The question of when to apply this thumping description to the unravelling of EM fortunes is more than academic. The word “crisis” has a way of fixing perceptions among investors, executives and policymakers while displacing nuance from analysis.
But the word is starting to surface. Dominic Rossi, global chief investment officer at Fidelity Worldwide Investment, which invests $290bn for its clients, referred to an “emerging market crisis” in the Financial Times. Also last week, the Institute of International Finance (IIF), an influential industry association, issued a report saying the fall in EM equities and currencies has “reached crisis proportions”.
Other analysts demur, while even some of those who use the description are keen to qualify it. The big difference, they say, between the current bout of EM frailty and the “Asian crisis” in the late 1990s — the last economic meltdown to originate in the developing world — is that this episode has evolved over many months, whereas the Asian crisis was an eruptive shock.
“In medical terms, the patient’s condition is chronic, not acute,” said David Lubin, head of emerging market economics at Citi. “EM has a persistent problem that results from two irreversible shocks. One is the end of an era which saw rapid, investment-led growth in China. And, two, the collapse of global trade growth to levels unseen for a generation,” he added.
The value of unsold apartments across the top seven cities of the country at the end of June has been estimated at a whopping Rs 4 lakh crore, with few signs the inventory will be cleared anytime in the next four years. At 7.5 lakh, the number of flats in the mid-priced range is virtually the same as it was at the end of March, this year, which means sales have come to a standstill.
In addition, there are 50,000 luxury apartments, priced at an estimated Rs 1 lakh crore, lying unsold in Mumbai alone. “Developers are now reducing the sizes of the apartments to make them more affordable,” Sandeep Runwal, director, Runwal Group, told FE.
Indeed, industry experts opine it could take as long as five years before builders are able to offload such a large number of units. Despite the large number of flats going abegging, however, some 37,000 flats in the mid-priced segment were launched in the three months to June, roughly half the number opened up for buyers in the March quarter, data from PropEquity shows. Mudassir Zaidi, national director, Knight Frank, says builders have realised there is little point in launching new properties since that would only pressure prices further. “The pace of recovery in housing sales is far slower than earlier anticipated and the high inventory is not coming down in a hurry,” Zaidi observed.
India ranks among the top five sovereign debt issuers from the emerging economies after China, said Moody’s Investors Service.
“The top five largest sovereign EM (emerging market) debt issuers, as of end-2014, were China (with $3.5 trillion total sovereign debt outstanding), India ($1.3 trillion), Brazil ($1.2 trillion), Mexico ($387.5 billion) and Turkey ($265.5 billion),” it said in a report.
Compared to debt volumes as of end-2000, China has overtaken India and Brazil as the largest debt issuer in 2014, it said.
EM sovereign debt outstanding has grown almost five times between 2000 and 2014.
The report further said that the vast majority of new issuance by emerging market governments or central banks has been directed to debt denominated in local currencies.
“…while EM foreign currency denominated debt grew one and a half times (from $0.9 trillion in 2000 to $1.2 trillion in 2014), EM local currency debt grew more than six-fold (from $1.4 trillion in 2000 to $8.7 trillion in 2014),” it said.
India’s total external debt at end-March this year was $475.8 billion, up 6.6 per cent from the corresponding period a year earlier. This was driven mostly by an increase in external commercial borrowing (ECB) and non-resident Indians’ deposits, showed data issued by the government on Friday.
As a percentage of gross domestic product, external debt was 23.8 per cent at end-March from 23.6 per cent as on March 2014.
Long-term debt was $391.1 bn, a rise of 10.3 per cent over March 2014. It was 82.2 per cent of the total external debt, as compared to 79.5 per cent at end-March 2014.
Short-term external debt was $84.7 bn, less by 7.6 per cent over the $91.7 bn at end-March 2014, and 17.8 per cent of the total external debt from 20.5 per cent in March 2014.
The share of government (sovereign) debt in total external debt was 18.9 per cent at end-March this year.
“A cross-country comparison based on International Debt Statistics 2015 of the World Bank, which presents the debt data for 2013, shows India continues to be among the less vulnerable countries, with its external debt indicators comparing well with other indebted developing countries,” the finance ministry stated.
ECB is a significant component in India’s external debt and key driver of its magnitude, it said.
Ukraine has secured a debt restructuring deal with international creditors that includes a 20 per cent haircut on $18bn of debt and a new, GDP-linked security for investors.
The agreement follows months of talks between Kiev and a committee of international investors, including Franklin Templeton, who hold close to $9bn of the country’s debt, as the war-torn country attempts to meet the terms of its IMF bailout by reducing debt costs
Thursday’s deal, which is supported by the IMF, will give Ukraine upfront debt relief of up to $3.6bn and reduce the country’s debt to GDP ratio to 4.3 per cent by the end of this year, supporting its planned return to capital markets in 2017, according to the Ministry of Finance of Ukraine.
