In emerging markets both the banks and the regulators are often subject to the whims of the state. So the size of the credit problems that actually lurk on their balance sheets may eventually make Europe’s problems look quite small
It’s all about Europe. Every day we read and hear in a never-ending stream about the problems in Greece. If the story is not about Greece, then it is about bad debts in the periphery countries of the EU (European Union) including Spain, Portugal, Italy and Ireland. The sovereign debts of these countries are supposed to be shaky and the holders of their debt, including many banks, could be in real trouble.
Isn’t it all a bit passé? I mean we have been hearing about this since I wrote my first column over two years ago. One has to ask whether these problems were any better or worse six months ago last fall? I doubt it. Despite the European problem markets all around the world have done rather well. The S&P index has increased over 10% even with its recent correction. The German index, the DAX, is up 23% since its lows of last September. There are debt problems lurking in the world economy, but they are somewhere else.
The best way to track a potential credit crisis is to look for a recent credit splurge. A good place to start would be Asia. Asia certainly has had its share of credit recently. It helped fund a period of exceptionally high growth, but like the housing bubble in Spain, high growth tends to mask problems.
To find the largest problems it is perhaps best to start with the region’s largest economy, China. China’s real estate bubble has been threatening for a long time. It has between 10 to 65 million vacant properties. Whole cities are vacant and unused. In addition, there are an estimated $464 billion worth of bad loans to local governments. Bad debt ratios for Chinese banks could be as high as 30%. But China is not alone.
The Chinese economy has an enormous impact throughout Asia especially on commodities producing countries like Australia. According to Societe Generale strategist, (uber-bear) Albert Edwards, “Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.” Australia has not had a recession since 1991. Like the housing bubble in the US, Australians have assumed that the past growth in housing prices will continue indefinitely into the future. The result is house prices have risen 300% since 2000, 100% more than in the US at its peak. Unlike the US, Australian house prices have not corrected.
But it is not just East Asia. India’s problems with high commodities prices, a falling rupee, and high interest rates are severe. According to a survey of 100 bankers by the Reserve Bank of India (RBI), bad loans are the most significant risk to the financial system. No bank is more exposed than India’s largest bank, the State Bank of India. Like other state-owned banks in emerging markets it invested in infrastructure at the encouragement of its political owners. Infrastructure is invariably a pit of corruption and waste.
The economic boom in Brazil has slowed, but the credit growth of over 25% per year has left many problems. Last year Brazil reported the highest default rate in nine years. One of the largest Brazilian banks, Itaú Unibanco, increased its provisions for bad debts by 38%.
Turkey’s credit has been growing at more than 30% which helped fuel its economic expansion. But now households are stuck with a debt to disposable income ratio that has risen from 35% to 45% in the past two years.
Not to leave anyone out, last year the Russian state and a large state-owned bank bailed out the Bank of Moscow to the tune of $14 billion. Even in Kenya credit to private households has increased by 32% in 2011, creating another potential credit bubble in one of the world’s poorest countries.
This is a globalized world. So a problem in Asia or in emerging markets is not just a problem for local banks. Citigroup in the US gets more than half of its profits from emerging markets. The Spanish bank, Banco Santander, has a large presence in Latin America and recently had a 32% surge in loan losses in Brazil. Both Standard Charter and HSBC have large exposures to Asia.
Many analysts are quick to assure investors that banks in emerging markets are well capitalized and there isn’t anything to worry about, but how do they know? Banks in Europe have gone through two stress tests to determine their risks, yet estimates of bad loans keep rising. The regulators in Europe are reasonably honest and independent from politicians. In addition, they are regulating mostly private banks. In emerging markets both the banks and the regulators are often subject to the whims of the state. So the size of the credit problems that actually lurk on their balance sheets may eventually make Europe’s problems look quite small.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).
What is not final is the governmental policy decision on the aspects to which the Western Ghat report submitted by Prof Gadgil panel relates, the High Court said
The Delhi High Court, while upholding the order passed by Shailesh Gandhi, Central Information Commissioner (CIC), has asked the ministry of environment and forest (MOEF) to publish the report by Western Ghats Ecology Expert Panel (WGEEP) on its website.
