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News Highlights - Week of 26 - 30 September 2011
Hong Kong, China's export growth moderated to 6.8% year-on-year (y-o-y) in August from 9.3% in July amid a weaker global economy. In the Republic of Korea, export growth in September eased to 19.6% y-o-y in September from 25.9% in August, while its current account surplus narrowed to USD0.4 billion in August from USD3.8 billion in July. The Philippines' trade deficit in July stood at USD570 million compared with USD183 million in July 2010. Thailand's trade surplus fell to USD705 million in August from USD2.7 billion in July as export growth eased and import growth surged. Viet Nam's exports rose 33.6% y-o-y in September while imports climbed 31.0% y-o-y.
*Viet Nam's cumulative GDP growth rate for January-September was reported at 5.8% y-o-y last week. The People's Republic of China's (PRC) Purchasing Managers' Index improved to 51.2 in September from 50.9 in August. Industrial production in Japan and the Republic of Korea expanded 0.6% and 4.8% y-o-y, respectively, in August. Factory output growth in the Philippines quickened to 6.8% y-o-y in July from 1.2% in June. Singapore's manufacturing output grew 21.7% y-o-y in August, largely due to strong growth in biomedical products.
*Consumer price inflation in Japan stood at 0.2% y-o-y in August, while in Viet Nam inflation reached 22.4% y-o-y in September on the back of a sharp rise in food prices.
*Last week, two banks in the Republic of Korea-Hana Bank and Woori Bank-issued 3-year bonds worth THB8.0 billion and MYR315 million, respectively, while Malaysia's AmIslamic Bank priced MYR600 million of 10-year subordinated notes.
*LCY corporate bond issuance in the Republic of Korea rose 27.1% month-on-month (m-o-m) in August, led by strong issuance growth in bank debentures and asset-backed securities.
*China Railway Construction announced last week its plan to issue CNY7.5 billion worth of medium-term notes. Shanghai Pudong Development Bank aims to sell CNY18.4 billion of subordinated debt. Indonesia plans to sell retail bonds with tenors of 3 years on 26 October. Krungthai Card intends to raise THB7.0 billion from a dual-tranche bond sale on 10 October. Thailand's Central Pattana aims to issue THB2 billion of 5-, 7-, and 10-year bonds.
*The PRC banking sector's assets grew 16.6% y-o-y to CNY104.4 trillion, while bank liabilities rose 16.0% y-o-y to CNY97.8 trillion in August.
*Government bond yields fell for all tenors last week in the PRC and Indonesia and for most tenors in Thailand and Viet Nam. Yields rose for all tenors in Hong Kong, China; Republic of Korea; and Singapore, and for most tenors in Malaysia. Yield movements were mixed in the Philippines. Yield spreads between 2- and 10-year tenors widened in the PRC; Hong Kong, China; Republic of Korea; and Singapore, while spreads narrowed in most other emerging Asian markets.
*Finally, some of the more interesting economic data due this week include consumer price inflation for Republic of Korea and the Philippines; export growth and trade balance for Malaysia; money supply for Japan and Indonesia; and foreign reserves for Hong Kong, China and the Philippines.
Sony's movie studio is in final talks to acquire the movie rights to the highly anticipated authorized biography of Apple co-founder Steve Jobs by Walter Isaacson.
According to a person familiar with the matter, the studio is negotiating to pay about $1 million for the rights to the project.
The person declined to be identified because the deal has not been finalized.
Sony was also behind the Oscar-winning biopic "The Social Network," about Facebook founder Mark Zuckerberg, and "This Is It," a documentary made of concert rehearsal footage of pop star Michael Jackson.
The news was earlier reported by Hollywood blog Deadline.com.
After Jobs' death on Wednesday, publisher Simon & Schuster pushed up the release date on Isaacson's "Steve Jobs" by a month to Oct. 24.
Large numbers of pre-orders of the digital e-book for $16.99 pushed the title to No. 1 on Apple's iTunes store and No. 2 on Amazon.com. Pre-orders of the hard cover copy, for $17.88, put the book at No. 1 on Amazon.
Last week Chitra Ahanthem ran out of sugar. But after visiting several shops around Imphal she realised there was no sugar available in the market. Most of her neighbours had stocked up. As the Sadar Hills District Committee's economic blockade enters its 61st day today, Ahanthem is just one of the thousands of residents in the Manipuri capital who are making major lifestyle changes.
