Macro Posts – Page 52 – WorldoutofWhack

Rupee in a global world: India’s macroeconomic framework is based on an antiquated belief that the economy is closed.

Jahangir Aziz writes in Indian Express… There is an entrenched and widespread belief among the same analysts and policymakers that India is a closed economy protected by its much vaunted regulatory and capital controls. Nothing can be further from the truth. Every time the world sneezes, India catches a cold. It happened in 2008 when Lehman collapsed; in 2011 during the European sovereign debt crisis; in 2013 when hit by the Taper Tantrum; and it is happening now.

The crux of the problem is that India’s macroeconomic framework is based on an antiquated belief that the economy is closed when in reality it is far more open. For example, the RBI has rarely linked its policy decisions to changes in global interest rates even after shifting to an inflation-targeting framework. It is the same with fiscal policy. Every budget document begins with a perfunctory paragraph on “global developments” but neither taxes nor expenditure has been changed in response to what has happened outside of India except when forced by crises. The overall fiscal deficit has remained virtually unchanged around 7 per cent of GDP since 2013-14, the year of the Taper Tantrum, despite the global economy, financial conditions, and oil prices undergoing large cyclical changes.

Consequently, when faced with a global financial shock, neither fiscal nor monetary policy has, as matter of course, adjusted to safeguard the economy. Instead, we have scurried around for ad-hoc solutions, as is gaining currency now with suggestions for more NRI deposits or external bond issuance. I am sure we will come up with another clever scheme and then pat ourselves on the back on how that staved off a crisis. However, we will face the same challenge again the next time global conditions change.

https://indianexpress.com/article/opinion/columns/indian-economy-rupee-vs-dollar-gdp-5361304/

why Global wages will no longer rise?

Companies in matured economies are scrapping annual wage reviews because most employees are disappointed by meagre increase in wages. As Indian economy gets more matured (few firms having large marketshare in an industry) employees bargaining power is only going to erode.

The next industry in India where employees will loose bargaining power is Financial services mainly Mutual fund, insurance companies and advisory business.There is technological disruption on one side which alone would have been easy to adopt without big job losses but on other hand the ever changing regulatory framework is aimed at consolidating the industry driving out the marginal players.

Below table from oxford economics enumerate “Many global factors which will hold down global wages”

No, Governments With Monetary Sovereignty Cannot Issue All The Debt They Want

Daniel Lacelle writes in this interesting piece “A country with monetary sovereignty can issue all the currency it needs” is a fallacy.
Monetary sovereignty is not something government decides. Confidence and use of a fiat currency is not dictated by government nor does it give said government the power to do what it wants with monetary policies.There are 152 fiat currencies that have failed due to excess inflation. Their average lifespan was 24.6 years and the median lifespan was 7 years. In fact, 82 of these currencies lasted less than a decade and 15 of them lasted less than 1 year.

Governments always see economic cycles as a problem of lack of demand that they need to “stimulate”. They see debt and asset bubbles as small “collateral damages” worth assuming in the quest for inflation. And crises become more frequent while debt soars & recoveries weaker.

The government benefits the first from new money creation, massively increases its imbalances and blames inflation on the last recipients of the new money created, savers and the private sector, so it “solves” the inflation created by government by taxing citizens again. Inflation is taxation without legislation, as Milton Friedman said.
First, the government policy makes a transfer of wealth from savers to the political sector, and then it increases taxes to the “solve” inflation it created. Double taxation .

which is exactly the case in India till we institutionalized inflation targeting. This did not leave wriggle room for the govt to find its way out of mountain of unproductive debt and the result is Muddle through economy

https://www.dlacalle.com/en/no-governments-with-monetary-sovereignty-cannot-issue-all-the-debt-they-want/

The show is over and we can all go home

The bounce in Global GDP growth is over as per Morgan Stanley. This is not a signal of global reflation, or synchronised growth, but the evidence of secular stagnation caused by constant demand-side policies.

We will have to wait for something to break again….so that central bankers, like superheroes can come to our rescue and restart the cycle of pumping money.

I believe that day is coming ,but this time the bailout will happen by govt fiscal easing not by monetary easing which will lead to SOVEREIGN DEBT CRISIS (rapidly rising bond yields)

why Interest rates are headed higher Globally

US fiscal policy is in uncharted territory: Running such a large primary deficit (federal revenues minus spending, not counting interest expense) in a period of strong growth and low unemployment is quite unusual, generally reserved for times of war, Goldman says.

why it will lead to higher rates across the globe?