“There is no reason for the petitioner (the government) to entertain the apprehension that the disclosure of the WGEEP report, at this stage, would impede the decision making process and also would adversely affect the scientific or economic interests of the states. The broad-based participative process of debate would, in fact, help the MOEF and the concerned states in arriving at a policy decision, which is in the larger interest and for public good,” justice Vipin Sanghi said in an order dated 17 May 2012.
Last month, the CIC passed an order asking the government to provide an attested copy of the summary of the WGEEP report and the report on the Athirappilly Hydro Electric Project in Kerala to G Krishnan. Mr Gandhi, the CIC, also asked the MOEF to place the WGEEP report in the ministry’s website before 10 May 2012.
The government then filed a petition in the high court against the decision of the CIC.
The MOEF constituted an expert panel on 4 March 2010 called the WGEEP under the chairmanship of Prof Madhav Gadgil. The expert panel had 13 members. The expert panel was constituted in recognition of the fact that the Western Ghats is one of the 34 global biodiversity hotspots, and is considered environmentally sensitive and ecologically significant.
Appearing for the government, Indira Jaising, Additional Solicitor General (ASG) submitted that before the recommendations of the WGEEP panel are accepted by the central government, the views of different states that are likely to be affected are required to be considered. “If, at this stage, the WGEEP panel report is made public, even before obtaining and considering the views of the affected states, there would be a spate of applications seeking notification of certain areas as ecologically sensitive, based on the recommendations contained in the WGEEP report,” she said.
Earlier, while passing an order, the CIC had said, “The disclosure of the WGEEP report would enable citizens to voice their opinions with the information made available in the report. Such opinions will be based on the credible information provided by an expert panel constituted by the government. This would facilitate an informed discussion between citizens based on a report prepared with their/public money. MOEF’s unwillingness to be transparent is likely to give citizens an impression that most decisions are taken in furtherance of corruption resulting in a serious trust deficit.”
Justice Sanghi, in his order, said, “Having considered the submissions of the learned ASG and perused the record including the impugned order, I am of the view that there is no merit in this petition, and I am inclined to agree with the reasoning adopted by the learned CIC for allowing the respondent’s appeal and directing disclosure of the WGEEP report prepared by Prof Madhav Gadgil committee and panel.”
The public information officer (PIO) and the MOEF had tried to maintain that the report submitted by the Prof Gadgil panel is not final. However, the HC said the panel has submitted its report and now it is for the MOEF to act on it in consultation with affected states.
“If there are any shortcomings or deficiencies in the said report, inter alia, for the reason that the same is based on incomplete or deficient data, or for any other reason, the said factor would go into the decision-making process of the MOEF and the concerned states. But it cannot be said that the said report is not final. What is not final is the governmental policy decision on the aspects to which the WGEEP report relates. The said report is one of the ingredients, which the MOEF and the concerned states would take into consideration while formulating their policy in relation to the Western Ghats ecology,” justice Sanghi said.
The Western Ghats have complex inter-state character as they are spread across an area of about 1.29 lakh sq km, in Tamil Nadu, Kerala, Karnataka, Goa, Maharashtra and Gujarat. There are apprehension in the government that the recommendations of the WGEEP would influence many sectoral activities, such as agricultural land use, mining industry, tourism, water resources, power, roads and railways.
If the Nifty holds above 4,789, gains may persist
The spike in headline as well as retail inflation for the month of May, the depreciating rupee and global issues dominated the scene this week. The market settled in the green on three of the five trading days, with the benchmarks notching gains on the last two trading days in the late session.
Overall, the market closed the week 1% lower. The Sensex declined 140 points to 16,153 and the Nifty closed at 4,891, down 37 points. The market is likely to see a volatile upmove with the Nifty going up to the level of 5,040. Improving economic conditions may take the market even higher. However, this upmove will be staggered and also as long as 4,789 is broken.
