four dollars of debt to create a dollar of growth.

Neither is he overly bullish on India. The country, he says, disappoints both its most enthusiastic backers and its worst critics in equal measure.

Sharma thinks the future of Asian growth could lie in the big- population countries with their huge domestic markets.

This will hold true because more and more nations are trying to do more at home, rather than trade, to power up domestic economies. For the smaller ones, therefore, the future is in plugging sharply into larger frameworks — a Singapore-Malaysia compact if that could be worked out, or the Asean Economic Community, if more life could be put into it.

Time will tell how right Sharma was in his analyses. Where countries defy his logic, and there will be some, inevitably, he will be accused of having peddled voodoo economics.

— The Straits Times/ANN

Published in Dawn, Business & Finance weekly, October 17th, 2016