A crisis as big as the subprime one is brewing in Asia

Feb 15, 2011

In this issue:
» Fund flows to emerging markets dwindling
» Government to do away with subsidies?
» Oil prices to touch US$ 300 a barrel
» Home prices to drop in major cities
» ...and more!

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In 2009 and 2010, Asia was the apple of the investor's eye as countries in the region recovered strongly from the global financial crisis to post healthy growth rates. But loose monetary policies in the West and high inflation have posed its own set of problems for the Asian economies. The biggest problem that Asia has been witnessing in recent times is the surge in food prices. And this issue could end up being more chronic rather than cyclical in the years to come. For starters, weather patterns have become unpredictable which in turn has hampered agricultural production of late. Then there is the issue of population. Asia alone, for example, will have another 140 million mouths to feed over the next four years. That is in addition to the almost 3 billion people in the fast-growing region currently. This means that demand will remain high in the future and supply may not always catch up.

The other big fallout of soaring food prices for the Asian region is likely to be a significant rise in debt. So far, it was believed that bloated debt was a problem that only Europe and the US were facing on account of the global crisis. But Asia is also likely to join this bandwagon. Take India for instance. It still has one of the highest proportion of poor in the world. This obviously means that most will not be able to afford food at such high rates. As a result, the Indian government would most certainly increase subsidies sharply and cut import taxes, which would put an additional strain on its finances.

Indeed, the crisis in Egypt was a product of the inability of the Egyptian government to tackle the problem of high inflation. And though extreme, noted economist Nouriel Roubini believes that persistently high food prices and inflation could raise the risk of more governments getting toppled. Certainly, Asian governments including India will have to give serious thought to some long term reforms if such shocks are to be avoided in the future.

Do you think that rising food prices will lead to a bigger crisis in Asia in the future? Share with us or post your comments on our Facebook page.

 Chart of the day
In terms of fund flows, 2011 does not seem to be turning out well for emerging markets. In fact, today's chart of the day shows that funds have been withdrawn from emerging markets in 2011 so far as compared to 2009 and 2010. In those years, investors rushed to emerging market shores to capitalise on the strong growth opportunities there as the developed world languished in recession. Now with inflation rearing its ugly head and food prices soaring, concerns have begun to emerge from these fast growing markets too.

* Up to Feb 8
Data Source: The Economist

An increase of 245%. This is exactly how much the cost of major subsidies has gone up in India in the past five years. And mind you, this does not even include subsidy on oil. In CAGR terms, it amounts to a huge 28%. When one considers India's nominal GDP growth rate of 14%-15%, it quickly becomes clear that such a growth in subsidy is not sustainable at all. Fortunately, the Government seems to have woken up to this fact. Hence, rather than trying to increase subsidies further, it is now looking to reduce pilferage in the system.

As a big step towards the same, it has set up a task force to create a way to directly transfer cash to the ultimate beneficiaries of various subsidy schemes. In other words, it is hoping to move towards a cash transfer system from the current system of PDS transfer. Needless to say there are challenges galore. The most pertinent being the problem of financial inclusion of India's most needy. However, we are happy that at least the Government has its heart in the right place and is trying out something different. Mind you, even a moderate success on this front could do wonders for the India growth story in the long run.

China's selfish currency policies have attracted criticisms from all counters. But the dragon nation seems to have done well for itself by managing to contain its currency appreciation. Lower inflation and higher imports in an attempt to reduce the economy's dependence on exports have worked in this direction. China's imports rose 51% YoY in January 2011. To put things in perspective, this brought down the country's trade surplus from US$ 13 bn in December to US$ 6.5 bn in January 2011. This data may be colored with seasonal impact due to the New Year festivities. However, weaker trade surpluses is what the government is aiming at. Notwithstanding the fact that it is coming at the expense of other economies. The G-20 nations have expressed displeasure over China's trade and currency policies in the past. But given its apex position in global trade, it seems that China will have its way longer than expected.

Consolidation is the buzzword these days. We are not talking about consolidation amongst companies. Instead, we are referring to consolidation among global stock exchanges. We recently heard about the proposed tie-up between NYSE Euronext and Deutsche Boerse, as also between LSE and Canada's TMX. These proposals have prompted talks that the global exchange market will shrink to 2-3 big players going forward.

Amidst this, however, Asian exchanges are likely to miss the consolidation bus. Blame it on tough regulations, and complex ownership structures. But the stakes are high here in Asia. While the US and Europe saw the number of new listings fall in 2010 (by 2% and 0.3%), Asia-Pacific bourses saw 3% new firms getting listed.

Overall, Asian exchanges might be treated as ‘national pride', but they need to move fast in catching up with their western counterparts when it comes to governance.

Higher inflation rates are playing havoc in yet another sector. This time it is real estate. To contain the ever rising inflation, the RBI has been hiking interest rates. And it plans to continue doing so in the near future as well. This has led to higher cost of borrowing funds, which in turn has led to a slack in the demand for homes. Net result being that prices for homes in major cities are expected to drop by as much as 30%.

This is definitely exciting news for those who are seeking to buy a home. But the point is that when the funds are so expensive, how will these people fund the purchase? This would just lead to demand dwindling. So is this the end of the real estate bubble at least for the major cities? Looks like it.

