A FinNiche Publication
FINNICHE | FINOMENA
FROM THE EDITOR’S DESK “If you’re in the luckiest one per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” -Warren Buffett FinNiche, The Finance Club of IMT-G, congratulates all the winners and thanks all the participants for their contribution. The arrival of new government in our country has expanded collaborations in trade, investment and technology that align with the development goals of the nation while sustaining with US as global hub of growth. “Chalein saath saathForward together we go”, the joint vision of two great democratic nations with diverse tradition and faith, working together for the benefit of the world. India‟s joint venture with the United States and Japan individually to expand and deepen its strategic partnership in order to harness the potential and burgeoning ties between people, economies and business. In the first edition of our quarterly magazine ―FinOmena‖, we bring to you the impact of the new government on Indian Market under the title “Is India on a track of Multi-Year Bull Run” and “Coal Block De-allocation and its Impact Analysis”. In the international scenario, this edition talks about “Credit Bubble in China”, “Can Eurozone Survive its Triple Dip Recession?” and “Effect of Geo-Political situation on Financial System”. Furthermore, we intend to inform our readers about the growth of Analytics in Financial domain. On a closing note, we Club FinNiche of IMT Ghaziabad invite you at RISCON’14 – National Risk Management Conclave, on 8th and 9th November 2014, with the theme on New Government Strategies: Birth of a New Risk or a Deterrent to it. We want to thank everyone who has contributed in our quarterly issue and hope to get the same enthusiastic response in future. We wish you success in your future endeavors. Enjoy the read! Regards, Team FinNiche E-Mail: finniche.imt@gmail.com
Disclaimer: FinOmena takes no responsibility for the opinions expressed in the magazine. July-September 2014
Page 1
FINNICHE | FINOMENA
CONTENTS Credit Bubble in China
Is India on Track of MultiYear Bull Run? Can Eurozone Survive its Triple Dip Recession? Growing Role of Analytics in Finance Coal Block De-allocation and its Impact Analysis Effect of Geo-Politics on Financial Systems
July-September 2014
Page 2
FINNICHE | FINOMENA
Credit Bubble in China
About the author: Saurav Ganguly is a student at Xavier Institute of Management, Bhubaneswar pursuing his MBA (Finance). He has 22 months of work experience in Essar Heavy Engineering Services. He has completed his B.E. in Mehanical Engineering. His interests are reading, writing and watching football.
China has rapidly increased its private investments through increase in credit lending after the Lehman Brothers downfall in 2008. The Chinese banking used to be the only source of lending few years back. The private investments in form of shadow banking, “entrusted” and “trust” loans from various corporates was growing at a very meagre rate of 1% per year until the year 2008. After this year the Chinese private domestic credit has risen from $9 trillion to an astounding $23 trillion. Much of this money has flown into bonds, stocks and real estate. According to Bloomberg‟s report, the increase in assets of the Chinese banks in the past five years has been $15.4 trillion which is almost double the increase in total assets of the “Big 4”Central banks of the world. This shows the magnitude of lending made by the banks. This debt has resulted in tremendous growth in the Chinese economy in the past few years against all odds. But this is a dangerous situation. The Chinese are paying $1 trillion in interest payments itself. The current trend shows that the GDP growth rate of China is decreasing after the average consistent growth of about 12% in the previous few years to below 8% in the subsequent years. Analysts have predicted that China‟s growth will fall around to 7% in the next two years. In this scenario the huge amount of debt in the balance sheets of the companies won‟t be offset by sufficient cash flows generated by them.
July-September June-September2014 2014
Page 3
FINNICHE | FINOMENA The dangerous build-up of debts and the explosion of risky and poorly regulated shadow banking has raised serious concerns about health of the Chinese economy. The credit structure followed by the Chinese banks is riskier as the down payments (30% of real estate value) is itself financed by the shadow banks without accessing the capability of the person to repay the loans back. Thus people are virtually taking the assets without paying any down payments. This Chinese policy of easy credit is analogous to America‟s easing starting in 2001. Moreover China is suffering from same malaise as the American economy like corruption, capitalism and failure to disclose the bad debts.
