When firms borrow in foreign currency, they experience losses after a large rupee depreciation. This exposure is offset by hedges such as exports. For exporting firms, unhedged foreign borrowing is a remarkable low-cost method for financing. But in the Indian landscape, foreign currency borrowing (FCB) is taking place in the wrong places. This points to problems in the underlying policy environment.
When a firm is obliged to repay $100 at a future date, and the dollar-rupee exchange rate goes from 65 to 75, the rupee value of payments that have to be made go up from Rs 6,500 to Rs 7,500. This risk is well understood. In a paper which is forthcoming in the journal ‘India Policy Forum’ (http://goo.gl/LwRVG9), Nirvikar Singh, Ila Patnaikand I look deeper at the policy puzzles of this field.
Who should conduct foreign borrowing? Two kinds of firms fit naturally. The first is an exporter. While repayment of debt is harder after a rupee depreciation, revenues go up, which offsets the loss. For every exporting firm, it’s possible to work out the magnitude of foreign borrowing that is safe, given the projected export revenues of the next few years. For such firms, foreign borrowing can be a usefully cheap source of debt financing.
The second category of firms where foreign borrowing makes sense are those who make tradeables. ‘Tradeables’ are things which can are freely transported across the border, e.g. steel. There is no barrier to arbitrage between the Indian market for steel and the world market for steel. As a consequence, the London Metals Exchange (LME) price of steel is multipled by the exchange rate to get the Indian price of steel.
The Russian ruble has recorded its biggest monthly gain since the early 1990s amid higher oil prices, an easing of the fighting in eastern Ukraine and a less intensive foreign debt repayment schedule as it claws back some of the losses it sustained during panic on currency markets last year.
The ruble climbed 11.5 percent in February to 61.7 against the U.S. dollar. That is the biggest monthly gain for over 20 years, business daily Vedomosti reported Friday citing Bloomberg data.
Over the same period the ruble rose by 13.2 percent to 69 versus the euro.
The rebound comes after the ruble lost about 40 percent of its value against the dollar last year amid dramatic volatility that peaked in December. The ruble dropped another 18.7 percent against the dollar in January.
The apparent stabilization of the currency has dispelled some predictions that the Russian economy is imploding, but experts caution against expectations of the ruble’s return to its early 2014 value, believing that the Russian government backs a weaker currency that is helping offset the impact of low energy prices on state income.
Borrowing costs will increase after refinancing. Increased borrowing costs and the weak rupee will pressure the credit quality of rated Indian non-financial companies. Interest rates in India will likely rise further amid measures by the Reserve Bank of India (RBI) to tighten liquidity and bolster the rupee, which has fallen near historic lows against the dollar.1 Interest rates for foreign currency borrowings will also increase in light of the US Federal Reserve’s decision to taper its bond-buying program.
» Upward revaluation of foreign currency debt will further tighten covenant headroom. Rated companies with debt denominated in foreign currencies will report an increase in total debt value as a result of the historically low rupee exchange rate. The current exchange rate for the rupee against the USD is about 15% below where it was on 31 March. If the companies’ total reported debt increases owing to foreign exchange moves, their financial covenant cushion will likely decline, particularly with respect to interest coverage and debt service coverage ratios, as we expect their interest costs to increase as well. The rated companies have some degree of natural hedge to mitigate against the impact of the depreciating rupee, however.
» Rated Indian companies need ongoing access to both domestic and international funding to address their refinancing needs. Rated Indian non-financial companies should be able to address their INR2.2 trillion ($32.8 billion) in debt coming due through March 2014, over 50% of which is denominated in foreign currency. We expect the companies will continue to have access to offshore and onshore funding sources to meet these pending maturities.
Overseas Foreign Currency Borrowings by Authorised Dealer Banks – Enhancement of limit
Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to A. P. (DIR Series) Circular No. 40 dated September 10, 2013, in terms of which AD Category I banks were allowed to borrow beyond 50 per cent of their unimpaired Tier I capital subject, inter alia, to the condition that the borrowing would have a minimum maturity of three years.
2. On a review, it has been decided to lower the requirement of minimum maturity from three years to one year for the aforesaid borrowings made on or before November 30, 2013 for the purpose of availing of the Swap facility from the Reserve Bank of India. It may be noted that after the said date, foreign currency borrowing by AD Category I banks beyond 50 per cent of their Tier I Capital shall have to be of a minimum maturity of three years.
3. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions/approvals, if any, required under any other law.
The rupee goes into a tailspin whenever there is any talk of dollar outflow. One of the factors weighing on the currency is the foreign debt of Indian companies that is set to mature in March 2014. According to rating firm Moody’s, 14 Indian companies will see $32.8 billion in debt maturing by the end of the financial year, half of which is denominated in foreign currency. Oil and gas companies, both state-owned and private, account for 60 per cent of the maturing debt, while state-owned enterprises account for about 48 per cent of the total debt. Among private sector companies, Tata Group accounts for 23 per cent of this debt, while Reliance Industries and Vedanta account for another 28 per cent. Given that the rupee has weakened by 15 per cent since March and interest rates have inched up in the US, refinancing this foreign currency debt will be more expensive for Indian companies.