US would be requiring huge amount of private savings to fund this deficit, projected to top USD 1 trillion dollars next year inspite of a solid economy.
US rates continue to rise as supply of bonds overwhelms demand for bond from local US private investors
US 10 year continues to rise reaching 4% ( which I believe will happen in next 12-18 months) making US bonds attractive compared to rest of the world.
The Foreign money invested in bonds across emerging markets will want to move to US to capture that rise in US yields unless Emerging markets raise rates sufficiently high to maintain the attractiveness of their local currency bonds
That means EM would have to sacrifice the growth , raise the rates in lockstep to fund and to maintain FPI money in local markets otherwise money will move to US to fund its budget deficit
The more EM raise rates , more their growth suffers and more US yields rise , the more money will move to US to take advantage of rising US dollar and rising US yields.
Picture abhi baki hai ( story is yet to be completed …… we are only in 2nd day of 5 day test match)

I must put a caveat here…. I am expecting US 10 year to revisit 2.5% before we eventually break out to 4% over next couple of years.

IL&FS update in Charts…….How Risk happens

ILFS saga continue to get interesting. When Andy Mukherjee wrote https://www.bloomberg.com/view/articles/2018-09-13/india-s-il-fs-is-facing-a-lehman-moment in Bloomberg, I was actually taken back by the comparisons to Lehman Moment. I am a little skeptical even now but I think this crisis will not blow over so easily and there is a high possibility it might spill over on other lower rated corporates. They might see their bond spread widen in coming days or at worst they might be shut out of corporate bond/commercial paper market. Since rating agencies have also been caught on wrong foot it is extremely rare for AA+ or A1+ to directly go to default), they will also tighten their so called standards further.

It is important for regulators and rating agencies to determine whether ILFS is a case of cash flow mismatch and simply overextending or something else.

The first chart is exposure of banks to IL&FS

2. The following chart is more relevant. It shows ILFS ( plus 4 subsidiaries)exposure as % of networth and as a % of credit book.

Most of it is still standard asset in Banks books

3. This is the copy to exchange of ILFS default on its commercial paper obligation. Most Commercial papers are in mutual fund books (liquid/ ultra/short term fund)and historically banks used to lend more money to corporates to payoff their commercial paper obligations and the liabilities used to shift to banks from mutual funds why?

Because Default on commercial paper or tradeable bond attract more media and public scrutiny than a default on individual loans to banks. Banks used to evergreen those loans and push default in future (problem solved)
ilfs3

4. Nomura has done a good job of quantifying the ILFS exposure but I think there are still more contingent liabilities which will come out in next few days.

ilfs4

India’s Forex reserves are all BORROWED unlike china which are EARNED

Sanjay Reddy an Economist at the New School for Social Research, New York writes on a very important which is not often analysed……India’s dependence on external financial confidence makes it fundamentally unlike China, as well as Korea, Taiwan, Singapore and other successful economies of east and southeast Asia. It makes it more akin to countries such as Brazil, Indonesia, South Africa or Turkey (collectively dubbed, with India, as the “Fragile Five” some years ago). China and other countries like it have pursued a policy that is export-oriented and manufacturing-centred, thereby generally covering their import bill and building up reserves over time In contrast, the fragile countries depend on the bets placed by foreign investors on their futures because they have failed to develop into successful exporting countries, at least on the required scale(that’s why our foreign exchange reserves can drain more quickly .Countries in this situation may grow but face continuous threats that a downturn in foreign confidence will halt their progress.

Efforts to please foreign investors with friendly policies, and robust economic growth based on domestic economic confidence can keep funds flowing in as long as the tide is favourable. Yet, these are not enough when the tide turns as a result of global factors. The most important such factor at present is the expected end of the “quantitative easing” policies that have caused cheap money to slosh around the globe, and financed much lending to and investment in the fast-growing emerging countries (of course, rising oil prices and other factors, including fears of increasing protectionism in the United States, also play a role). The export-oriented formula, “Make in India,” offers a correct prescription for India, as did Raghuram Rajan’s compatible import-substituting variant, “Make for India”. But the inadequate realisation of India’s productive potential is the ultimate basis of the ongoing vulnerability.

Conclusion

India’s failure to become a broad-based manufacturing exporter owes less to prices than to everything else that successful countries such as China do well and that India does not—adequate infrastructure, reliable and inexpensive power, an adequately healthy and educated workforce and many others. India’s remarkable success in global services exports masks this more basic failure of economic capabilities and social inclusion. Advice to the RBI and to the government to do nothing and allow the Rupee to slide confuses coping and cure. No one can predict if or when the fall of the Rupee will continue. What is clear is that it is the symptom and not the disease, and this must be not merely diagnosed but adequately treated.

Rupee, CAD and unemplyment

The most important comment in this the meeting to discuss Rupee fall came from Omkar Goswami, founder and chairperson of Corporate & Economic Research Group Advisory Pvt Ltd. who said that one matter of concern for India is the addition of 12-13 million people to the work force every year. In a world driven by knowledge, technology and machines, 80% of the extra 12 million workforce are absolutely unprepared for employment in terms of education and training, said Goswami. The other matter of concern is that even if people will be better off with economic growth, income inequality is on the rise.