The deal will need to be voted on by a majority of investors for each bond, and as the plans includes the so-called Russia bond held by Moscow, which has so far not taken part in any debt negotiations, some holdouts are expected.
Emerging market debt is sidestepping a violent rout in global markets despite dire warnings about the risk posed by a surge in EM borrowing since the financial crisis.
A chain reaction triggered by China’s decision to devalue its currency has led to severe movements in emerging market equities and currencies that have yet to be matched by equivalent turbulence in debt markets.
“There is no chatter in trading rooms about a debt crisis,” said David Riley, head of credit strategy at BlueBay Asset Management. “EM bonds have held up relatively well considering the pressures they are already under.”
Although prices for hard currency debt sold by countries including Turkey, Mexico and Indonesia have fallen, sending yields up, year to date the total return on JPMorgan’s emerging market sovereign debt index is minus 0.3 per cent, compared to minus 15.86 per cent over the same period for MSCI’s EM equities index.
The difference reflects the fact that bond markets have long been flagging the risks of stalling global growth and low interest rates, Mr Riley said, while other markets have been more optimistic.
Steep falls in currencies such as the Turkish lira and Brazilian real against the US dollar have pushed down prices for local currency debt further, meaning the total return year to date for EM local currency debt is now minus 12.7 per cent, according to JPMorgan.
Anyone who follows China knows that the country faces a particularly vexing problem when it comes to debt. The way we explain it is simple: Beijing is attempting to deleverage and re-leverage simultaneously. Needless to say, this isn’t possible, but that hasn’t stopped China from trying, as is clear from the multitude of contradictory policies and directives that have emanated from Beijing over the course of the last nine months.
Nowhere is the confusion more apparent than in China’s handling of its local government debt problem. In an effort to skirt official limits on borrowing, the country’s provincial governments racked up an enormous amount of off-balance sheet liabilities. These loans carried higher interest rates than would traditional muni bonds and ultimately, servicing the debt became impossible. In order to help provinces deleverage, Beijing launched a program whereby high interest LGFV loans can be swapped for new local government bonds that carry substantially lower interest rates. In fact, yields on the new bonds are close to yields on general government bonds meaning provincial governments are saving somewhere on the order of 300 to 400 bps. But there’s a problem. Banks aren’t particularly keen on swapping a higher yielding asset for a lower yielding one. The PBoC’s solution was to allow the new bonds to be swapped for central bank cash which the banks could then re-lend into the real economy. The problem with this is that it transforms a deleveraging effort (the local government refi program) into a re-leveraging program (the LTRO component). Shortly after the program was launched, the PBoC effectively negated the entire effort when it moved to loosen restrictions on the very same LGVF loans that caused the problem in the first place.
Admittedly, lengthy discussions about fiscal mismanagement across China’s various provincial governments doesn’t make for the most exciting reading, but it’s hugely important from a big picture perspective. Why? Here’s why:
The Bhushan Steel debacle continues. After the promoter, Neeraj Singal was arrested in a bribery scandal, supposedly giving Rs. 50 lakh to Syndicate Bank CMD S.K. Jain, in a much publicised CBI arrest. The money was allegedly being given to get a loan extension which, given Bhushan Steel’s books, would not have otherwise been forthcoming.
The Massive Debt Overhang
It has debt of over Rs. 40,000 cr. and all of it continues to be “standard”, it seems. That means there isn’t a default of interest or principal on the facilities.
The first half of 2015 saw Japan’s national debt rise at its fastest pace in four years, hitting a new record high at ¥1.057 Quadrillion!! Have we reached Keynesian nirvana yet? Or is just a little more “what difference does it make” debt-fueled fallacy going to fix it all?
Even if they had been compiled by his own spin-doctors, Portugal’s latest unemployment figures could hardly have been better for Pedro Passos Coelho, the country’s centre-right prime minister.
The last batch of labour market numbers to be published before a general election in October showed the biggest quarterly drop in the country’s jobless rate for at least 17 years — falling by 1.8 percentage points in the second quarter to 11.9 per cent.
This is the lowest level since 2010, before painful austerity measures imposed under an international bailout saw unemployment soar to a record 17.5 per cent in 2013.
Mr Passos Coelho’s ruling coalition welcomed the figures as “historic” — trumpeting them as proof that punishing spending cuts and tax increases have turned around a struggling economy and put Portugal definitively on a path towards export-led growth and sustained debt-reduction.
But the day after the National Statistics Institute released the jobless figures last week, the euphoria was dashed by a series of sobering warnings from the International Monetary Fund over the country’s heavy debt burden and a slackening pace of reform.