During the recent G20 meeting, the Indian and the Japanese government announced to boost their bilateral currency SWAP agreement from US 15 billion to US 50 billion. This measure is most certainly a step in the right direction and not just because I have been talking about it for months but the arrangement sends all the right signals to the market and will help to arrest the fall of Indian Rupees and other emerging market economies should follow suit to stabilise their currencies. The central bankers across the emerging markets should realise that using old tools to protect a potential run against a currency doesn’t work today and this is why it is important for the policy makers to get ahead of the curve instead of waiting for the fires to start erupting and then get into a fire fighting mode.
So the need of the hour is for emerging market economies including India to better plan the road ahead and prepare well for various possible outcome. Small measures may send a signal of intent to the market but is never enough to stop a big tidal wave and with this in mind the central bankers across emerging markets should beef up their existing firewalls to protect the economy. The fiscal situation of many emerging economies today including of Brazil, India, Indonesia and Turkey among others are somewhat stretched and its one of the reasons why they are feeling the HEAT. In a very deeply interconnected world a credit or market event in one economy could easily have a damaging impact on the other so a bilateral, regional and global cooperation will be Key to any credible long term solution and safeguarding against negative momentum.
The Indian government and RBI will do well to reach out to their counterparts in Taiwan , China, HK, Singapore among others and create a similar currency SWAP agreement agreed with Japan during the G20 summit. There is a lot of goodwill and willingness among policy makers as well as the politicians and businesses in Asia and across other emerging economies to work with each other as evident from the south to south investment boom. Any possible cooperation should address the short, medium and long term issues and not just be focused around dealing with a potential CRISIS down the road.
Reserve Bank of India (RBI) and other central bankers across emerging markets should go further and explore the possibility of settling bilateral and regional trade in their own currencies rather then using the U.S. dollar to settle bilateral trade. This will not just help them diversify but also remove pressure on the currency related to current account deficit because they won’t be required to settle trades in US dollar.
By all accounts, the currency market in its current shape and form is inefficient and unless the world finds a uniform single trading currency unit (USTC) and decides to use IMF style Special Drawing Rights ( SDRs) to settle bilateral and global trades , using a third party currency to settle trades will come with serious forex risk leading to volatility and also added layer of costs. Developing a globally accepted Uniform Single Trading Currency Unit (USTC) to settle trades will make trade easy and also help solve many existing problems but getting all the major trading nations behind the idea may not be that easy.
This is why there is a clear and compelling case for RBI and other central bankers across emerging markets (EM) to look ahead and use the existing volatility as an opportunity to reach out to their counter parts across the world including of other emerging nations and work out the framework and infrastructure that will facilitate the settlement of trades in regional or bilateral currencies. India’s biggest trading partner is ASIA and based on EXIM Bank’s data for the financial year 2011-12, India’s overall export to ASIA makes up around 51.6% of the country’s total EXPORT. For the financial year 2012, India’s total exports stood at US 142 billion and its total IMPORT bill for crude petroleum alone was US 155 billion which is around 65.9% of its overall imports of US 235 billion for the same year. The current account deficit and the requirement for a high level of US dollar reserve to keep paying the import bills has obviously put a lot of pressure on the Indian rupee.
So there is a need for India to explore the possibility of settling trades in other currencies and it makes all the sense in the world for RBI and the Indian government to propose their counter parts in China to settle at least 20% of CHINA- INDIA trade flow of US 36.4 billion ( of which US 26 billion is import from China and US 6.4 billion in export to CHINA) in RMB and Rupees, India should also work with UAE Government and explore the possibility of settling around 15% of its overall trade flow of US 38 billion ( of which US 19.6 billion in imports and US 18 billion in export) in Rupees as well as Dirham. And also further explore settling around 15% of INDIA- RUSSIA trade flow in Roubles ,18% of INDIA – MALAYSIA trade flow in ringgit or rupees and 75% of all SAARC area trade flow in Indian Rupees. This measure will most likely relieve any immediate pressure on the Indian Rupee and also help the trading partners to diversify. The idea enables the policy makers to use simple yet innovative tools to Outthink the speculators and hopefully get them out of the game. The initiative is also in the benefit of most ASIAN and other emerging market economies as their currencies have come under serious pressure this year due to concern over the stretched fiscal situation of some of the economies including of India, Indonesia, Brazil among others as well as FED’s planned tapering in the level of quantitative easing (QE), all this has created a degree of uncertainty over emerging markets and there are already talks of a possible Asian crisis looming in some corners of the financial markets.
There are no solid evidence to suggest that there is an imminent ASIAN crisis brewing or on the cards and the latest China’s trade data seems to suggest that the global demand is in fact improving and gathering momentum but having said that the policy makers across emerging markets will need to have a proactive approach and willingness to work together to stay ahead of the game. The governments of the day will also need to do what is necessary to get the fiscal house in shape and fast track all the critical and essential reforms focused on growing the economy. These measures will not only send the right signals to the markets but also relieve any existing concern and anxiety over the direction of the economy especially in the current circumstances.
The overall macro picture of Asia today looks very different and most Asian economies are generally in a better shape then they were going into the ASIAN crisis of 1997. Also the JAPANESE economy is gathering momentum and feels more confident then ever and the government of the day in Japan will most likely be willing to support any regional cooperation aimed at stabilising the financial markets if and when required as evident from the recent currency SWAP agreement agreed between India and Japan. A growing and confident Japanese economy is good for ASIA and the government of Japan understands the importance of a vibrant and growing Asia as its economy is very closely tied to the region and the same goes for Australia. The INTRA-ASIAN trade flow is now over US$ 63 trillion dollar mark and is projected to be around US$ 109 trillion by 2020 so ASIA will continue to grow and this growth story has still got legs.
The world has changed and this is why I keep saying to my friends and colleagues, if you are Investing in the year 2013 then you should first start with developing a better understanding of the world today, the current world order and the society of the day and here is why, the information drivers of today make a MARKET EVENT instantly available to a global audience in seconds and at the same time so any event that has occurred or may occur is open to a number of possible interpretation from various parts of the financial market with instant analysis. In short, there is never a shortage of OPINION or commentary and these opinion derived from many different OPINIONS floating around at the same time creates more uncertainty leading and adding to more volatility. So the volatility related SWINGS in the market now tends to be bigger and higher then seen historically mostly because our world today is more interconnected than ever before and also the global economy is very different to what it was in let’s say 1993 or 1997 and it also behaves differently. This is why using past comparisons and old tools to make projections comes with a serious risk and it may not accurately reflect the ground reality.
Also any analysis or projection is generally a best guess and not something that is SET in stone so in order to get better at assessing a situation one needs does need to look at the Big Picture and also develop a 360 degrees vantage point. This is why I believe following a fixed strategy when you are getting shot at from so many different angle is for brave hearted and the only thing I have learnt so far is that I KNOW NOTHING and everyday is a new DAY at school. Learning never stops and when there are many factors at play making projection or forecasting a specific outcome is extremely difficult and prone to errors so those who are brave enough to suggest that a possible carnage in Emerging markets is on the card or more or less imminent have most likely misjudged the whole situation and not looking at the complete picture. No doubt that emerging market economies are stretched and struggling somewhat but the current situation also makes them quite attractive for value investors and it will be unwise to assume that by taking out the HOT money supply as a result of QE tapering, the emerging markets are going to start faltering by dozens. Going forward there will be no shortage in supply of various projections or commentaries suggesting many possible outcomes but through a collaborative, proactive and innovative approach the policy makers should look to get ahead of the curve and quell any potential reckless speculative bet or bets that could drive the economy into another CRISIS.