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Asia is a “relative” safe haven given growth resilience vs DM – We see no
regional “decoupling”, but no China hard landing either — Deteriorating global
growth prospects will likely hurt more export-dependent economies but the
domestic-driven economies of Indonesia, India and China should fare relatively well.
We think hard-landing fears in China are exaggerated – 1) the credit problems
do not look systemic, leading to widespread defaults; 2) We expect headline
inflation to ease noticeably by 4Q 2011, which will give China room for some policy
easing towards year-end; 3) China has significant fiscal flexibility in its central
government balance sheet, access to fiscal and public sector assets and negative
real rates that should make the overall debt burden manageable; 4) Related to the
first three, not all credit-funded investment is an immediate loss – we think
regulatory forbearance and financial repression (e.g. encouraging some refinancing)
will give China room to amortize losses over time.
But room for countercyclical policy response is more limited than before —
With a less steep decline in commodity prices, stickier inflation expectations and
lower nominal rates to begin with for most, the ability to ease monetary policy is
more limited than in 2008. We expect Singapore, Indonesia (for sterilization cost
reasons) and Malaysia may be the most inclined to ease monetary policy. While
there is room for counter-cyclical fiscal policy in most of the region except South
Asia, we think China has much less room for credit-fueled infrastructure stimulus
executed by the local government than in 2008, and will resort to more central
government-funded fiscal stimulus, with possibly a lower multiplier effect.
Asia cannot be a “safe haven” from financial linkages — We remain cautious
on risk sentiment, with our FX strategists calling for continued dollar rebound (DXY
at 80.8 in 3M). Outside of CNY (spot), where we expect gradual appreciation, we
don’t think any other Asian currency is a “safe haven’. Vulnerability of Asia FX could
lead to further real money redemptions of local bond portfolios, but we expect
redemptions to be temporary and should reverse once global risk stabilizes.
We assess expected Asia FX based on FX reserve ammunition and
willingness to use it — We find that MYR screens weakest in Asia and CNY
screens the strongest. While we remain biased to be long USDAsiaFX on dips given
our bullish USD house view in the interim, on an intra-Asia basis we are biased to
be long CNY and SGD, while short MYR, TWD and possibly KRW (at better levels).
India
Summary view — Growth in the coming quarters will likely remain in the sub-8%
range and average 7.6% in FY12 due to (a) aggressive monetary tightening, (b)
structural policy issues, and (c) worsening global prospects.
Things to watch — Trends in inflation should largely be determined by the
interplay between currency and commodity prices. Fiscal targets are likely to see
significant slippage.
Strategy — In line with other EM currency forecasts, we have revised our INR
forecasts due to continued risk aversion and a rising dollar. The INR change for
March 12 is from Rs45.5/$ to Rs48/$ and for March 13 from Rs44/$ to Rs46.5/$.
Macro trends indicate a slowdown
Macro trends remain subdued. Recently-released macro and sectoral data
indicate a clear slowdown in economic activity. During 2QFY11, GDP came in at
7.7% — the second consecutive quarter of sub-8% growth. We expect this trend to
continue due to (1) lagged effect of 500bps of tightening, (2) structural policy issues,
and (3) worsening prospects on the global front. Going forward, we maintain our
view of trends in headline GDP growth remaining subdued at sub 8% levels. This is
based on agriculture at 2.5%, industry at 6.8% and services at 9.2%.
Worsening global prospects could take a toll on growth. The further
deterioration seen on the global front has taken its toll on risk assets — EM
currencies, equities and bonds. While India’s low exports/GDP, domestically
financed fiscal deficit, limited exposure to foreign liabilities, and a healthy banking
system are positive, in times of risk aversion, India immediately comes on the radar
due to its twin deficits and reliance on external capital. As mentioned earlier, though
India is relatively better placed, the worry this time is (1) A slowing economy and (2)
Limited ammunition v/s 2008 that Indian policy makers have in the event of a crisis.
This is on both the fiscal and monetary fronts, where higher deficits and stickier
inflation would limit space for conventional policy responses.
