Societe General Cross Asset Research publishes a Special Report titled ‘How to survive the balance of payments crisis,’ and proposes investment strategies based on the analysis of external imbalances in 25 developed and 23 emerging countries. This article looks at India.
SocGen place special emphasis on external imbalances, saying they have “huge market implications.” Balance of payments dynamics played a huge role in the Eurozone debt crisis and in the turmoil unleashed in the emerging markets after the Fed’s hint to taper off QE3.
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SocGen examine the external accounts of a country by looking separately at its (1) current account, and (2) net international investment position. In the words of the analysts, (1) is a ‘flow’ approach, and (2) is a ‘stock’ approach, and both provide different insights into the country’s economics.
According to research, the current account balance, expressed as a percentage of GDP, was the best predictor (among annual indicators) of currency crises in emerging markets.
Given these litmus tests, what is the outlook on emerging markets such as in Asia, and particularly India?
Asia’s deteriorating external dynamics
According to SocGen, Asia depicts deteriorating external dynamics. Between 2011 and 2013, the current account balance deteriorated most for Indonesia and Malaysia. On India, its three-year average current account deficit is below the 4% ‘redline’ threshold. It’s not surprising that Asian currencies have been roiled in the turmoil after the Fed’s taper threat. SocGen describe it picturesquely with a Buffetism: “Only when the tide goes out do you discover who’s been swimming naked.”
India facing structural problems
SocGen thinks India faces two structural problems relating to indebtedness: a very high and chronic public sector debt, and a private sector debt that is growing too fast. In addition, its current balance has been deteriorating rapidly.
SocGen ascribe India’s ‘too strong’ currency depreciation to the size of its current account deficit, below the 4% threshold.