Winds from Middle East Impact India

February 2011, Volume: 12Sensex 17728 Nifty 5310 Dollar 45.68 Gold 20280 Silver 45380 Crude Oil ($) 101.71 Investeurs Chronicles ,[object Object],Mozambique has awarded India's Jindal Steel & Power a 25-year licence to explore and mine for coal in the northwest Tete province, in return for a $180 million investment. Jindal will invest $180 million in the Tete coal mine, as part of a project that will cover 2, 1540 hectares and directly employ 1,500 people, Government will own a 10% stake. More…India's annual food inflation declined to a seven-week low as improved supplies eased prices of fruits and vegetables towards the end of January. The annual inflation in food articles stood at 13.07% in the week to January 29, nearly four percentage points lower than the week before. The decline was largely due to a fall in prices during the week, most importantly of onions. More…..Current Chronicles India will pick up by next one month the vendor for its biggest-ever military fighter deal for purchasing 126 Medium-Multirole Combat Aircraft at a cost of $11 billion, the contract of which is expected to be finalized by September. Six aircraft including Russian MiG-35, American F-16 and F/A-18, Swedish Gripen, European Eurofighter and French Rafale are in the race for the multi-billion dollar contract. More…In a major relief to South Korean steel major Pohang Steel Company (Posco) — and continuing a pattern of reconciling violations of environmental laws with additional conditions for clearance — the environment ministry approved the firm’s Rs 54,000-crore ($12-billion) steel plant. Seen as one of the largest foreign direct investments in India, the project has been in limbo for nearly six years. More…The government approved follow-on public (FPO) offer of the state-run lending agency Power Finance Corporation worth about Rs 5,732 crore. The offer would comprise 5 per cent disinvestment of the government's share in PFC through putting 5,73,88,335 crore shares of Rs 10 on sale. The government currently holds 89.78 per cent stake in the public sector company. The market capitalization of PFC currently stands at Rs 28,854 crore. More… India's industrial output in December rose a slower-than-expected 1.6 percent from a year earlier, government data showed on 11th Feb. Manufacturing output, which constitutes about 80 percent of the industrial production, rose an annual 1 percent.More… Cover StoryWinds from Middle East - Effects of turbulence of Egypt on India The year 2010 was a tough one for the global food system. The connection among rising prices, hunger, and violent civic unrest seems intuitively logical. Even past month was unpredictable & unexpected happenings -- the fall of Tunisia's strongman, departure of Egyptian President Hosni Mubarak post civil unrest and political shifts in Yemen, Jordan and elsewhere -- may presage seismic change across the Arab world.There are clearly some very different scenarios out there, “What’s going on in Egypt has again reminded us that the world economy is not out of the woods, and that things we do not anticipate can have a significant negative effect on global markets and risk sentiment.” Political uncertainty in Egypt has left policymakers, exporters and India Inc worried about its impact on India. But Egypt is 3,000 miles away from India and Tunisia is about 6,000 miles away. So most Indians wonder as to how do these events affect us? Is it just global news?The truth is that these events affect everyone around the world. Middle East controls two-thirds of the worlds proven oil reserves and about half of the world's natural gas reserves. Thus, what happens in Middle East is of equal concern to all as it affects the prices of an essential commodity – oil. The events in Tunisia and Egypt have led the oil prices to touch US$ 100 per barrel. And this is when Egypt and Tunisia are not the largest producers of oil.Saudi Arabia, Iran, Iraq, Kuwait, the UAE, Yemen and Egypt are the major suppliers of crude oil to India. “Unfortunately, developments in the Middle East and its impact on the Arab world are causing uncertainty about production & availability of Crude oil. If political crisis in West Asia and North Africa continue it could accelerate the inflationary pressure in the economy and increase the oil import bill.” Experts also cautioned that the impact for India could be severe in terms of exports, crude oil import and remittance if the political crisis in West Asia and North Africa would prolong. ,[object Object],Egyptian units and are watching the situation closely. The impact of this shutdown will be felt