Interest rates appear close to peaking
Inflation to be determined by interplay between currencies and commodities.
Inflationary pressures continued unabated in August, with the WPI rising 9.78%.
While we have been expecting inflation to remain elevated due to higher minimum
support prices of agricultural crops and continued upward revisions to past data;
two further price pressures have emerged over recent weeks: (1) Commodity prices
have showed no sign of abating despite slowing global demand. This has a strong
bearing on the WPI given that ~60% of the inflation basket is linked to commodities;
(2) Over the last month; the INR has weakened 7.3%, which adds to inflationary
woes. Going forward, key to watch would be if a decline in commodity prices plays
out; and the extent to which this is offset/neutralized by exchange-rate depreciation.
Interest Rates – Odds favor a pause. At its policy review, the RBI continued its
anti-inflationary stance, raising the operating policy rate — the repo (liquidity
injection) rate by 25bps to 8.25%. This marks the 12th rate action since the RBI
began tightening in Mar10; with effective tightening at 500bps. The deteriorating
global macro has resulted in many central banks pausing (UK, South Korea,
Malaysia, Philippines) and Brazil cutting rates. This puts the RBI in an unenviable
position of balancing slowing growth and rising inflation. While odds favor a pause
in rates for now, key factors shaping policy decisions would be (1) domestic growth
(2) global financial conditions and (3) domestic inflation trends, which would largely
be determined by the interplay of commodity and currency movements.
Fiscal slippages – well priced in
Latest Fiscal Deficit at 55% of Target. India’s April-July fiscal deficit came in at
Rs2,288bn or 55% of budget estimates of Rs4,128bn and v/s Rs909bn in the same
period last year. Total revenues (tax + non tax) were Rs1464bn v/s Rs2,418bn last
year. However, as mentioned earlier, YoY comparisons are skewed as last year’s
non-tax collections benefited from the 3G license fees. Expenditure rose 12.8% to
Rs3752bn v/s 3327bn last year.
Bottom Line: Fiscal Slippages – Well Priced in. As mentioned earlier (see Fiscal
Update – Not Looking Good: Revenues and Expenditure Both Under Pressure),
despite the announcement of austerity measures, we expect the government to
miss its deficit target due to both lower revenues and higher expenditures.
Depending on the timing of the pay-out to oil companies, the headline deficit
number could come in the 5.1% to 5.8% range v/s budget estimates of 4.6% of
GDP. Yields are likely to remain range-bound as the slippage could result in higher
borrowing. However, the extent of the rise could be limited depending on whether
RBI resorts to OMO or issues short-tenor T-Bills.
Risk aversion prompts currency forecast revisions
Gauging External Vulnerability. With risk aversion/capital preservation becoming
key, markets that could get more severely hit than others are those: (1) running
current account deficits or (2) that have external financing requirements, which puts
them at risk for sudden stops in capital flows. Once again India stands out on both
counts: While FX reserves are comfortable at US$281bn, India is amongst the most
vulnerable EMs due to (a) a high current account deficit (CAD) and (b) high foreign
holdings of stocks. Thus, reserves coverage is at 3.4x ST debt and amortization; but
looks weaker if we look at “total external financing requirements” given the high
CAD — around 2x assuming our CAD forecast of US$58bn.
External debt also key. Latest data pegs India’s external debt at US$306bn, of
which short-term debt stands at US$65bn by original maturity and at US$129bn by
residual maturity. While NRI deposits and sovereign debt are typically rolled over,
what needs to be watched is trade credit, which is partly included in commercial
borrowing, as well as short-term debt by original maturity. (Trade credit comprises
~90% of short-term debt by original maturity).
FX forecast changes. Continued risk aversion and a dollar rally has seen most EM
currency forecasts being revised, with the INR showing further near-term weakness
followed by a medium-term bounce. The INR change for March 12 is from
Rs45.5/US$ to Rs48/US$ and for March 13 from Rs44 to Rs46.5/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia is a “relative” safe haven given growth resilience vs DM – We see no
regional “decoupling”, but no China hard landing either — Deteriorating global
growth prospects will likely hurt more export-dependent economies but the
domestic-driven economies of Indonesia, India and China should fare relatively well.