Here comes another estimate for oil prices. The oil analyst Charles Maxwell from Weeden & Co. has come up with a price level of US$ 300 per barrel for crude in the coming decade; regardless of what happens in Egypt. We agree that Egypt will hardly be a deciding factor in long term direction of oil prices. Infact, we believe that the concerns driving the current short term rise in oil prices are overplayed. These are driven by speculations that the crisis will cause contagion engulfing oil rich Middle East which is a naïve assumption.

That oil prices will continue to soar in the long run is a simple manifestation of demand supply theory. To serve the growing oil demand, the current reserves are depleting at a fast rate. What makes things scarier is that as per IEA, the crude oil production has already peaked in 2006. Unless we come up with a major oil field discovery in the near term, the only solution is increased investment on development and usage of alternate energy sources.

In the meanwhile, the Indian stock markets were trading above the dotted line as buying activity intensified during the post noon trading session. At the time of writing, India's benchmark index, the BSE-Sensex, was trading higher by about 60 points. Stocks from the banking, oil & gas and power sectors were in favour, while those from the capital goods and realty spaces were amongst the top losers. As for the rest of Asia, the sentiments seemed mixed as China and Japan were trading marginally higher, while Hong Kong was trading weak.

 Today's investing mantra
"Investing isn't just about probabilities. It's about consequences, and you've got to be prepared for them." - John Bogle

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17 Responses to "A crisis as big as the subprime one is brewing in Asia"

sara tpalat

Feb 19, 2011

Yes, It is going to be a big issue wherein there going to be riots and atrocities. The population growth to be controlled. It is obvious that if the current situation continuous, the need for food is going to be more. A long term policy focusing on the population growth to be implemented by all nations.


ronodeep das

Feb 17, 2011

india is unlikely to face "food crisis" as a result of production. supply shortages, may arise due to distribution bottlenecks,which is infrastructure centric, that needs to adressed as a matter of policy...



Feb 16, 2011

Food scarcity is a genuine issue which every nation should address urgently. But, I don't quite agree with the Oil price prediction for the next decade. I am almost certain alternative energy would be in place by the middle of this decade. Did the so called experts and consultants in the U.S and Europe predict the downturn that began in 2006/2007 !!! Not at all.


zephyrine goveas

Feb 15, 2011

The doomsday scenarios have been painted time and again on the one side and on the other you exhort the readers to invest through your Value Pro, Hidden Treasure etc recommendations. India has enormous potential to expand agricultural output. There was more hunger in India in the 70's with less population, than now with one billion plus population. In the 70's, there was guest control order in Mumbai whereby one could not have lavish celebrations including wedding receptions. It was difficult to get bread (pav). If there are hungry people now, the reason is wastage. The food wasted alone can feed millions in India. One should analyse how the well to do waste food in India. The amount of food wated at weddings and other functions is shameful. So, the need of the hour is to have guest control order even now, so that the enormous food that is being wasted at thousands of weddings and other functions especially by the well to do can be avoided. The price of food also will come down.


Sunil Godse

Feb 15, 2011

I agree. Food security is a world wide problem. Please look at presentation on IDFC Web site.Food Security. Hunger Not a choice.


china PK usa

Feb 15, 2011

china or chinese do not like war£¬all about u know i guess u heard from voa£¬chinese target suspass USA in next decades



Feb 15, 2011

A major crisis is indeed brewing with regard to high food prices. India is not onlyhaving to feed more mouths but are mouths are also looking for better quality food and higher protein as our disposable incomes have increased.
Our food production is woefully inadequate with obsolete agricultural practices, poor storage and handling. The problem is further compounded due to purchasing by the food processing industry, online commodity trading making basic food prices expensive. Further government purchases at market price and resale through the public distribution cycle at subsidized prices compound the problem.
In addition very few of the current and future generation are likely to take up agriculture as it is seen as boring in comparison to the IT industry.

We do have a major food crisis on hand happening right now and it is time for the government to act NOW.


Anupam Garg

Feb 15, 2011

it is quite obvious that rising food and energy prices will lead to crisis. i hav personally given up on hope of govt stepping in & saving us. It is now upto the people of the country to do adequate planning on their own & save themselves from the clutches of inflation.


Ashok Lele

Feb 15, 2011

Statistic about population & food security are perfect.Our rulers are planning haphazardly, for instance setting up of SUPER THERMAL POWER projects.Many are planned & will be operational after 5 to 10 years from now.Availability of COAL will be a problem. This has came in ET recently (Read comments by Shreeprakash Jaiswal minister in charge of coal & mines.Billions of Rs. investment in Ultra mega power projects ! Nobody is speaking about curtailing population which will pose serious threat to our "MERA BHARAT MAHAN" Agricultural land is converted into Industrial hubs known as SEZ ! Cannot comment on many other issues.Let us pray GOD to save AAM AADMEE ....


Kirti Shah

Feb 15, 2011

This article has rightly alarmed Asian countries & in particuler India.Poverty(food) can lead the situation beyond imigination.Food and high inflation must be upper most in the mind of Goverment,failing which situation may take ugly turn.Hope good sense prevail.

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