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

1. Investeurs Chronicle
September 2013, Volume: 78

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. 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. 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. 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. 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. 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

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