We think hard-landing fears in China are exaggerated – 1) the credit problems
do not look systemic, leading to widespread defaults; 2) We expect headline
inflation to ease noticeably by 4Q 2011, which will give China room for some policy
easing towards year-end; 3) China has significant fiscal flexibility in its central
government balance sheet, access to fiscal and public sector assets and negative
real rates that should make the overall debt burden manageable; 4) Related to the
first three, not all credit-funded investment is an immediate loss – we think
regulatory forbearance and financial repression (e.g. encouraging some refinancing)
will give China room to amortize losses over time.
But room for countercyclical policy response is more limited than before —
With a less steep decline in commodity prices, stickier inflation expectations and
lower nominal rates to begin with for most, the ability to ease monetary policy is
more limited than in 2008. We expect Singapore, Indonesia (for sterilization cost
reasons) and Malaysia may be the most inclined to ease monetary policy. While
there is room for counter-cyclical fiscal policy in most of the region except South
Asia, we think China has much less room for credit-fueled infrastructure stimulus
executed by the local government than in 2008, and will resort to more central
government-funded fiscal stimulus, with possibly a lower multiplier effect.
Asia cannot be a “safe haven” from financial linkages — We remain cautious
on risk sentiment, with our FX strategists calling for continued dollar rebound (DXY
at 80.8 in 3M). Outside of CNY (spot), where we expect gradual appreciation, we
don’t think any other Asian currency is a “safe haven’. Vulnerability of Asia FX could
lead to further real money redemptions of local bond portfolios, but we expect
redemptions to be temporary and should reverse once global risk stabilizes.
We assess expected Asia FX based on FX reserve ammunition and
willingness to use it — We find that MYR screens weakest in Asia and CNY
screens the strongest. While we remain biased to be long USDAsiaFX on dips given
our bullish USD house view in the interim, on an intra-Asia basis we are biased to
be long CNY and SGD, while short MYR, TWD and possibly KRW (at better levels).
India
Summary view — Growth in the coming quarters will likely remain in the sub-8%
range and average 7.6% in FY12 due to (a) aggressive monetary tightening, (b)
structural policy issues, and (c) worsening global prospects.
Things to watch — Trends in inflation should largely be determined by the
interplay between currency and commodity prices. Fiscal targets are likely to see
significant slippage.
Strategy — In line with other EM currency forecasts, we have revised our INR
forecasts due to continued risk aversion and a rising dollar. The INR change for
March 12 is from Rs45.5/$ to Rs48/$ and for March 13 from Rs44/$ to Rs46.5/$.
Macro trends indicate a slowdown
Macro trends remain subdued. Recently-released macro and sectoral data
indicate a clear slowdown in economic activity. During 2QFY11, GDP came in at
7.7% — the second consecutive quarter of sub-8% growth. We expect this trend to
continue due to (1) lagged effect of 500bps of tightening, (2) structural policy issues,
and (3) worsening prospects on the global front. Going forward, we maintain our
view of trends in headline GDP growth remaining subdued at sub 8% levels. This is
based on agriculture at 2.5%, industry at 6.8% and services at 9.2%.
Worsening global prospects could take a toll on growth. The further
deterioration seen on the global front has taken its toll on risk assets — EM
currencies, equities and bonds. While India’s low exports/GDP, domestically
financed fiscal deficit, limited exposure to foreign liabilities, and a healthy banking
system are positive, in times of risk aversion, India immediately comes on the radar
due to its twin deficits and reliance on external capital. As mentioned earlier, though
India is relatively better placed, the worry this time is (1) A slowing economy and (2)
Limited ammunition v/s 2008 that Indian policy makers have in the event of a crisis.
This is on both the fiscal and monetary fronts, where higher deficits and stickier
inflation would limit space for conventional policy responses.