"And I don't even belong to the economically weaker sections who have been hit the hardest by this blockade. This isn't the first time there has been a blockade in Manipur, it is, however, the longest. I fear it won't be the last either,"says Ahanthem who hasn't taken her car out for days as she can no longer afford the petrol.
Petrol costs Rs 140 per litre during the day and is sold at Rs 200 in the night. Apart from the petrol pumps, little shacks tucked into corners of overcongested markets and stretches of roads surreptitiously sell petrol. It's the same with gas cylinders —being sold at Rs 1,000 at the beginning of the month, the going rate for one cylinder is now Rs 2,000. There is no butter, no milk and all other commodities are being sold at prices marked up anywhere between 10-20 per cent. Rice, despite being locally grown, is being sold at anything between Rs 40-70 a kg.
Despite crippling life in Imphal, the economic blockade on National Highway 39 (Imphal-Dimapur) shows no sign of resolution. Instead, residents of Jiribam are now demanding a separate district and have put smaller pickets up on NH 37 (Imphal-Jiribam) tightening the noose around the valley. The police recently stepped up security on the highways and has now deployed commandos in the affected areas even as counter-economic blockades in Naga-dominated areas threaten to take off.
"The issue is complex which is why its taking the government so long to take a stand. The Kuki tribe which is the dominant tribe in the Sadar hills is demanding a separate district for administrative reasons. They feel that they have been neglected and for even something as simple as a birth or death certificate they have to travel 100 km to the district headquarters in Senapati district which is a Naga-dominated area. The Naga tribe in the state is opposing the move to create a separate Sadar Hills district as they feel that this land belongs to them. So whichever stand the government takes, it will be displeasing one tribe or the other,"says a senior government official.
But the government cannot ignore the "legitimate Kuki demand," says Ngamkhohao Haokip, president of the Sadar Hills District Demand Committee and the man behind the economic blockade in the state.
This could be the mother of all mining scams, and this time it's in Odisha, a State which accounts for over 30 percent of India's iron ore deposits.
A CNN-IBN investigation has exposed a mining scam estimated at Rs 3 lakh crore, a scale that dwarfs the Bellary mining scam in Karnataka and the Goa mining scam exposed by Firstpost recently.
The investigation by Jajati Karan has established that illegal mining flourishes in Odisha's Keonhjar distric. Five companies have been charge-sheeted for illegal mining by the Odisha government's vigilance department. Illegal mining operations in three companies – Serajuddin Mines, Rungta Mines and Indrani Patnaik Mines – were caught on camera by the CNN-IBN team.
The Odisha mining scam is estimated at Rs 3 lakh crore. Raman Kirpal/ Firstpost
These were among the 243 mines where work had been suspended after an uproar in the Odisha Assembly in 2009.
Yet, today, the illegal mining continues.
At Balda, at the Serajuddin mines, truckloads of iron ore could be seen emerging from the main gates, all of it mined illegally. Even at night, the CNN-IBN team found trucks leaving loaded with the illegally mined iron ore.
At Unchabali, the CNN-IBN team trekked past pillars marking the Indrani Patnaik Mines to the top of a hill where it caught images of illegal mining at a grand scale.
At Jajang, at the Rungta Mines, the team sneaked a camera in for a few minutes to uncover even more illegal mining.
According to the State Vigilance chargesheet, the illegal iron ore mining at these three mines alone has caused the loss of a staggering Rs 2,352 crore to the state exchequer.
Anup Patnaik, Director, Vigilance, says: "Show cause notices have been served on the owners of all the mines that we are investigating. We have also seized their materials, and told them that mining cannot continue till our case is over."
Independent estimates have valued the illegally mined iron ore at Rs 3 lakh crore. Each tonne of iron ore fetches the mining company nearly Rs 8,000, while the State government gets a measly royalty of Rs 78 per tonne.
The Mines Department of the Odisha government, however, defends the charge-sheeted mine owners.
Says Manoj Ahuja, Secretary, Steel and mines: "The royalty has been paid for, so it's not illegal in that sense. There are no accounts that somebody has done illegal mining." At worst, it is a violation of a technical norm, he adds.
Last year, the Indian Bureau of Mines issued a show-cause notice to these mines, but took no further action. Till date, 13 minor officials have been arrested, but none of the senior functionaries have been touched.
