Are we seeing a repeat of the 1997 Asian crisis? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are we seeing a repeat of the 1997 Asian crisis? 

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In this issue:
» Current account balances are deteriorating
» Innovation is the way to come out of stagflation
» Why the future remains positive for gold
» Are foreign investors willing to invest in India?
» ...and more!


00:00
 
Rewind to the year 1997. This was when the Asian financial crisis unraveled beginning in Thailand when the Thai Baht collapsed. Indeed, Thailand had racked up massive foreign debt putting pressure on the currency. The Thai Baht was traditionally pegged to the US dollar. But there was dearth of foreign currency to support this fixed exchange rate. The crisis reached such a head that the government was forced to float the Baht, effectively leading to its collapse. What more, this was not contained within Thailand. Infact, the contagion spread to other South Asian economies as well, leading to a loss of confidence in the region.

Having burnt their fingers badly, these economies began getting their act together and focused on building foreign reserves which would enable them to deal better with any future shocks. It helped that their economies also started performing better. All of this meant that emerging countries in general began to evince much interest from foreign investors as their economies were set on a high growth trajectory while growth began to stagnate in the developed world. So much so that when the 2008 global financial crisis struck and the developed world sunk into recession, all hopes were pinned on emerging markets, particularly China and India, to make up for this loss. Thus, when the central bankers starting turning on the printing presses, quite a lot of this money flowed into various asset classes in the emerging countries.

But the scenario has not played out as per plan. Emerging markets have also been struggling in the last couple of years. The issues have been as much led by global factors as they have been by problems specific to each country. The problems most common seem to be the formation of asset bubbles, general slowdown in the economy and high inflation.

What more, there seems to be more pain in store. As it is, the Fed's QE taper has put pressure on emerging market currencies because of huge capital outflows. And the steep fall in the Argentinian peso yesterday has not helped matters either. Indeed, as reported in the Financial Times, the currencies of most of the emerging countries tumbled yesterday following the developments in Argentina. This has raised fears of another crisis unraveling similar to the 1997 Asian crisis.

Argentina's problem has been a product of a large current account deficit, dwindling foreign currency reserves and inflation reaching as high as 25%. It has basically highlighted the ineffectiveness of the Argentine government in managing the economy. Most economists have been quick to point out that it would be extreme to compare the current developments to the Asian crisis. Simply because all of the emerging countries are not alike, each having different issues.

That may well be the case. But it certainly reinforces the harmful effects on an economy led by gross mismanagement by the government. Eerily, India is also grappling with some similar problems, most notably current account deficit and high inflation. The current government has also received flak for not being able to revive the economy through the implementation of productive reforms. While we are certainly in no way are suggesting that India will face the same fate as that of Argentina, we hope that our faith is further restored when the new government that comes into power this year puts the economic development of India a priority on its agenda. This would certainly go a long way in curing the many ills that afflict India currently.

Do you think that the crisis unfolding in the emerging markets currently is similar to the 1997 Asian crisis? Let us know your comments or share your views in the Equitymaster Club.

P.S. - We would like to remind our valued readers that registrations for the The Equitymaster Conference 2014 are set to close today i.e. 25th January 2014. And from what we have been told, there are very few seats left. So make sure you register for the same before it gets too late!

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01:26  Chart of the day
 
One of the reasons that led to the steep fall in the Argentinian peso has been a large current account deficit. And as today's chart of the day shows, deteriorating current account balances seems to be a problem affecting many of the countries both in the developed and developing world. India's current account deficit is also not small by any standard. So far, imports have been rising mostly because of oil and gold, while exports have failed to catch up. The government so far has tried to correct the situation by putting curbs on gold imports. But from a longer term perspective, a much more constructive move will have to be employed. And this would largely mean making exports more competitive.

Current account balances are deteriorating


02:05
 
Different schools of thoughts have all come up with different reasons as to why economic growth has come to a near standstill. And there's one out there that holds lack of innovation responsible for the current state of affairs. Making this claim is Nobel Laureate economist Edmund Phelps. As reported by moneynews.com, Phelps is of the view that its surprising people are suddenly talking of stagnation. Whereas as per him, we've been in stagnation since as way back as 1972! Governments have thrown all sorts of ammunition and now we are kind of out of that ammunition. And hence there is the need to dig deeper as per him if we have to get out of this rut.