A spike in headline inflation for the month of April and weak global cues saw the indices extend their losses on Monday. Support from the European indices and US stock futures resulted in the market closing in the positive on Tuesday. However, the rupee hitting its five-month low and unsupportive global cues resulted in the market closing sharply lower on Wednesday.
The market overcame European fears and closed marginally in the positive on Thursday. Better-than-expected results from State Bank of India and US futures moving from deep red to green provided the much-needed boost to the market in post-noon trade, ensuring a positive close on Friday.
Among the sectoral indices BSE Fast Moving Consumer Goods (up 2%) and BSE Healthcare (up 1%) were the noteworthy gainers while BSE Auto (down 6%) and BSE Consumer Durables (down 3%) were the top losers.
The top five Sensex gainers in the week were Sterlite Industries (up 6%), State Bank of India (up 5%), Infosys, Jindal Steel & Power (up 3% each) and ITC (up 2%). The key losers were Tata Motors (down 13%), BHEL (down 9%), Maruti Suzuki (down 6%), Hindalco Industries (down 5%) and Coal India (down 4%).
The Nifty leaders were Sesa Goa (up 8%), Sterlite Ind (up 6%), SBI (up 5%), Power Grid Corporation and BPCL (up 4% each). Tata Motors (down 13%), BHEL (down 9%), Reliance Infrastructure (down 8%), Maruti Suzuki (down 6%) and Axis Bank (down 5%) settled at the bottom of the index.
The rupee gained 5 paise to close at 54.42 against the dollar on Friday with the Reserve Bank of India's (RBI) swift action pulling it back from near 55-levels touched in early trade amid strong capital outflows. Dealers said strong dollar demand from importers, mainly oil refiners, on expectation of further rise in dollar on concerns caused rupee's fall.
Headline inflation moved up to 7.23% in April 2012from 6.89% in the previous month. High inflation is a setback to the big picture of the economic growth as well. Prices are rising along side decline in industrial production. Index of Industrial Production (IIP) contracted by 3.5% in March and gross domestic product (GDP) growth slowed to three-year low of 6.9% in 2011-12.
On a similar note, consumer price index (CPI) based inflation, or retail inflation, shot up to the double digit mark at 10.32% in April on account of substantial increase in vegetable, edible oils and milk prices. Based on the CPI, the inflation for March was revised to 9.38% from the provisional estimate of 9.47%.
Earlier this week, global credit ratings agency Moody's downgraded the country's three largest private sector lenders-ICICI Bank, HDFC Bank and Axis Bank-to D+ from C- to align them with the sovereign rating. As a result, the hybrid debt ratings of these banks, except HDFC Bank, will be negatively impacted.
On the results front, engineering major Larsen & Toubro (L&T) on Monday posted 13.9% jump in stand-alone net profit at Rs1,920.41 crore for the fourth quarter ended 31 March 2012 and said it expects a 15%-20% growth in revenues and order book in the current fiscal. The company had reported a net profit of Rs1,686.21 crore during the January-March quarter of 2010-11.
L&T's net sales for the quarter grew by about 21% to Rs18,460.90 crore as against Rs15,261.17 crore in the same period of FY10-11.
India's largest lender State Bank of India (SBI) on Friday posted net profit of Rs4,050.27 crore in the fourth quarter ended March 2012, against just Rs20.88 crore recorded in Q4 of the previous fiscal. SBI's profits had taken a big hit in Q4 of 2010-11 on account of higher provisioning for bad loans and increased tax outgo. Total income of the bank rose to Rs33,959.54 crore in the quarter against Rs26,536.84 crore in the same quarter a year ago.
On the international front, Europe is expected to keep its stranglehold on the markets in the week ahead, as investors take stock of Greece's commitment to the Eurozone and watch for other issues related to the debt crisis.
Facebook's stock market debut did not live up to the expectations as the social network's shares closed the first trading day on a flat note with technical glitches at the Nasdaq stock exchange sending confusing signals to investors. After rising to an intraday peak of $45 apiece, the shares ended at $38.23, up only by 0.61% from the $38 offer price.