Asia’s Irrepressible I-Rate Sentiment
Through August India and Indonesia were unshielded by BRIICS protection as they led regional currency and capital market falls with stocks off 20 percent on the MSCI. Lame duck governments could not inspire confidence despite changes in central bank personnel and policy, as corporate leverage and refinancing needs raised anxiety against the tougher external funding and economic growth backdrop. For both countries current account deficit and short-term debt requirements absorb 90 percent of reserves, which in turn are off over 10 percent on regular exchange rate intervention with the rupiah below 10,000 and the rupee, 65 to the dollar for post-crisis bottoms. Government bond auctions have failed on postponed fiscal adjustments and new spending plans, including tax breaks for labor-intensive Indonesian investment and a sweeping Indian food subsidy to fight hunger nationwide although geographic and rural-urban concentrations differ. In Jakarta state pension funds and enterprises were ordered to buy shares and Bank Indonesia has embarked on consecutive 50 basis point rate hikes. Foreigners liquidating fixed-income positions have complained of dollar access delays and official price interference, as backup swap lines are reinforced through the regional Chiang Mai initiative dating to the 1990s Asian crash aftermath. The GDP growth forecast has slipped under 6 percent and inflation may touch double-digits on higher fuel costs and currency depreciation. Scandals have erupted at the oil regulator and anti-corruption commission to underscore the poor governance ranking, as military and business establishment figures are early candidate favorites along with Jakarta’s dynamic provincial head. With company earnings slumping, P/E ratios have descended to the core market average and despite recent rapid consumer credit expansion banks are “resilient” with good capital adequacy and NPL measures, according to Fitch Ratings.
Indian stocks have also lost their typical premium but foreign investors remain net sellers with the big conglomerates owing $20 billion in external debt through year-end, with a total of $170 billion to be repaid by all private and government borrowers by next March. Expatriate deposits will be sought to help bridge the gap and dedicated dollar facilities were established for energy imports to ease rupee tension. In his inaugural speech central bank chief Rajan described the economy as “fundamentally sound” as he promised to revive the original financial services modernization agenda which accompanied Prime Minister Singh’s coalition re-election. As he appeared before parliament to promote long-term infrastructure facilitation and opening his ministerial team acknowledged that both domestic and global factors were to blame for the immediate crisis slashing GDP growth to 4.5 percent. Dr. Singh predicted exporters could benefit from better competiveness at the same time the vaunted offshore services industry reported record shrinkage. Returning Finance Minister Chidambaram has tried to stay above the fray as he announced multi-point strategies for budget and trade deficit reduction and limited the rice transfer program with popular anger of all varieties raging.
