Singapore, China and Hong Kong most resilient in Asia, says Citigroup index.
With the global financial market turmoil spreading far and wide, can India remain insulated from the crisis? If Citigroup’s Vulnerability Index is any indicator, India is among the most vulnerable Asian economies. In Asia (except Japan), China is the most resilient economy, while among Brazil, Russia, India and China (Bric) nations, India is at the lowest position, according to Citigroup’s Vulnerability Index.
Citigroup cites India’s very high ratio of total external finance to forex reserves and high level of mobile capital compared to the reserves as the main drawbacks, making the country highly vulnerable to the global financial crisis.
| WHO'S THE RISKIEST OF THEM ALL? Citigroup’s vulnerablity indicators (%) | ||
| Country | Mobile capital to forex reserves | External financing to forex reserves |
| Korea | 208 | 95 |
| Vietnam | 34 | 64 |
| India | 59 | 21 |
| Indonesia | 237 | 13 |
| Philippines | 97 | 12 |
| Thailand | 54 | 0 |
| Taiwan | 88 | -6 |
| Singapore | NA | -9 |
| Hong Kong | NA | -15 |
| China | 16 | -19 |
| Malaysia | 71 | -24 |
| Note: Higher the figure, more vulnerable the country Source: Citigroup | ||
The country’s total external financing for 2008 is estimated at $63.7 billion(Rs 3.05 lakh crore) (current account deficit and debt repayment), which accounts for 21 per cent of its forex reserves, making it highly vulnerable to the crisis. However, Korea and Vietnam are the most vulnerable in Asia, with their total external financing making up 95 per cent and 64 per cent of their respective forex reserves.
Singapore (9 per cent), Hong Kong (15 per cent) and China (19 per cent) are among the most resilient of the Asian economies, cites the Citigroup report.
Mobile capital includes short-term debt and foreign holdings of stocks and bonds. According to Cititgroup, India’s short-term debt is $36.6 billion (Rs 17.53 lakh crore)and foreign holdings of stocks and bonds are $140 (Rs 6.70 lakh crore) and $5 billion (Rs 23,955 crore) respectively. India’s mobile capital accounts for 59 per cent of its forex reserves. A sudden capital outflow can raise the risk for the Indian economy, bringing the rupee too under pressure, says Citigroup.
“Since our reserves have been built on capital flows and not with savings, we remain vulnerable when the tide reverses,” said K N Dey, CEO, Basixfx, a forex advisory firm.
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Dey said the rupee might touch the 50 mark to a dollar on capital outflows. FIIs’ stake in the Indian market, as estimated by Citigroup, is $140 billion. A leading domestic investment banker said the global financial market turmoil is spreading and added that he would not be surprised to see a further FII sell-off, which could play a major spoilsport for the Indian market. A weaker rupee makes it costlier for FIIs and hedge funds to pull out of the market and a decline in stock prices only adds to their woes. But according to Krishnamurthy Vijayan, CEO, JPMorgan AMC, “Exchange rate matters when money is waiting to come in. But when there is selling under compulsion, the exchange rate does not matter.”
“Regardless of the future path of the financial crisis in the US, global economic and market conditions are likely to change. The world will probably no longer be the same as the one of the past decade. The global turmoil will further tighten liquidity and lead to a dramatic slowdown in global assets inflation,” says the Citigroup report. The report adds: “Rising capital outflow risks could also add greater pressure on the Indian rupee, won, peso and rupiah.”
A fund manager of a domestic brokerage house said selling by hedge funds in the Indian market is like throwing a stone in the sea. Since the depth of the sea is not known, it will be difficult to ascertain where the stone is headed or how far hedge funds will continue with their selling spree.