if it lasts longer than the drawn down of inventory.ConclusionIt is hoped that the current situation will be resolved in a peaceful manner, in the best interests of the people of Egypt. India wishes that Egypt, a fellow developing country with which she enjoys close and traditional ties, will continue to be a strong and stable nation, contributing to peace and prosperity in the region. How the situation bears out will have an impact, not only on the oil market, but also on the wellbeing of the global economy and the stability of the world's financial markets.Looking ahead The situation in Egypt has reminded investors that geopolitical risks are always present and in this case uncertainty is high, both in terms of what will happen and what the potential impact will be. Foreign institutional investors (FII) pulled out $1.5 billion from shares this year until 2 February, with high inflation and rising violence in Egypt hastening withdrawals as risk aversion grips global investors. “People are nervous because FII funds are moving out. Participation from domestic investors is completely missing. The market depth seems to be very weak. The events in Egypt and elsewhere may in part represent a build-up of inflationary pressure in emerging countries, underscored by the disparate set of monetary policy activities in emerging and developed nations. From an equity investment implications standpoint, it seems likely that the effect on local markets could vary significantly depending on a number of factors. This trend speaks of the growing importance of country selection among emerging markets as correlations between those markets have been falling. From a broader investment perspective, the extent to which any clarity on all of the issues emerges will have much to say about how they will impact financial markets going forward.Impact on Manufacturing CompaniesThe impact of the Egypt situation has had on crude oil further impacted manufacturing companies. Crude oil further led to increase in the raw material cost for all companies & forced many Indian consumer companies to temporarily suspend operations. Higher prices for raw materials are already squeezing corporate profit margins. While many firms appear able to pass those costs on for now, sharp spikes will eventually force consumers to cut back on spending.Many domestic companies, especially in the FMCG sector, have a manufacturing presence in Egypt that caters to the Middle-east and North Africa (MENA) region. Sales from the region contribute about 7-8 percent of the total revenues for these companies. Company-wise Marico has sales of about 7% from the entire region, and about 3% from Egypt itself. As of now, the company has shut down its facility and is closely monitoring the situation to take the next step forward.Dabur will also see a minor impact as 2.5% of its consolidated sales come from Egypt, though; it has a manufacturing facility in Nigeria and UAE. So, it will be easier for Dabur to source the products from these countries to Egypt. Emami though has negligible sales, was in the process of setting up a manufacturing facility in Egypt, which was expected to be operational in the next six months, is now expected to get delayed. Asian Paints, too, has about 5% of its sales coming from the Egypt region. The company has two manufacturing facilities there, which sources said, have also been shut down as of now.Maruti Suzuki exports cars to Egypt, which accounts for three per cent of its overseas sales, would be impacted due to the political unrest. In the manufacturing sector Tata Motors, Ashok Leyland, Bajaj Auto and Aditya Birla Group in real estate and construction are some of the important Indian companies having stakes in the country. Firms have shut down theirCover Story Winds from Middle East Open ForumGovernment has already achieved half of its target for disinvestment, and with FPO of shares for IOC, and a few others in pipeline, it is all set to meet its disinvestment goal in current fiscal.Then there were encouraging tax collections. FY 2010-11 saw record collections in the first three quarters of 2010-11. As a result, total tax collections by the end of December 2010 amounted to 72 per cent of the annual target of Rs 7.45 lakh crore. This stems from the fact that economy as a whole has been performing well, & revenue department’s ability to collect more tax during the year.However, worth mentioning is the fact that without revenues exceeding yearly mark, deficit contraction plan would have gone stray, more so, because, just like revenue, expenditure, too, exceeded its budgeted estimate. Another significant observation