India: Global and Local News getting grimmer

Tuesday, November 11, 2008

I have been talking about this for a long are Big Guy reports that India has some serious issues to deal...playing politics will do damage...

Credit Suisse
India: The Potential For An Extraordinary Bust

The implications of the monetary policy steps are likely to be far and wide. In the long-term, the question of central bank independence may resurface although we strongly believe that in extraordinary times all policymaking arms are better off working in perfect harmony. The other question is whether the measures are sowing the seeds of a highly leveraged economic stabilization and recovery which could lead to a bigger bust a few years hence.

While critical, we think that this is better discussed after the stabilization is achieved and not now.

In the short term, we are more convinced than before that lending rates are likely to come down by 300-400 bp in the coming months. We also now believe that credit growth will re-accelerate. If the measures over the weekend do not achieve this, a lead provided by
some government-owned banks will help facilitate this.

Essentially, the policy focus should materially raise the chance of the economy avoiding the worst on bankruptcies and growth breakdown. Yet, most of the new credit extension will be more for current operations.

We do not think that mere availability of liquidity or lower interest rates will cause many to borrow for long-duration project work or discretionary asset purchases in the current environment.

In brief, the measures should help generate a good economic stabilization but not necessarily a recovery to 8%+ growth rates.

Market: politics to matter
It’s an unprecedented turmoil. And, it is being tackled by an unprecedented policy. Despite the positives said above, the outcomes are uncertain particularly given that prospects in the critical external economy and markets are more tenuous.

Yet, valuations (discussed in a separate note today) are so compelling that any long-term investors should be tempted to add to their exposure and beta in Indian markets. Our single domestic worry is politics. Within weeks, the nation could dive headlong into a pre-election frenzy. There are nearly no indicators currently about the likely form of the next government.
Rather with less apparent political conviction for a free-market driven growth, investors may be given many reasons to worry about a nonbusiness friendly government in the coming months.

The next few months should also contain more corporate confessions and less policy steps than in the period just past. As a result, we still expect the Sensex to re-test our bottom of the range fair value of 9000 in 1H09. We would still not eliminate risks of more falls medium-term.
Goldman Sachs: India: Growth, interrupted
We are revising down our GDP growth numbers for FY09 to 6.7%
from 7.5% and for FY10 to 5.8% from 7.0%.
The larger-than-expected shock to the financial sector over the past couple
of months, and its knock-on effects on both domestic and external demand
are responsible for our lower growth projections. We believe there is little
fiscal room for additional stimulus in FY10.
We now expect growth to trough at a quarterly pace of 5.0% in the
April-June quarter of FY10, before recovering to 6.6% by end-FY10.
The slowdown, in our view, is very much cyclical in nature.
We look at the impact on corporate, bank, household and government
balance sheets, and negative feedback loops.
The silver lining—a large monetary policy stimulus, prospects of a
good agricultural crop supporting rural demand, lower commodity
prices, and ongoing infrastructure spending which would limit
further downside to growth.
Merrill Lynch
Can India pay US$89bn by June 09? US$25bn at stake.

We reckon funding ~US$25bn/US$89bn of external debt retiring by June 09 could prove challenging if international credit markets do not improve. As scenarios go, this is not one of the worst, given the US$274bn of fx reserves and US$28bn of CRR to cut (to reach the 3% statutory minimum). True, the RBI’s US$9.9bn of forward purchases also approach delivery October-February. Unless flows do not revive, we would expect the RBI to sell spot to fund forward delivery.

Fx reserves: Comfy 3.1x US$89bn short-term external debt

Fx reserves are an adequate 3.1x US$89bn short-term external debt at 1-year’s residual maturity (Table 2). We note that this far exceeds the Greenspan-Guidotti rule that fx reserves need equal short-term external debt (see
Just another INR episode, here). Second, fx reserves are a high 123% of external debt. Finally, fx reserves are a comfortable 8.4 months’ FY10 MLe imports at US$150/bbl.

US$45bn trade credit: Non-oil US$10-15bn an issue

We believe funding part of US$25bn of non-oil trade credit could be at risk. Oil credit, likely half the short-term external debt, should drop off with falling oil prices. FY08 trade credit jumped US$17.7bn as oilcos borrowed abroad (than from Indian banks) to fund higher oil imports. Unless oil prices run back up, oil bonds forthcoming should extinguish oil credit. Note trade credit should be tied to realizations. We think there is some long-run leveraging by rolling over cheaper trade credit, which we conservatively assume about half the non-oil trade credit.

US$20bn NRI rupee deposits: Unlikely to fly away
We do not expect non-resident Indian rupee deposits to be repatriated. First, the return at 100bps + Libor of corresponding maturity is attractive after our expected hikes ((see,
here). Second, a weak INR - Rs46/USD – likely discourages repatriation. We continue to expect the INR to regain strength in 2HFY09 (seeINR: Stemming the tide, Fx Spotlight, here).

US$10bn FCNRB deposits: Expect rate hikes

We expect the RBI to further hike the premia over Libor banks can offer on fx
denominated FCNR(B) deposits. The repatriation probability (say, US$5bn) is higher. First, a part could be leveraged to play rate differentials. Second, 25bp + Libor is not as attractive. Finally, a weak INR is no deterrent.

ECBs: Getting riskier with global risk aversion
We believe that rolling over some – say again, half - of the commercial borrowing could pose problems if international credit conditions do not improve. Although approvals are running US$1.5bn a month, 1QFY09 saw a paltry net US$1.5bn actually flow in (see,
here). We do expect ECBs to pick up with liberalization of I NR limits, higher premia over Libor and improvement in global risk aversion.
Economic gloom swept through Japan and several emerging nations on Monday, and European banks bore the scars of the worst financial crisis since the 1930s.

*Rating agency Fitch cut **Romania**'s credit rating to "junk" status in one of four emerging market downgrades and said the global financial crisis had put the ratings of **South Korea**, **South Africa**, **Russia** and ** Mexico** in jeopardy.*
*Foreign investors have dumped east European assets, fearing that many in the region may not be able to handle large foreign debt burdens.*
*Several nations, including **Iceland**, **Hungary** and **Ukraine**, have sought help from the International Monetary Fund. Fitch also cut the ratings of Bulgaria, **Kazakhstan** and **Hungary**.*
In Asia, Japanese manufacturers suffered their biggest quarterly slump in machinery orders in a decade, official data showed, boding ill for capital investment as the economy teeters on the brink of recession.
Even fast-growing China has not proved immune. Beijing approved a 4 trillion yuan ($586 billion) government spending package to boost domestic demand and help the world's fourth-largest economy ride out the crisis.
China's stimulus comes on top of more than $4 trillion in government pledges around the world for bank bailouts, credit guarantees and fiscal spending to contain the damage from the worst financial turmoil in 80 year.
I continue to hold my earlier forecasts:
Global financial crisis: Effect on India
2008 and beyond: India Stock market
India: Growth boom being written

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