INSUBCONTINENT EXCLUSIVE:
It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times;
crises do not happen to us, here and now
We are doing things better, we are smarter, we have learnt from our past mistakes
The rules of valuation no longer apply
Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before
chance and circumstance provoke a crisis of confidence that pushes it off
Almost every top strategist listed events to watch out for that included geopolitical risks from North Korea to US interest rate increases
But come August, the talk is all about Turkish lira and the contagion
Turkish lira is down 31 per cent, Indian rupee has declined 4.6 per cent to its lowest level, Indonesian rupiah has collapsed 6.9 per cent
and Argentine peso is down 25 per cent
The MSCI Emerging Market stock index is into a bear territory falling 20 per cent from its recent peak.
Emerging markets have seen a fund
outflow of $39 billion this year, compared with an inflow of $23 billion in 2017
The US dollar index has climbed 4.33 per cent
scholar, to express the rarest of rate events
but it was just a trigger
It has been feeding on high dollar debt and was running an average current account deficit of 5.2 per cent of the GDP for 12
after years of fast growth
That spread to other East Asian economies, then known as Asian Tigers, and subsequently resulted in capital controls and International
Monetary Fund-designed bailouts.
This time the tune is different
From experience, these countries have built up foreign exchange reserves, the banking system is efficient, and their economies are in a
Radhika Rao, economist at DBS Bank, Singapore
much better shape than it was in 2013, when fiscal deficit and current account deficit were at multi-year highs
says Su Sian Lim of BNP Paribas
Bank of India piling up $400 billion in foreign exchange reserves.
When currencies of countries such as China, Indonesia, Thailand and
Indian products expensive
So, any depreciation in line with other trading peers is a welcome relief.
So long as the currency slide is due to global factors, it may be
But is it only the global factors
Vulnerabilities returnFinancial markets tend to ignore the fault lines for years before they wake up to
the fundamentals of an economy and begin to punish them
curbs on gold imports and focus on containing inflation and narrowing fiscal deficit
CAD is projected to rise to 2.5 per cent of the GDP this year
And fiscal deficit is beginning to climb with the government shifting the goal posts for two years in a row
interest rates, albeit modestly
what is driving the direction of trade and the broader economy is different
This time around, it is the electronics import
Electronics comprised 11.69 per cent of imports in July, up from 6.7 per cent in 2013
Crude is down to 28.2 per cent and gold is down to 6.7 per cent.
Policy optionsUS dollar reserves in EMs may be close to record highs, but
all these have not been built on solid ground like in China, which is among the few nations that run a current account surplus.
Quantitative
easing (QE) by the US Federal Reserve, European Central Bank and the Bank of Japan in the last decade since the blow up of Lehman Brothers
flooded the markets like India
This led to higher consumption and record lending by banks in domestic markets.
The party may be coming to an end now with the US raising
The binge during those times, when overseas borrowing was cheap, led to many EMs building up debt
says Chris Wood, strategist at CLSA
But India has been relatively calm with just a 50-basis points increase in 2018
A basis point is 0.01 percentage point
With short-term debt of $222 billion coming for repayment in the next eight months and inflows slowing, India is exposed to a selloff.
The
Monetary Policy Committee, in a conventional way, may have to hasten interest rate increases if the contagion worsens and the rupee
economist at Bank of America Merrill Lynch
wrong signals with little panic as yet