In April this year, the Odisha High Court finished its hearing over the demand for a CBI inquiry into the mining scam, but reserved its orders. Activists believe that only an independent and impartial inquiry can reveal the extent of the alleged nexus between mine owners, politicians and bureaucrats
RTI activist Biswajit Mohanty, who has filed a PIL calling for a CBI inquiry into the illegal mining in Odisha, points out that the mining scam was exposed accidentally in 2009, when a ruling BJD MLA asked an innocuous question to the Assembly. The reply exposed the mining scam. (Watch Mohanty's interview to CNN-IBN here.)
The government was then forced to order an inquiry, and the vigilance department conducted an enquiry. But Mohanty argues that the theVigilance Department is ill-equipped and incompetent to investigate a scam of this magnitude.
"It doesn't have jurisdiction, it cannot investigate beyond the State's border", which he says is critical because even the Central Ministry is involved."They have to be investigated, and it cannot be done by the Vigilance Department." In addition, he points out, the case has international ramifications because the ore has been exported to other countries, principally China.
"All of us have challenged this enquiry order on the simple ground that it lacks jurisdiction, it lacks competence, it lacks adequate manpower and infrastructure," Mohanty adds. "We believe it is a cover-up by the State government to protect the miners and allow illegal mining to continue."
The scam also highlights the issue of "intergenerational equity" which the Supreme Court has highlighted in an earlier vedict, Mohanty noted.
"The State and the Centre have to decide how much of mining can be permitted within, say, 25 years or 50 years or 100 years… At the rate at which leases have been given, we don't expect resources to last beyond 25 years. This kind of a policy cannot be permitted," reasons Mohanty.
The joker in the pack this year has been the Indian rupee. At a time when the Indian and Chinese economies may be the last men standing, the rupee – unlike the Chinese yuan – is into steep decline and fall.
On Tuesday, the rupee hit a two-year low of 48.24 against the US dollar, suggesting that short-term demand and supply issues are determining its value when the macro-fundamentals should actually lead to a strengthening of the Indian currency.
The financial markets are clearly divorcing from reality – though in the long term they will surely correct.
There is, of course, one good economic reason for the rupee to fall. It's the growing trade deficit (imports minus exports), which hit $55 billion in the April-August period this year. Unless this deficit is bridged by capital flows, the rupee has to decline. Even the Reserve Bank cannot keep selling dollars – which it has shown no great inclination to do —to stem its fall.
The rupee's drop is complicating the fight against inflation. We are now importing inflation (whether it is through higher oil prices or something else), and this will push the Reserve Bank to keep raising rates till something gives.
As against this downer, two other macroeconomic indicators are a relative positive for us.
One of the key determinants of exchange rates is relative interest rates, adjusted for inflation. US policy rates are near zero, and will stay that way, while Indian rates are at 8.25 percent. The US inflation rate is 1-2 percent above the policy rate; ours is, too. This means there is no greater risk in the Indian currency than the US dollar. Sooner or later, capital flows should be headed our way, strengthening the rupee in the process.
Second, India scores on the growth potential front when compared to the US and Europe. No matter how much we slow down, we will still be growing 6-7 percent faster than both these big trading partners. This means capital should be flowing away from the dollar and eurozone, and towards India.
Then why is the rupee showing no spine?
Once inflation is down, the rupee will start moving up towards it medium trajectory of appreciation. Photo:Flickr/Creative Commons
One explanation, of course, is global risk-aversion, which is making capital seek safe havens. To be sure, there is no real safe haven in the world today, given the volatility of every currency, the threat of double-dip recession in the US, and the shakiness of most financial markets.
In fact, faced with the prospect of a eurozone collapse, money has been flowing into Swiss franc and the Japanese yen. This has forced the Swiss central bank to draw a line in the sand saying it will not allow the franc to rise above 1.2 against the euro. It will buy unlimited quantities of the euro to do this. The Bank of Japan also unleashed a tsunami of dollar purchases in August to prevent the yen from rising.
The joke is really on the concept of safe havens. Switzerland, whose banks handle assets that are six times its GDP, is really the most vulnerable of them all. A major bank collapse can bring down the Swiss economy, even as the world pressures the Swiss to wind down their support for global tax evaders. This is why the Swiss are planning to raise capital adequacy norms for banks to 19 percent.
