78 i chronicle


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Cover Story End to QE: Not a great idea for Asia?
Outlook Chinese Yuan
Stats India Gloom on GDP, Fiscal Deficit and Mining and Manufacturing output
Emerging Country Nigeria
In Focus Facts on Food Security Bill

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78 i chronicle

  1. 1. Investeurs Chronicle September 2013, Volume: 78
  2. 2. Cover Story Asian stock markets have been under pressure recently from an announcement by the US Federal Reserve that “quantitative easing” or QE as it is commonly referred to, is likely to be tapered off in near future. This relatively unconventional monetary policy ―which involves purchasing bonds or other financial assets directly from commercial banks and other private institutions to increase the monetary base― was introduced in November 2008 at the height of the global financial crisis to try to fend off an economic slump. As a monetary tool, QE was always meant to be temporary, since each bond purchasing program results in a significant expansion of the US Federal Reserve’s balance sheet. Now with the fear of a recession dissipating and the economy showing signs of gradual recovery, the prospect of an end to QE is just around the corner. Speculation that the policy may soon end saw the yield on US Treasury 10-year notes shoot up, bolstered also by robust economic and employment data. The higher yields on US Treasuries prompted an unwinding of the “carry trade”—a practice involving borrowing funds in US dollars to invest in higher return emerging market assets. The Federal Reserve’s announcement prompted a quick selloff in Asian stock markets and further declines may well be in store as the yields on US Treasuries continue to rise and as foreign investors exit the region. Although there is no clear timeline for a scaling back of QE, higher returns on US assets pose a short-term risk for emerging Asian markets. Emerging Asia has previously seen a surge of large inward capital flows, especially short term funds, on the back of its relatively strong growth prospects in the post-global financial crisis economic environment. Clearly cheap funding costs in the global market played a part in this. The notion that a region associated with thrift, low debt and high savings is vulnerable to an ebbing tide of global credit is controversial. But the sell-off gripping emerging foreign exchange and equity markets has exposed an Asia that, despite amassing huge currency reserves and devising policies to insulate it from the kind of fund flight that triggered the Asian financial crisis in 1997 and 1998, has once again become susceptible to the rapid reversal of capital inflows. Economists, bankers and investors say they caught a glimpse of Asia's possible future in June, when regional markets convulsed at a suggestion by Federal Reserve chairman Ben Bernanke that the central bank of the world's largest economy might start scaling back quantitative easing, or QE. Those concerns have returned with a vengeance in the second half of August, to batter markets in India and Indonesia. End to QE: Not a great idea for Asia?
  3. 3. Cover Story Having failed to dismantle politically and socially knotty obstacles to growth, Asia has instead relied on low interest rates and massive borrowing to keep its economies expanding, particularly since the 2008/09 global financial crisis that prompted the Fed to start aggressively buying bonds. But whether it's immigration and labor laws in Japan, the dominance of state enterprises in China or hurdles to foreign investment in India, each nation faces its own third rail of reform - one that stands to revive productivity and boost potential growth if resolved, but which has proved too politically fraught to undertake. As a result, if and when QE finally ends, Asia could find its growth targets much more costly to achieve. AVOIDING PAINFUL REFORMS Asia was able to avoid many such painful reforms after the crisis of the late 1990s when the global technology boom boosted demand for its exports. Then, when the global financial crisis hit, strong domestic finances helped insulate the region. Growth rates remain enviably high: the IMF projects that developing Asia's economy will still expand by 7 percent this year. But exports have not recovered as smartly in the wake of the 2008/09 crisis. With Europe barely out of recession and the United States recovering only grudgingly, growth in exports from seven of Asia's biggest exporters - Japan, China, South Korea, Taiwan, Thailand, Hong Kong and Singapore - ground to a halt in the second quarter. Many Asian nations have instead tapped a rising tide of cheap global funds to keep economic activity humming. With the Fed keeping its rates at virtually zero to resuscitate U.S. growth, global investors scoured the globe for higher returns, helping push down Asia's borrowing costs. Massive inflows of credit helped some countries keep growth relatively strong, but Asia's private sector debt soared to 165 percent of GDP in 2012, according to Nomura, higher than the 127 percent level prior to Asia's financial crisis. Borrowing by households and companies in South Korea, Hong Kong and China, is now double the size of each country's respective economic output. In short Asia has levered up like the rest of the world at the same time as earnings were coming down. The other concern among economists is that all that borrowing has not gone into profitable investments that boost productivity and growth. Take China. It responded to the global financial crisis by flooding its economy with cheap credit. When the Fed cranked up money printing, Beijing had little choice but to keep borrowing costs low or allow its currency to rise rapidly. The amount of credit in China's economy almost doubled between 2008 and last year, and investment climbed to 46 percent of GDP. Almost half of that money went into either property or infrastructure, according to Nomura .China's empty buildings and ghost cities are testimony to over-investment in property and construction, but overcapacity also plagues heavy industries such as cement, steel and coal. Producer prices in China have consequently been falling for 16 months as growth slows. Now China appears to be gearing up for some form of bailout of its lenders.