here is the one time nature of the prominent revenue drivers in 2010-11. Be it, spectrum sale, or disinvestment proceeds, both are non repetitive in nature. Despite being able to meet budgeted deficit mark for 2010-11, achieving fiscal discipline in the coming fiscal appears to be a formidable task for the finance minister.Trouble in sightMajor threat to the fiscal discipline emanates from the expenditure side. Government has recently raised wages of the National Rural Employment Guarantee Act workers by 20 per cent, & indexed it with the inflation. Though, a socially desirable initiative, it means higher expenditure burden in the next & succeeding financial years. Projected expenditure on MGNREGS is to go up by 50% next year to Rs 64,000 crore or a little less than a per cent of the country’s GDP.Wanted: DisciplineFiscal discipline is the focus of India’s Union Budget 2011-12 momentum Finance Minister, Mr. Pranab Mukherjee in the Union budget 2010-11 stated,’ Government will address the fiscal deficit in right earnest to come back to the path of fiscal consolidation at the earliest.’ To put his words in to action, FM fixed the targets for fiscal deficit for 2011-12 and 2012-13 at 4.8% and 4.1% in the Medium Term Fiscal Policy Statement, and a debt-GDP ratio of 65% (as against 79% in 2009-10 ) by 2014-15. But with expenses set to grow and revenues set to disappoint, neither seems likely at the moment.India, currently finds itself in face of a lethal mishmash of elevated fiscal deficits, a high current account deficit and double-digit inflation, a situation remiscient of 1991 crisis.So far, so goodFor the current financial year, spectrum auction bounty of around Rs.1.3 lakh crore has ensured that government is able to meet, even out perform its fiscal deficit target. Further aiding revenue are disinvestment proceeds. Next in line is the prospect of rising subsidy bill, especially food subsidy, post Food Security Bill. Expert estimates it to cast an additional burden of Rs 92,060 crore. Large food grain procurement would also require higher minimum support prices and imports, which would increase the fiscal burden further. Other exerting subsidies are oil subsidy, & fertilizer subsidy. Expenditure is expected to increase sharply due to rising crude oil and commodity prices in international market.Tackling deficitStrategy should be two pronged: Government must reprioritize its expenditure, and introduce reforms on the revenue side. But let’s not forget that 60% of the total government spending is incurred on interest payments, subsidies, defence, wages and social sector schemes; none of which can be reduced. On top of that, containing expenditure in the terminal year of a five year plan is always difficult. Hence, reforms on the revenue side appear to be the only aide in combating fiscal deficit in 2011-12. Goods and Services Tax (GST) improvement is the significant reform in waiting. It would be beneficial to expand the base of service tax by taxing all services with a short negative list. Another impending important reform on revenue front could be an administrative one. Strengthening information system would result in higher revenue collection. Examples in sight are introduction of tax information network (TIN), and information system on excise duty, both of which led to buoyancy in income tax, & indirect tax collection, respectively, in 2010-11. Task in handAlthough there is no need to panic, yet, the overall scenario remains worrisome. This year’s budget will be in backdrop of difficult macroeconomic environment. An uneven global recovery, an unsustainable level of current account deficit at 3.7% of GDP, moderating industrial growth in the last four months to an average of 6.5 per cent, tight liquidity Open Forumconditions, and last but not least, sky rocketing inflation which is showing no signs of moderating have provided finance minister with quite a task at hand!Union Budget 2011-12 demands fiscal discipline, not fiscal populism. Fiscal consolidation is critical for several reasons; including the fact that monetary policy is most effective in tackling inflation when fiscal deficit is organized. Expansionary fiscal policy based growth is no longer a rational option. RBI is doing it bit in this regard by compressing private demand through multiple interest rate hikes since March 2010. A disciplined budget would be able to keep a lid on government demand. Growth, as such, is following a trend rate and does not require short term policy support, & a fiscal deficit higher than in comparable countries.Last year, Mr. Pranab Mukherjee had opted for a growth oriented