Consequently, he has urged policymakers to open the gates for innovation. Phelps does seem to have a point here. There's all this talk that we need to reduce our debt levels. But there's another way of solving the debt problem. And that is by growing so fast that within few years, the debt levels do look manageable. And this can be made possible only by innovation. Therefore, what Phelps wants is a change of attitude. Well, we can't help but agree.

02:35
 
Last year was a year of surprise with regards to trend in gold prices. Gold, considered as a hedge against inflation and the trade of the last decade, witnessed the end of a spectacular bull run. In the preceding years, global recession and unabashed money printing turned investors towards gold. And then in 2013, gold prices fell by 28% as US hinted towards tapering.

Does this mean start of a bear run for gold? Mr. Peter Schiff, the CEO of Euro Pacific Capital doesn't think so. Infact he expects the future to be promising for gold. Mr. Schiff believes that at current gold price levels, the market has priced in a complete tapering. However, he also believes that it has been aggressive in doing so. This is because Fed is unlikely to withdraw the stimulus and follow the tapering timetable without throwing the economy off the road to recovery. Well, he indeed has a point. Afterall, it is not going to be easy for US to adjust to the new policy after years of money printing. As uncertain times lie ahead, we believe investors should have some exposure to this yellow metal in their portfolio.

03:06
 
Alan Greenspan's accommodative monetary policy saw interest rates in the US going from 5% to 0.25%. This not just fuelled asset bubbles in the US. But also prompted ambitious companies in India to look for global presence. One would recall large Indian conglomerates raising cheap foreign debt to fund expensive acquisition. There were even cases where the company acquired was larger than the size of the acquirer. Even though interest rates in the US have not gone much higher, the chances of further money printing stands diluted. Does that mean ambitious India Inc will have to rein in expansion plans? Well that does not seem to be the case. This time around the source of cheap money seems to be another money printing obsessed economy Japan. Large Japanese banks are currently more than willing to fund leveraged buyouts for India Inc. And at a time when their American and European counterparts are unwilling to bloat their balance sheets, the Yen denominated loans are a relief to India Inc. However, one cannot predict how long will the Japanese banks keep the cheap yen supply on. And Indian companies certainly stand the risk of piling on too much debt in the greed of cheap money. Not to mention the forex risk that comes along with it.

03:38
 
A survey released by Ernst & Young has revealed some interesting reasons for dwindling foreign investor confidence in India. As per the survey, unhealthy business environment and political uncertainty are key factors for lack of investor interest. If the situation improves, more than half of the respondents are willing to invest in India. Labor arbitrage is considered to be a key reason behind it. However, there is one cause of worry. Increased number of respondents compared to last year have shown their unwillingness to invest in India. This is a sign that investors have been fed up of bureaucracy in the last one year. Also, other emerging markets like Philippines and Vietnam have become hot spots in recent times. If the Indian government wants to attract foreign capital, it needs to undertake a policy overhaul. Unless the ease of doing business is improved, foreign investors will flock to other markets. This will rob India of the necessary foreign capital which has been its backbone of growth.

04:10
 
Global indices slipped in the negative territory in the week gone by as sell-off by investors intensified. Factors such as slowdown concerns in the second largest economy, China, reduced support from US monetary policy as well as political problems in Turkey, Argentina and Ukraine accentuated the bearish sentiment. France, Germany and the US were the biggest losers with each of the indices tumbling by more than 3%.

Also, indices in the UK and Japan were down by 2.4% and 2.2% respectively. China's manufacturing sector continued to battle sluggish demand from traditional markets in the US and Europe. Its Purchasing Managers' index slipped to 49.6 in January, the first time in six months, signaling a contraction. The index was 50.5 in December. However, China's benchmark index saw a jump of 2.5% as money market rates fell and property companies rallied on better earnings prospects. But Hong Kong and Singapore indices declined by 3% and 2.3% respectively.