  4. 4. Cover Story At the other end of the spectrum are countries such as Indonesia and India, which didn't binge on credit, but instead failed to take advantage of cheap money to boost the capacity of their economies to create jobs and reduce their dependence on imported fuel and manufactured goods. India thus suffers from an under- investment problem. World Bank data shows that growth in India's investment in equipment and other physical assets, other than land, has been slowing since 2007. One sign of how little investment is accomplishing is that the region's current accounts, the sum of an economy's trade balance and its investment income, are steadily evaporating. The overall current account surplus in Asia's 11 largest economies dropped from 6.3 percent of aggregate GDP in 2007 to 1.6 percent last year, according to Nomura's calculations. Japan's once formidable surplus has dropped almost to zero and India, Indonesia and Hong Kong have all slipped into deficit. Further, consumption's contribution to GDP has not risen significantly and private-sector economists point to a worrisome decline in the return on Asia's investment. Asia, in short, is getting fewer bangs for its buck. According to HSBC, labor productivity growth in Asia, excluding Japan, has been slipping since 2007 along with economic growth rates. Pricier global capital poses a problem for a region still financing its own development. The Asian Development Bank estimates the region needs to spend $8.3 trillion, equivalent to China's GDP, over the current decade to maintain and expand its electricity, telecommunications, transport and water supply. The timetable set out by the Fed on scaling back QE comes at a particularly bad time since the largest emerging markets - China, India, and Indonesia - are all trying to push through much-needed and significant structural reforms. Global funds may not just stop pouring in - since February, investors have been pulling money out of Asia-dedicated funds. While foreign investors are still buying stocks in Japan, they have sold at least $10 billion worth of stocks in the rest of Asia in the past 13 weeks, according to Nomura. It also stands to batter currencies, as India and Indonesia are finding out . Asia's 53 percent rise in reserves since the global crisis looks less comforting when compared with the 125 percent increase the Bank for International Settlements has measured in Asia's short-term external debt since 2008. That means that while in 2008 Asia had $4.60 for every dollar it owed foreigners over the next two years, it now has only $3.15.That's where structural reforms come in. That’s what Asia lacks. At this point, it remains to be seen to what extent a scaling back of QE will impact financial market conditions in emerging Asia. What is clear, however, is that there will be some knock-on effect and it would be desirable for the Federal Reserve and Asian financial authorities to keep the channel of consultation and discussion open in the tapering process.
  5. 5. The currency hit an all-time high of 6.1124on August 15, 2013. The immediate trigger seems to be the strong data which has fueled expectations of an economic rebound. July's economic data indicated the economy may have found renewed momentum in the third quarter following a sluggish first half, led by industrial production and retail sales. However, the outlook on further gains looks to be unclear for now. The USDCNY spot exchange rate depreciated 0.0124 or 0.20 percent during the month of August, 2013. Another factor that may be deterring onshore companies from buying US dollars is the relatively high yields available in the onshore bond market. Despite the large amounts of funds pumped into the markets via reverse repo auctions, one year Chinese debt still yields a chunky 3.5 per cent implied yields via dollar swaps for similar maturities are around those levels. With those kinds of yields available in the onshore market layered on top of an appreciating currency, importers are only buying US dollars for their immediate hedging needs. USD/CNY is 6.1196 as on August 30, 2013 and we expect the Yuan exchange rate to be largely stable and to trade within a tight range for the rest of the year. China’s fundamentals are not supportive for further appreciation and it may depreciate to 6.16 at the end of the year and stay at that level over 2014. Stats Outlook-Chinese Yuan Gloss Undervalued A financial security or other type of investment that is selling for a price presumed to be below the investment's true intrinsic value.