Moody’s does not expect any of these companies to face a problem in refinancing the debt, but “if the companies’ total reported debt increases, owing to foreign exchange moves, their financial covenant cushion will likely decline, particularly, with respect to interest coverage and debt service coverage ratios, as the rating agency expects their interest costs to increase as well”. Companies such as Reliance Industries, NTPC, Oil and Natural Gas Corporation (ONGC) and Tata Consultancy Services, which have more cash than debt maturities, will not face any difficulty refinancing this debt. Clearly, ONGC (with a rating of Baa1 stable), Reliance Industries (Baa2 positive), Bharat Petroleum Corporation (Baa3 stable) and Indian Oil Corporation (Baa3 stable) are unlikely to face any refinancing issue. These companies have more than $13.4 billion (Rs 90,000 crore) in debt denominated in foreign currency. These companies would continue to have access to funding – both domestic and international funding – due to their size and state-owned status. Read More
Fitch Ratings has downgraded Malta’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘A’ from A+. The Outlook is Stable. Fitch has simultaneously affirmed Malta’s Country Ceiling at ‘AAA’ and Short-term foreign currency rating at ‘F1’.
KEY RATING DRIVERS The downgrade reflects the following key rating drivers and their relative weights:
High – There has been significant fiscal slippage. Malta’s general government deficit was 3.3% of GDP in 2012, well above both the government’s target (2.2%) and Fitch’s September 2012 forecast (2.6% of GDP). This slippage has carried over to 2013, when Fitch forecasts a deficit of 3.6% of GDP, compared with 2.7% in the original 2013 budget. The European Commission has re-opened the excessive deficit procedure (EDP) against Malta, with the deadline for correcting the excessive deficit set for 2014. In its previous rating review (September 2012), Fitch identified material fiscal slippage in 2012 as a negative rating trigger.
– Public debt dynamics are worsening. Fitch now forecasts that general government gross debt (GGGD) will peak at 74% of GDP in 2014-15 (two years later than we previously expected) and decline only marginally in the medium term, remaining above 73pp of GDP by 2020. A debt ratio that is higher for longer reduces the fiscal space to absorb future adverse shocks.
Medium – In Fitch’s view, the authorities’ response to the 2012 fiscal deterioration has been slow. The 2013 budget is moderately expansionary, rather than starting consolidation. Although the newly-elected government has committed to fiscal consolidation and pledged to exit EDP by 2014, as yet there has been no clarity around the fiscal measures underpinning the adjustment. The April 2013 Stability Programme Update suggests the fiscal adjustment will be based solely on revenue growth. Despite Fitch’s forecast for positive GDP growth in 2014-15, the agency believes it will be difficult for the government to reduce the general government deficit and put public debt on a downward trajectory without some adjustment on the expenditure side. Read More
Fitch Ratings has downgraded Croatia’s Long-term foreign currency Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-‘, while the Long-term local currency rating has been downgraded to ‘BBB-‘ from ‘BBB’. The Short-term foreign currency IDR has also been downgraded to ‘B’ from ‘F3’ and the Country Ceiling is lowered to ‘BBB’ from ‘BBB+’. The Outlook on the Long-term IDRs is Stable.
KEY RATING DRIVERS The downgrade of Croatia’s IDRs reflects the following key rating drivers, all of which have been assigned a high weight:-
– Croatia’s fiscal outlook has deteriorated since Fitch’s previous sovereign rating review in November 2012. The agency has revised up its forecast for this year’s general government deficit to 4.7% in 2013 from 3.9%, while general government debt/GDP is now expected to peak at 66% of GDP in 2016, up from our previous forecast of 62%. Stock-flow adjustments, emanating from the restructuring of loss-making state-owned enterprises, pose further risks to public debt sustainability.
– A structurally weak growth outlook has impaired the prospects for fiscal consolidation and the attainment of public debt sustainability. Real GDP growth has significantly underperformed ‘BBB’ and ‘BB’ medians: the economy has been mired in recession since 2009, contracting by a cumulative 11%, and unemployment far exceeds rating peers. Q213 national accounts suggest that the rate of contraction is declining, but Fitch now expects the economy to contract by a further 0.9% in 2013, in contrast to our previous expectation of growth of 0.3%. Read More
The Swiss National Bank has just released its latest monetary policy assessment and, as expected, its affirmed the cap on the Swiss franc at SFr1.20 per euro.
The SNB notes that the Swiss franc is “still high” in its statement:
The SNB stands ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures, as required.
Important background – the Swiss government earlier on Thursday hiked its 2013 growth forecast from 1.4 per cent to 1.8 per cent, and its 2014 forecast from 2.1 per cent to 2.3 per cent, noting that the recovery appears to be bedding down in Europe.
Here’s an excerpt from the upbeat statement released from the State Secretariat for Economic Affairs in Bern: Read More
1. Net foreign currency positions mostly fell in the latest Commitment of Traders report. Only the yen and peso futures saw a net increase in speculative positioning. Generally, this was a reflection of a reduction in exposures. Specifically, of the 14 gross positions we track, only four experienced increases. Even the peso, where the net position increased, both long and short gross positions were reduced (the former less than the latter).
2. Activity picked up and there were three gross currency futures positions that were adjusted by more than 10k contracts. The gross long euro positions were cut by almost 16k contracts. Over the past two reporting periods, the gross longs have fallen by about 25%. Gross short Canadian dollar and Australian dollar positions were reduced by 11.0k and 16.7k contracts respectively.
3. We are struck by the resilience of the sterling bears. The gross short position is the largest behind the Japanese yen, despite sterling trading at multi-month highs. When the shorts finally do capitulate, it may very well be a sign the a top is nearby.
4. The net short yen position rose by nearly 16k contracts to 95.1k. This is the largest net short position since late May. It was a function just as much of gross longs giving up as the dollar resurfaced above JPY100 as it was new shorts being established The gross short yen position is the largest among the currency, while the gross short euro, sterling and Australian dollar positions are roughly the same size. The gross long euro position is the most among the currency futures, more than twice second largest (peso).