Britain, which is home to huge global banks that are "too big to fail" and will need rescuing by the government in case there is a run on them, is planning to mandate at least 17 percent capital adequacy. The assets of British banks are 4.5 times its economy.
As for Japan, the less said the better. How can an economy with two decades of almost no growth and a domestic debt twice the size of its stagnant GDP, really be a safe haven? The only way Japan can keep the yen down is by unleashing another tsunami of yen debt – which will only worsen its macroeconomic stability. Japan is still an economy waiting for the ultimate implosion.
In that ultimate safe haven, the US, national debt more or less equals GDP, and the Obama administration is trying to cut down expenditure to make sure it stays solvent. But here's the sobering thought, according to David Rosenberg, who says the US economy is facing a double-dip recession, having accumulated $5 trillion of debt in just the last three years – to avoid a depression.
Europe is ticking time-bomb. The betting is that the euro will soon see some opt-outs like Greece and possibly Portugal. But even if Germany is blackmailed or cajoled into bankrolling the euro, the only consequence will be slower growth and economic uncertainty. Everyone knows that Greece is insolvent. The only way it can be rescued is by asking banks to take a "hair-cut" – that is write off some of their Greek debt. This, again, means German banks have to recapitalise themselves. They need capital.
In sum, the US isn't a safe haven, Europe isn't one, Switzerland does not want to be one, and Japan isn't anyone idea of a safe haven.
The only certainty is the prospect of slow growth, and a reduction is consumption and wealth, says Satyajit Das, a risk consultant and author of Extreme Money. In an article in DNA newspaper, he says:
"The proximate cause of recent volatility (in markets) is the down grading of the credit rating US (irrelevant) and the continuation of Europe's debt problems (relevant). The deeper cause is the realisation that future growth will be low and the lack of policy options."
So what will happen now?
"The most likely outcome is a protracted period of low, slow growth, analogous to Japan's Ushinawareta Junen — the lost decade or two. The best case is a slow decline in living standards and wealth as the excesses of the past are paid for. The risk of instability is very high; a more violent correction and a breakdown in markets like 2008 or worse are possible. Frequent bouts of panic and volatility as the global economy deleverages -reduces debt- are likely. Problems created gradually over more than the last three decades can only be corrected slowly and painfully," says Das.
Now, if Das is correct, capital flows should be moving away from US, Japan and Europe – which are heading for slow growth and even wealth erosion – and towards where they are more likely to show positive results: India, China and the emerging markets.
The conclusion, therefore, should be two-fold: in the short run, as western investors and banks worry about their problems back home, and seek to hoard capital against the prospect of huge losses from bad loans, there will be great risk aversion. This is why capital flows into India this year are down 80 percent from last year already.
However, the long-term prospects will depend on how soon investors in the rich nations redefine their mental idea of a "safe haven." When this happens, India will face a tsunami of capital flows, which will reverse the trend in the rupee.
Some research reports doubt whether this will happen too soon. A Deutsche Bank report dated 15 September says it has revised its long-standing view that "the exchange rate is poised to display a tendency toward medium term appreciation, as India's high growth potential would allow it to attract foreign capital and hence it would run an ample and steady balance-of-payments surplus. This view has run counter to the argument that India's persistent current account deficit and reliance on commodity imports make the exchange rate unlikely to sustain trend appreciation."
So what is Deutsche Bank really saying?
"We now see an additional force complicating the debate: inflation. The persistence of high inflation over a number of years is bound to impact the economy's competitiveness…Furthermore, latest estimates of India's purchasing power parity-based exchange rate also show that one needs substantially more local currency to purchase an internationally comparable set of goods."
"Going forward, one can envision one of two scenarios — either India brings down inflation sharply to stem the rise in the real exchange rate, or it succumbs to a bout of nominal exchange rate depreciation. This issue is independent of the ongoing bout of global risk aversion. We see the rupee's vulnerability rising unless inflation is brought back to the previous trend of 4-6 percent."
This explains the recent weakness of the rupee. It also suggests that the Reserve Bank cannot afford to pause on rate hikes till the back of inflation is broken. Once inflation is down, the rupee will start moving up towards it medium trajectory of appreciation.
Put another way, succour on capital flows are vitally dependent on the battle against inflation.