Even the Indian markets remained almost flat. Slowdown in manufacturing in China as well as fears of a rate hike in the monetary policy by RBI on 28th January weighed down on the markets. The wholesale price inflation (WPI) is still ruling high despite easing off in retail inflation. This in turn has sparked speculation of a rate hike to rein in inflation.

The sectoral indices remained mostly negative for the week gone by. The biggest losers were oil and gas (down 1.5%), realty (down 1.5%) and power (down 1.4%). The IT stocks were the biggest gainers on strong quarterly results with the BSE IT index (up 1.4%). Banking, consumer durables and pharma were the other indices that managed to report positive gains for the week.

Performance during week ended Jan 24
Data Source: Yahoo Finance


04:56  Weekend investing mantra
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball." - Warren Buffett
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9 Responses to "Are we seeing a repeat of the 1997 Asian crisis?"

BISWESWAR GHOSH

Jan 29, 2014

I did not yet understand correctly why and how the QE tappering functions. step 1 Fed prints money by seeling Bonds. Who buys Bonds and how money printing tends to divert US public fund to emerging Market when the Stock Market in US has swelled doble over couple of years. What is the relationship between QE teppering vis a vis Bond Market falling / rising and outward flow of US funds from India to home country. I like to recieve one elaborated essay on it.

Like 

rohit dave

Jan 27, 2014

Till the people will try to improve the morality and ehics to change the cenario by cleanlyness,education.and we the people have to come out from religious mind expenses on religion is more thane total of education and senitation

Like 

chandrasekaran

Jan 27, 2014

Dear Sir,
a very good article, which reveals the facts on currently spreading dangers on our economy & an urgent need for awakening for the correction & fixing the holes in CAD.Other wise it is sure that our economy might get in to the Trap of vicious poverty cycle which take more of our labor to get out of it.Widening CAD with Bulging subsidies & Himalayan corruptions are well known factors, pull our economy in to the depth of irrecoverable sickness.

Like 

manoharkantak

Jan 27, 2014

New Government will not be able to do miracles. The mind set of people is so polluted, that we can only hope. Effect is to be noted as time passes. It is going to be a coalition government, but with Narendra Modi as PM there are better hopes as he will trim down the subsidies and wasteful expenditure. That will raise inflation temporarily, but usage will also be reduced subsequently.

Like 

Govind

Jan 26, 2014

Yes I feel that 1987 is going to repeat in Asia. India is going to face worst I believe.

Like 

harjeet singh kalra

Jan 25, 2014

I agree with Mr Edmund Phelps. The heavy debt in the Ameican Economy supported to a large extent by all countries investing in American Treasury Bills example China is sustainable because it has Innovation .Two important examples process for extraction of Shale gas and three dimensional manufacturing alone have the potential to provide impetus to US Economy in the years to come.

Like 

girish shah

Jan 25, 2014

I hope u seriously read my letter -u see a lot of wealth(not money) of india has been siphoned off to the tune of lakhs of crores by the congress and its friendly parties .all of them had already realized in 2011 that they will not win the 2014 elections and may be this is the last chance to loot .so u see the chart of our currency how it toppled since 2011 .and despite all the hula bulla the American and European economies are limping and not sinking on our wealth.the rise of the marwadi gang at delhi has come from that time I TILL age 56 was never worried about indias future but the present set up is giving me sleepless nights.pray to god that modi wins by a huge majority or else there will be total chaos each politican raping this country AND PUTTING IT BACK TO THE PREINDEPENDENCE ERA.

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Harjeet singh kalra

Jan 25, 2014

Yes we might go the same way.The requestest for reduction in import duty on gold any relaxation in 80:20 scheme is poorly timed. Any relaxation at this juncture would be suicidal.Besides increasing CAD it will put pressure on rupee which may follow the peso path.further it may well lead to a credit downgrade even before the elections. Our FM and RBI are wise enough to realise this but may be pressurised by the political establishment to reduce the duty snd tinker with the 80:20 Scheme.

Like 

SHAH DILIPKUMAR

Jan 25, 2014

An excellent lucid and simple covering all corner aspects of economy for a common people to economic doctorate and eeven rbi governor who ignores common people to win the favor of ruling party absolutely unbiased views for all of us

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