but potentially inflationary budget. Result is double digit inflation. The onus lies on him; this year to send out the right signals to the economy and the market that government is committed to prudent expenditure management. Russia Follows China in Using Reserve Ratios to Curtail Inflation ThreatRussia, the only one of the so-called BRIC countries without capital controls, is following China and Turkey in relying on reserve requirements to drain cash from the economy and avoid luring more speculative investment. The central bank on January 31 increased the mandatory reserve ratio while unexpectedly leaving its deposit rates unchanged after inflation in January accelerated to the fastest in 15 months. Policy makers cited the threat of rising capital inflows driven by higher oil prices. Consumer prices in January surged 9.6 percent from a year earlier, triggered by the worst drought in at least 50 years, while monthly inflation was 2.4% the quickest in two years. Brace for food price shock, Africa warnedThe World Bank IMF are warning poor regions that have so far not been hit by rising food prices, like sub-Saharan Africa and the Caribbean, to get ready to face them. In some parts of the world, weather-related supply shocks have pushed up prices, and there is a likelihood of substantial long-term increases. So far, Asian economies have felt the biggest effects from food inflation, while higher prices are partly to blame for unrest in the Middle East including Egypt and Tunisia.South Africa - Zuma: New jobs fund, tax breaks President Jacob Zuma on 10th Feb announced the establishment of a jobs fund of R9bn over the next three years to finance new job-creation initiatives. In addition, the Industrial Development Corporation (IDC) had set aside R10bn over the next five years for investment in such economic activities with a high job creation potential, he told parliament in his third state of the nation address.US backs Brazil in currency war with ChinaTimothy Geithner, the US Treasury Secretary, has voiced tacit support for Brazil in its quot;
currency warquot;
with China in a sign that the two giants of the Americas will work together to tackle the issue. Speaking during his first official visit to South America's biggest country, Mr Geithner said quot;
undervalued currenciesquot;
elsewhere meant Brazil has received a disproportionate share of global capital inflows. Foreign investment has driven a 38pc appreciation of Brazil's real against the dollar in two years and a flood of cheap Chinese imports has damaged the country's manufacturing base.Thai Chamber of Commerce worried border fights will hamper ASEAN economyChairman of Thai Chamber of Commerce Dusit Nontanakorn has disclosed that the private sector wants to see an end to the territory feud soon as ASEAN members, including Thailand and Cambodia, are set to form ASEAN Economic Community (AEC) in 3 years. Mr. Dusit has explained that the longer the demarcation issue drags on, the less likely for ASEAN members to consolidate for economic integration. The objectives of AEC consist of the development of a single market and production base that is highly competitive as well as the free flow of products, investments, labors and capital.Philippines economy grows at record paceThe National Statistical Coordination Board has today revealed the Philippine economy grew at its fastest pace in 2010 – expanding by 7.3% from a year earlier.The growth was boosted by a rise in business and consumer spending and represented the fastest annual expansion since democracy was restored 24 years ago.Emerging Markets Currency wars have been rare throughout most of history, with the earliest currency war occurring in the 1930s during the Great Depression. Competitive devaluation returned in September 2010, however. Markets across the world are in the midst of an international currency war, a term brought back to the market by the Brazil’s finance minister, Guido Mantega in the first week of October 2010. As finance minister of the country whose currency is among the ones most appreciated against US$ in 2010, the choice of the term was obvious. In December 2010, the Brazilian real against the U.S. dollar reached BRL 1.696, an appreciation of 55.34% over the last 98 months, since the sudden and unexpected maxi-devaluation in 2002.The movement in foreign currencies, increase in commodity prices and Brazilian interest rate hikes contributed to the Real’s appreciation. Gain for the euro against the US dollar also supported the Real’s appreciation. The Real has rallied around 40 percent vs. dollar since the start of 2009, making it the best performing