India’s Trampled Roaming Turf
Indian shares alone among major Asian emerging markets turned positive in local index terms, as foreign investor net inflows also reappeared in August due to good earnings at a cross-section of top thirty companies, despite price-earnings ratios outstripping the global average by seven times. As Prime Minister Narendra Modi underscored in his last Independence Day speech before national elections, expected 7.5% medium term gross domestic product growth in the world’s number six economy was “running elephant” pace, even if consumer inflation was back to 5% and fiscal and current account deficits were criticized in recent ratings agency and International Monetary Fund reports.
The rupee slipped to 70/dollar, below the level five years ago at the height of the “fragile five” scare, despite central bank tightening and intervention from the $400 billion reserve pile, as bond investors in contrast target India for the largest outflows. They accuse Governor Urjit Patel of erratic and missing communication on monetary and exchange rate policy, with the gap even more noticeable since the June exit of top economic advisor Arvind Subramanian, who returned to a US think tank. On the structural front too, fund managers alternated between skepticism and acceptance of tax and banking sector changes as an underlying allocation rationale. Performance is likely to continuing gyrating into the poll period, without clarity on the Modi first term legacy and future plans, as the broader asset class endures harsher judgment after Turkey’s crisis.
Former Indian officials poked holes in the Modi Administration’s track record, with previous Finance Minister P. Chimdaram faulting demonetization and unified tax complications, with additional rate overhaul from the Goods and Services Council in July, for cutting fixed capital formation below 30% of GDP. An old economic planning head warned of “populist spending” to derail fiscal responsibility, which could include intact subsidies shielding against higher oil import prices. India Ratings decried a 7% drop in household savings the past five years to 16%, while Moody’s estimated the current account deficit will swell 1% to 2.5% of GDP, half the fraction during the 2013 US Federal Reserve Taper Tantrum. Fitch chimed in that the weaker currency will aggravate banking and corporate stress and repayment risk in view of unhedged borrowing, just as big state lenders began to double bad asset recovery in the first quarter under new procedures. The setback revived momentum for a central disposal agency, with a proposal now circulating for a public-private structure with $15 billion in initial capital that would focus in particular on idle power facilities.
The IMF acknowledged “important” insolvency and foreign direct investment steps in its August Article IV survey but urged greater labor and financial sector ones for productivity and savings. Credit growth was down to 12% annually, amid slow deleveraging and poor governance and inefficiency among the dominant state banks. The Fund urged more private competition, as US venture capital giant KKR launched a local financial services unit with a full small business line. It recommended adherence to the 3% fiscal deficit cap and longer-term public debt reduction to 60% of GDP, and insisted that recent agricultural and housing support be counted on-budget. Further interest rate hikes are in store with “upside” inflation, and could invite future government and corporate bond inflows as foreign portfolio ceilings are in principle relaxed. The 2018 Banking Reform Roadmap is “vague” and board independence and privatization should accompany future recapitalization. Trade, infrastructure and product regimes are also outdated, according to the report.
In the region Malaysia too has been on a relative tear, with an 8% gain since July and $100 million poured into the IShares US-based ETF last week during Turkey’s collapse. Prime Minister Mahathir Mohamed at the 100-day mark put $20 billion in Chinese projects on hold over debt concerns, pressed investigations and asset seizures around the IMDB scandal, and replaced the main sovereign wealth fund board. The growth forecast was slightly pared to 5% with the current account surplus intact, and the central bank eased mandatory hard currency export surrender rules on a possible path to reauthorizing offshore derivatives banned under the previous government. Foreign investors maintain one-quarter local bond ownership as Moody’s Ratings praised fixed-rate Islamic issuance as a sound strategy which can withstand wily old politicians’ uneven policy delivery, with Asia now scrambling for these safeguards.
