India must lead the emerging markets

Emerging markets (EMs) are bracing for a fresh bout of pain and pressure. Surging interest rates, soaring debt burden, slowing economic growth and slackening external trade are beginning to take a toll on the currencies that are seeing sharp depreciation.

An interesting and ironic aspect is that G20, that came into being in 2008 to restore economic growth and financial stability in the aftermath of the global financial crisis, is chaired by Argentina this year, where domestic interest rates are shooting up to 40 per cent and the currency is on the verge of collapse.

Growing debt

What do the data say? On the last count (2017), the global debt level stood at $237 trillion of which $56 trillion is from EMs forming 215 per cent of their respective GDP. China did a bit of paring but its household debt as a percentage of disposable income reached 104 per cent just a tad lower than 109 per cent of the US. Its total debt/GDP ratio is at 300 per cent and corporate leverage ratio at 160 per cent.

The proportion of stressed firms that cannot cover interest expenses is currently hovering between 15 and 25 per cent in major emerging economies such as Brazil, Turkey, India and China. FX denominated debt of EMs reached $8 trillion forming 15 per cent of the total debt. More than $1.8 trillion of debt is likely to come up for due in 2018 with much of it from China, Russia, Turkey and India. The US Fed tightening interest rates from 0.875 per cent in the first quarter of 2017 to near about 1.75–2 per cent now and EU’s plans to halt further purchases in €2.4 trillion bond market are likely to add further heat on the redemptions and rollovers.

On the growth front too, real output growth is set to remain in the vicinity of 5 per cent for the EMs as a whole and in Asia at about 6.5 per cent for the next five years. MSCI emerging markets currency index against the US dollar, which reached a record of 1727.55 on January 2018, showed a sharp fall by over 3 per cent to 1667.68 by mid-June.

According to Bloomberg, the currencies of South Africa, Turkey, Russia, Brazil and Indonesia are mapped by traders as most volatile and vulnerable with bid costs for insurance of month-to-month CDS premiums in June rising 8-15 per cent in Brazil, South Africa, Turkey, Mexico and Malaysia.

Blips and slips

The consensus so far, however, seems to be is that there is no reason to fear as macro prudential system in the world is now better placed and organised. But there could be some blips and slips that cannot be ruled out.

How can India position itself in such a scenario? During the various crises right from Asian (1997) to the Global (2008) and of regional nature in between, India chose to wait and watch, whereas China took the lead in expanding its presence and influence.

In the recent period, China bought stakes in Pakistan and Dhaka Stock Exchanges whereas India is stuck in litigating with Singapore over licensing of an index product. When long-term development banks such as China Development Bank and Asia Infrastructure and Investment Bank are holding roadshows in India seeking business, two of India’s oldest development banks that converted to commercial banks to sell cards and car loans are seeing a fall from grace and are losing relevance.

It is now an opportune time for India to lead a dialogue in the developing world. By revisiting old virtues, an honest review must be conducted of current limitations and recognising priorities for future. Financial development hinges on gaining domestic strength and not being a bystander to the vicissitude and vagaries of excessive dependence on private capital.

The Washington Consensus that put private capital on the pedestal for pursuing development is now under pressure. In the last 10 years most of the monetary easing went to boost the asset values or expanding corporate leverage. While small pockets of affluence emerged on the back of high asset valuations and huge returns in certain asset classes, for a larger part of the world and its people, growth is illusory with prospects for jobs and income becoming a real scare.

Divided G-7

Help from the developed world, if the concerns escalate, is uncertain as G7 is in a bickering mode and the developed world is besieged with its own problems. Average growth rates of real per capita output in advanced economies shrank by half to 0.9 per cent during 2010-19 as compared to 1.8 per cent in 2000-09. Differences are rising among the rich nations over several issues.

In this context, there are some quick steps that India could consider.

Domestic savings must be boosted with assurance on safety and stability of long-term savings. People must be stopped from rushing towards risk markets which is normally the forte of a few. There is a difference between driving a consumption economy for improving the well being of people and pushing them towards risky markets for investment that operate on a zero sum game.

The US and the western economies in the early stages of development thrived on safer investments and stable returns. Also it is important to bring in a strong financial customer protection mechanism to rein in banks and financial companies.

A big push to development banking and long-term finance is also necessary, though India had missed this opportunity.

Stock exchanges must boost new capital raising rather than being mere trading venues.

For instance, during 2006-2016, while China raised $541 billion new capital from the stock markets, India could barely mop up $47 billion. Use of local currencies for settling bilateral trade must be increased which China is already doing in a big way.

The public sector including banks must be reformed and strong governance and performance agenda must be put in place reducing the scope for undue interferences and frequent policy shift. Entrepreneurship along with the the private sector must be encouraged so that depth and value is added to the economy.

These were all virtues that formed the fundamental framework of policies and guided developed markets in their early stages of transformation and also hold potential to be equally effective for developing countries. India thus could be in the right place at a right time to set an agenda for the developing world.

The writer runs the consulting firm ‘Growth Markets Advisory Services’. The views expressed are personal

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