  6. 6. Emerging Country- Nigeria Nigeria officially the Federal Republic of Nigeria, is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in the north. Its coast in the south lies on the Gulf of Guinea on the Atlantic Ocean. The Nigerian economy is largely a petroleum based economy. The economy of Nigeria shows overdependence on the capital-intensive oil sector, which provides the 28% of GDP, 95% of foreign exchange earnings and about 65% of government revenues. Nigeria’s production of crude oil currently averages at 2.4 million bpd. As of 2012 figures Nigeria’s worldwide crude oil reserves are 37 billion barrels. GDP growth slowed to 6.6% in Q1 2013, down from 7% in Q4 2012, but close to the overall 2012 rate of 6.5%. The non-oil sector continues to drive growth. Meanwhile, the oil sector remains weak; hit by severe flooding last year.According to PWC report Nigeria is projected Gross Domestic Product (GDP) of nearly $4 trillion by 2050 and an annual average real GDP growth rate of about 6 %. Inflation stayed high in 2012, averaging just over 12%, with core inflation close to 14%. Strong oil exports lifted the current account surplus to about 5.9% in 2012, despite rising imports and heavy income and services outflows. Nigeria's total external merchandise trade decreased in the first quarter of 2013 from the previous quarter. The 29 % dip in external merchandise was blamed on a 41.4 % fall in the value of exports in the fourth quarter of 2012 to the first quarter of this year. Imports increased by 27.4 %from the fourth quarter of last year. When combined with the decrease in exports, there is a trade imbalance of about 60.8 % in the period under review. According to the 2013 World Investment Report published by the United Nations Conference on Trade and Development, UNCTAD FDI, to Nigeria dropped by 21.34 % to $7 billion in 2012, from $8.9 billion recorded in 2011 due to political insecurity and a weak global economy Trade between India and Nigeria has risen to $ 16.6 billion, which indicates a significant boost in the economic relationship between the two friendly countries. India’s FDI in Nigeria also amounted to $10 billion. Major items of Indian exports to Nigeria include rice, transport equipment, machinery and instruments, pharmaceuticals and electronic goods. Its major items of imports from Nigeria are petroleum–crude and products, non-ferrous metals, metal ferrous ores and metal scraps, wood and wood products, and cashew nuts. Vital Economic Statistics of Nigeria Economy Particulars Details GDP (nominal) $345.651 billion(2012 estimates) GDP growth rate 6.99% (2013 estimates) Currency Naira Credit Rating BB- (Fitch) Fiscal Deficit 1.85% of GDP (2013) Current account Deficit 4.80 % of GDP(2013)
  7. 7. In FocusForex Facts on Food Security Bill The Food Security Bill, which seeks to entitle 67% of the country’s population — about 800 million people — to subsidized food, was passed in the Lok Sabha on 26th August 2013. Highlights of the Bill are: • Drafted by the Sonia Gandhi-led National Advisory Council in 2010, the Bill originally proposed legal food entitlement for 75% of India’s population. However, In July this year, the Govt brought an ordinance covering 67% of the population • 75% of rural and 50% of urban population — an estimated 800 mn people — are to receive 5 kg of wheat, rice and coarse cereals at Rs 3, Rs 2 and Rs 1 a kg, respectively. . The Bill doesn’t include pulses and edible oils, as the country lacks supply of these. • The grain required to cover the whole population is estimated at 77 mt, while the govt’s annual procurement has averaged around 60 mt • For now, the govt proposes to implement it through existing system of ration shops. Later, it could be shifted to a modernized PDS that works on biometric ration cards • The present PDS system does not have the legal umbrella. The legal entitlement in the Bill provides beneficiaries the right to take the govt to court if they are denied the service • The govt’s food subsidy bill will rise from the present Rs 90,000 crore to over Rs 130,000 crore. Besides inflation fears, the rise in subsidy bill could affect govt’s ability to contain its fiscal deficit at 4.8% of GDP Data from 19th August 2013 to 30th August 2013 Sensex Nifty 18,307 .52 18,619 .72 5414. 75 5471. 80 Gold (10 gm) Silver (1 Kg) 31155 32990 51233 53880 Crude Oil ($/barrel) Dollar/INR 109.90 114.01 62.35 66.57
  8. 8. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com