Sanjeev sanyal who is the principal economic advisor said there is no need to hike rates to defend the currency. Sanyal also said that the RBI is well equipped with a robust foreign exchange reserve of $400 billion, and there is no doubt about the central bank’s ability to step in the market if the rupee weakens too far too soon

(which will be a big mistake).

I believe India needs to run a more restrictive monetary policy at this point of time and also simultaneously curtail non essential imports which will in turn help to reduce Current Account Deficit.

https://www.livemint.com/Money/A9LoCRvPx9Gw2JKXlMiwOJ/No-immediate-need-for-govt-RBI-to-take-steps-to-influence-r.html

Emerging Markets out of woods?

Heisenberg writes…….there will be more than a few stories written over the next several days about how the combination of a cooler-than-expected August CPI print in the U.S. (Thursday), a larger-than-expected rate hike from the Turkish central bank (Thursday) and a surprise rate hike from Russia (Friday), are all signs that the situation for developing economies could stabilize.This week, the dollar has come off pretty handily, with gains across Emerging Market currencies . US Retail sales missed pretty handily on Friday which, all else equal, should put more downward pressure on the dollar. The sharp rise in bond yields across EM prompted Goldman to comment that ” EM now has a potentially adequate “yield cushion”, which the bank says could support the space going forward”.

All of the above (i.e., a couple of negative surprises from the U.S. economy with CPI and retail sales missing, rate hikes from Turkey and Russia, and rising real rates) suggest stabilization might be in the cards. There are more key EM central bank meetings on the horizon, and they’ll be watched closely.

Despite all of this, it’s still unclear that emerging markets are out of the woods. Trade escalations have played dollar positive since April and U.S. foreign policy is becoming more unpredictable seemingly by the day. In almost all cases, that unpredictability has a positive read-through for the dollar What’s needed here are convincing signs that the U.S. economy is losing momentum and/or some kind of dovish lean from the Fed. In the absence of that, it seems just as likely as not that the market will continue to oscillate between fleeting bouts of dollar weakness and a renewal of greenback strength, with the latter continually chipping away at fragile EM sentiment..

In conclusion although an argument has been made of EM stabilization SocGen has take on who’s most vulnerable, ( in case positive script does not play out)

To assess vulnerabilities across emerging markets, we examine external positions, short-term external debt, foreign currency-denominated debt, fiscal and debt positions, reserve adequacy, and foreign bond ownership. A scorecard of gross (i.e. total number of indicators that suggest high vulnerability) and net (the summation of negative, neutral, positive vulnerability factors) vulnerabilities sheds light on which currencies might experience additional stress as the Fed continues to tighten monetary policy or if other factors impair EM sentiment.
High vulnerability: Turkey, South Africa, Malaysia, India, Indonesia.
Medium vulnerability: Mexico, Chile, Brazil, Colombia, Czech Republic, Hungary, Poland.
Low vulnerability: Korea, China, Thailand, Russia.

Indian consumption and rising consumer leverage

According to the Reserve Bank of India (RBI) data,

In May 2010, the total outstanding personal loan amount with banks stood at Rs 5.89 lakh crore. This amount as on June 2018 was Rs 19.33 lakh crore.

Consumer durable loans’ as on May 2010 was Rs 8,138 crore, and on June 2018 it was Rs 20,300 crore.

Outstanding credit cards’ amount as on May 2010 was Rs 19,579 crore, and on June 2018 it was Rs 74,400 crore.
These are all unsecured loans, i.e., you don’t have to give collateral to borrow.

As on June 2018, the total number of credit cards outstanding were 3.93 crore, and on June 2011 it was 1.76 crore.

Since 2010, a lot of banks have changed their strategies and have started focussing more on retail lending. “The size of their retail loan books has gone up due to this change in strategy. Categories like mortgage and auto loans are not much of a worry because they are collateralized with fixed assets. The miscellaneous category is of interest as it is large in size and needs some degree of monitoring. These are generally unsecured loans that are usually taken for purposes like marriage, festival etc

According to CRISIL a large proportion of customers taking personal loans, consumer durable loans are working class in the age group of 25 – 45 years. In terms of geographic split, metropolitan cities (population greater than 10 lakhs) accounted for 80% of the credit card customer base in FY17. However, the share of metro cities has been continuously declining from close to 99% in FY12 to 80% in FY17,”

This has been the biggest driver of Indian Growth and the above data is only from banking system. NBFC, HFC, P2P and other fintech company related consumer lending is not captured in the data.

The two components in equation of C+I+G+ ( X-M)= GDP, which have worked wonders for India is Govt spending and Consumption . Indian household leverage is low compared to Emerging Economies but needless to say it is rising very fast.

My concern is that rising consumer leverage is met with stagnant salaries/wage (except for govt employees) and we may start to see stress on consumption and consumer balance sheet in next couple of years .