Wednesday, August 26, 2009

New Exim Policy (2009-2014) - Some issues for review

This will be interesting news today. Commerce and Industry Minister Anand Sharma has many concerns that he would need to address. Let me put forth some of them

1. Increasing protectionism in the developed world especially wrt primary articles of exports. Does India need to worry?

2. The increasing services exports game...the BoP components of business services that we discussed. Does the new FTP have an agenda for the services sector?

3. Given the fact that India has not been a great export oriented economy, do we look forward to major changes that will make us so?

4. China's economy is set to take a new place in the coming years..does our FTP have to exhibit a China focus?

5. There is news that the FTP may explore Latin American and African markets especially with respect to traditional exports? Do we have competitive advantage?

Will look forward to your responses based on the new Exim Policy being unveiled today (Aug 27, 2009)


Monday, August 24, 2009

Decoupling: A Reality or a Myth???

A couple of years back ( late 2007), before the market meltdown, when it was just an ordinary recession, there was a theory that the big emerging markets (BRIC: Brazil, Russia, India, China) were "decoupled" from the US economy(& other developed economies). Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. But in reality, Economies have become more intertwined through trade and finance, which should make business cycles more synchronized. The slide in emerging stock markets (in 2008) on Wall Street's fall seems to support this view. These people on the blue channel suddenly have, forgotten about Decoupling and are seldom find giving the statement that::

“When America catches cold( & not swine flu), rest of the World starts sneezing”.

Have these white collared people forgotten their statements made a couple of years back???

Decoupling does not mean that an American recession will have no impact on developing countries. That would mean too impractical. Such countries have become more integrated into the world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). Consumption is gaining more weight in the US economy. For example, it contributes about 72 percent to the GDP of China. The complex web of financial transactions, makes the global economy tightly coupled. The “decoupling” argument became the latest big idea to shrink dramatically when tested in the real world (provided if we leave out Chile which still reported a GDP of 8%+ in FY2008). Decoupling was all the rage early last year when international financial markets all but ignored the increasing turmoil in the U.S. economy and stock market. However, some advocates of this theory still believe that the basis of comparison they selected got them into trouble. U.S. economies that were showing wear and tear then were those to which the rest of the world would never be heavily exposed. The U.S. slowdown was driven almost entirely by housing, it made sense that the rest of the world kept right on going. Housing is a domestic story which was strangely linked to the entire world.

The rise in risk aversion is global and will have an impact on credit terms and availability everywhere. And we're finally seeing evidence that the U.S. job market is losing steam and consumer spending is slowing. It was only through economic liberalization (LPG 1991-92) that the economies of Asia were able to grow as fast as they have, allowing for the development of conspicuously consuming middle classes. This resulted in opening up of economies ( i.e. trade, finance etc) and therefore rise of inter-dependence.

The new Asian consumers may not be able to compensate for all of the exports that would be lost during an American recession( the textile sector which depended heavily on exports is already facing problems and their voices for an exclusive severance package keeps on rising with time).

The irony is that these economies are more coupled with the rest of the world than they ever were in the past.

Saturday, August 22, 2009

Currency carry trade.

Currency Carry trade.Started with the Japanese Yen, continuing with US Dollar and can start with Chinese Yuan. The interesting observation is that it has the huge capability to effect the direction and magnitude of global capital flow. (BIS Survey on “Evidences of Carry trade”, September,2007) .
What is currency trade? Currency carry trade i.e. borrowing short term loans in low interest currency (funding) and investing in high yielding currency (target). The three conditions to ensure profitability are stable funding currency, interest rate differential and appreciating target currency. It provides liquidity in the target currency country, thus reducing the cost of capital for that country. It comes to emerging market mainly in the form of FII, providing much needed liquidity in the countries. According to Kotak Mahindra Bank, the increase in FII 15.8% in 1st quarter of 2009 can be attributed to Dollar carry trade. It provides better investment opportunities for the investors worldwide.
Sounds harmless, right?
Carry trade is a wave, until it turns into a tsunami by unwinding. Any expectation of target currency depreciation, funding currency appreciation and decrease in interest rate differential can lead to massive sell off of the target currency, crashing the stock markets. As can be seen from major stock market fall of 2007 and 2008, when the appreciation of Yen took place, even Japan’s economy was deep in recession. The recent fall in Nikkei is also being attributed to the unwinding of Yen carry trade.
The evidences of carry trade are everywhere. The continuously falling Dollar Index, the foreign holding of Japanese reaching 7 year high and China issuing dollar denominated bonds etc etc. The so called “green shoots” like” rising asset prices, rise in stocks indices.” seen as revival of world economy can be just one of the overshoots of omnipresent (well almost!!) dollar and yen carry trade.
The thing that strikes me that what if the unwinding is in offing? What if as the world economy recovers, the dollar appreciates and the interest rate rises to check inflation and widening deficits in US? What if the unwinding of dollar carry trade makes the growth of emerging markets go for a full toss? Will it push the world economy back into another recession? What is the probability of this happening?
Carry trade does carry many million $“questions “in its womb.
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An introduction

“Arguing against globalization is like arguing against the laws of gravity.”This statement by Kofi Annan truly specifies international finance is not a matter of choice any more. The international events has deeper and broader impact on nation, corporate and individual ,as manifested from Great Depression to- not- so-long- ago financial crisis.
So here is the is the avenue for the discussion of all major economic event, predict crest and troughs of business cycles, apply Keynes and Hicks, know all “micro” and “macro” NoMics, test if IRP and PPP are at par with the reality and of course, know baskets full of Currency!!!
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This blog is a team effort of two people. We are:
1. Prof Archana Pillai,Faculty,IBS Hyderabad
2. Tanuja Kumari,Student,IBS Hyderabad