Interest rates appear close to peaking
Inflation to be determined by interplay between currencies and commodities.
Inflationary pressures continued unabated in August, with the WPI rising 9.78%.
While we have been expecting inflation to remain elevated due to higher minimum
support prices of agricultural crops and continued upward revisions to past data;
two further price pressures have emerged over recent weeks: (1) Commodity prices
have showed no sign of abating despite slowing global demand. This has a strong
bearing on the WPI given that ~60% of the inflation basket is linked to commodities;
(2) Over the last month; the INR has weakened 7.3%, which adds to inflationary
woes. Going forward, key to watch would be if a decline in commodity prices plays
out; and the extent to which this is offset/neutralized by exchange-rate depreciation.
Interest Rates – Odds favor a pause. At its policy review, the RBI continued its
anti-inflationary stance, raising the operating policy rate — the repo (liquidity
injection) rate by 25bps to 8.25%. This marks the 12th rate action since the RBI
began tightening in Mar10; with effective tightening at 500bps. The deteriorating
global macro has resulted in many central banks pausing (UK, South Korea,
Malaysia, Philippines) and Brazil cutting rates. This puts the RBI in an unenviable
position of balancing slowing growth and rising inflation. While odds favor a pause
in rates for now, key factors shaping policy decisions would be (1) domestic growth
(2) global financial conditions and (3) domestic inflation trends, which would largely
be determined by the interplay of commodity and currency movements.
Fiscal slippages – well priced in
Latest Fiscal Deficit at 55% of Target. India’s April-July fiscal deficit came in at
Rs2,288bn or 55% of budget estimates of Rs4,128bn and v/s Rs909bn in the same
period last year. Total revenues (tax + non tax) were Rs1464bn v/s Rs2,418bn last
year. However, as mentioned earlier, YoY comparisons are skewed as last year’s
non-tax collections benefited from the 3G license fees. Expenditure rose 12.8% to
Rs3752bn v/s 3327bn last year.
Bottom Line: Fiscal Slippages – Well Priced in. As mentioned earlier (see Fiscal
Update – Not Looking Good: Revenues and Expenditure Both Under Pressure),
despite the announcement of austerity measures, we expect the government to
miss its deficit target due to both lower revenues and higher expenditures.
Depending on the timing of the pay-out to oil companies, the headline deficit
number could come in the 5.1% to 5.8% range v/s budget estimates of 4.6% of
GDP. Yields are likely to remain range-bound as the slippage could result in higher
borrowing. However, the extent of the rise could be limited depending on whether
RBI resorts to OMO or issues short-tenor T-Bills.
Risk aversion prompts currency forecast revisions
Gauging External Vulnerability. With risk aversion/capital preservation becoming
key, markets that could get more severely hit than others are those: (1) running
current account deficits or (2) that have external financing requirements, which puts
them at risk for sudden stops in capital flows. Once again India stands out on both
counts: While FX reserves are comfortable at US$281bn, India is amongst the most
vulnerable EMs due to (a) a high current account deficit (CAD) and (b) high foreign
holdings of stocks. Thus, reserves coverage is at 3.4x ST debt and amortization; but
looks weaker if we look at “total external financing requirements” given the high
CAD — around 2x assuming our CAD forecast of US$58bn.
External debt also key. Latest data pegs India’s external debt at US$306bn, of
which short-term debt stands at US$65bn by original maturity and at US$129bn by
residual maturity. While NRI deposits and sovereign debt are typically rolled over,
what needs to be watched is trade credit, which is partly included in commercial
borrowing, as well as short-term debt by original maturity. (Trade credit comprises
~90% of short-term debt by original maturity).
FX forecast changes. Continued risk aversion and a dollar rally has seen most EM
currency forecasts being revised, with the INR showing further near-term weakness
followed by a medium-term bounce. The INR change for March 12 is from
Rs45.5/US$ to Rs48/US$ and for March 13 from Rs44 to Rs46.5/US$.
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