major currency after the Australian dollar and South Africa’s rand (ZAR).Brazil’s central bank has raised its benchmark Selic target rate three times in 2010 to 10.75 percent, from a record low of 8.75 percent and again raised it to 11.25 percent this year, as the economy expanded at the fastest pace in two decades. That compared with rates close to zero in the US and Japan, encouraging investors to pour their money into Brazil and other higher yielding emerging markets for better returns. It is expected that the central bank will again raise the benchmark rate by 1 percentage point by the end of the year to 12.25%. Higher rates attract more investments from abroad, where borrowing costs in developed economies are close to zero. That demand will likely continue as rates head higher, & overwhelming government measures to contain the real’s gain.In a bid to control appreciating domestic currency, Brazilian authorities have introduced two policy amendments so far in this year. One change obliges banks to make compulsory reserve deposits on foreign exchange futures contracts. The other change allows the government’s Sovereign Wealth Fund to operate in the foreign exchange derivatives market. Both forms of intervention are explicitly designed to hold back on further appreciation of the Brazilian real against the US dollar.Brazilian officials have pulled out all the stops in their efforts to prevent foreign inflows from having a negative effect on the economy.In this tug of war between foreign inflows flooding Brazilian market and preventive measures by the government, it is expected that there would be strong deterioration in the current account in 2011 & 2012 and Real will drop by 10.2% to 1.85 per dollar by the year-end.Brazilian RealOutlook Call Rates as on 11th February 2011 6.70%-6.75%CommoditiesAluminum (1 kgs) 113.95Copper (1 Kg) 456.55Zinc (1 kg)110.50Steel (L) (1000kg)29040.00As on 11th February 2011ForexForward Rates against INR as on February 11, 2011Spot Rate1 mth3 mth6 mthUS45.6545.9246.4347.1Euro61.7462.0962.7763.63Sterling72.9473.3674.1775.18Yen54.6354.9755.656.44Swiss Franc46.8747.1847.7348.44Source: Hindu BusinessLineLibor Rates as on February 11, 2011Libor %1 mth3 mth6 mth12 mthUS0.260.310.460.79Euro0.871.041.291.64Sterling0.610.801.101.57Yen0.130.180.340.56Swiss Franc0.130.170.240.51Forward Cover % as on February 11, 20111 mth3 mth6 mthUS 6.93%6.84%6.40%Euro6.50%6.63%6.14%Sterling6.67%6.73%6.17%Yen7.35%7.13%6.68%Swiss Franc7.79%7.35%6.75%Source: Hindu BusinessLine The countdown has already begun. The tenth Cricket World Cup tournament to be held in Indian sub-continent region will get underway on February 19. The grand tournament is expected to rake in over $1 million from the sale of merchandise.Further, at stake are sponsorship deals worth Rs.150 crore and ticketing revenues of Rs.125-150 crore, culminating from about 2 million tickets to be sold for the 43-day tournament. The World Cup Central Organizing Committee had already released over 1 lakh tickets as part of its first phase of online ticket sales in Mid-2010.Some more business associated with World cup Rs 700 crore: On-air advertising & sponsorships # Rs 300 crore: On-ground sponsorships # Rs 200 crore: Promotional activities and merchandiseICC has 4 partners Each firm has paid Rs 70-85 crore to ICC for this World Cup rights.ESPN Star Sports Rs 55 crore: Rs 35 crore: What the six associate sponsors will each pay ESPN. Airtel Digital Television, Nokia, Maruti Suzuki, Philips and PepsiCo are in. One more company will join this list.Rs 5.5 lakh/10 sec: Spot rates for commercials, 77% of the ad spots sold out, 15% inventory to be sold at a premium laterSo, are you ready for the grand sporting extravaganza?Which is the world's largest publicly traded fund manager? Name the first company from India to list on the Nasdaq.Name the BPO outfit that is owned by Wipro.Which was the first futures and options exchange to get its shares listed on a stock exchange?Name the richest football club in the world.Which Australian bank made a bid for the London Stock Exchange?Dr Reddy's Labs has made a major acquisition in the overseas markets last week. Name the company acquired by it.Who is the author of `Earning Money is Everything: From Zero to 10 Billion Yen, My way'? Which bank is the world's largest lender to agriculture? Which global investment-banking firm started out in 1838 as a London-based merchant-banking outfit founded by American businessman George Peabody?In FocusFinancial Q Baap of Cricket! ,[object Object]

Winds from Middle East Impact India

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