Chinese economy and something needs to be done to avoid major catastrophe in the future like the Economic Crisis of 2008 otherwise it could turn out to be Asia‟s Lehman Brothers Moment. Collapse of this shadow banking system in China would result in sky-high interest rates and there would be a plummet in credit. The flow of cash from investors to dicey borrowers would result in decades of misery which we saw in Japan after the bubble burst in early 1990‟s.
The following measures need to be taken by the Beijing Government to curb the economic downfall of China. Tighten the oversight of the country‟s shadow banking services amid fears of bad loans reaching dangerous levels. The lending rates should more accurately reflect the risks by removing the implicit government guarantees. Proper ratings of bonds, stocks and instruments must be done. Higher borrowing costs and better transparency to investors will help curb dicey customers. Since non-bank financing has grown to 3040% of the domestic GDP, an impaired credit channel would weaken China‟s growth, so utmost care needs to be taken by the official as one wrong step may prove out to be very costly. It is necessary that the new borrowings made were done through bonds or Now, is this $23 trillion bubble bursting? The traditional bank loans, rather than shadow answer is yes, it has begun to impact certain banking routes. industries in China with high operating and financial leverage like Ship Building, Iron and The Chinese Bubble burst will impact itself the Steel, Real Estate Development and the Trust most and the export oriented partner countries and other Financial Institutions. International like its neighbours South Korea, Japan and Business Times quoted last year that China‟s Australia would feel the similar effect. This debt laden steel industry was on the verge of would call for the much awaited call for change bankruptcy. In December, Quartz reported that in structure of the Chinese economy from a huge coal company “Liansheng Resource export oriented to consumption oriented. There Group” declared bankruptcy with $5 billion in needs to be change in the structure to curb the debt. First corporate bond default was allowed after effects of the bubble burst. But still some in China which inflicted losses to small of the officials are hopeful that everything is investors. A manufacturer of solar panel in alright and the Chinese economy is going to Shanghai was able to pay only the interest part sustain well in the future also. But time can of his $15 million loan. Until now, Beijing has only answer these questions and tell us what bailed out various troubled companies to restore happens to China. In 2007, Ben Bernanke also confidence in the credit markets but 88% of the assured the same things about the predicted revenues of the trust companies are at risk. crisis and massive credit bubble in US. These are the alarming indicators for the July-September 2014
Page 4
FINNICHE | FINOMENA
Is India on Track of Multi-Year Bull Run?
About the author: Debjit is pursuing his MBA in Finance from IMT-Ghaziabad, currently in 2nd year. He is a passionate finance enthusiast.
Indian equity market is rising. After years of economic slowdown, we are getting good signals from all the corners. Equity market is ready to board a lift to the high floors. Rakesh Jhunjhunwala estimated that it could be the mother of all bull runs - not just a multi-year bull run but multi-decade one. Other market experts also predict same bullish indication. Some expect bull to run at least up to 2017-18. It is a bull run supported by fundamentals as well as sentiments and foreign flows. Sensex has risen 29.71% from Janâ€&#x;14 to till date. Similarly CNX Nifty has increased by 30.75% from Janâ€&#x;14 till date. So both the markets are bullish and sky rocketing. With strong policy changes and helpful business environment, Indian Bourses could create a history.
Fig 1: NIFTY
Fig 2: SENSEX
MARKET BOOSTERS: A) Political- a Historical Mandate: Previous two terms of UPA have seen many ups and downs. But Congress government faced serious slowdown in economy. Though by official terms the recession ended in 2009 itself, the market sentiments were bearish throughout. Rupee depreciation added to the woes. Government being a coalition could not take firm steps because of the opposition of regional parties.
July-September 2014
Page 5
FINNICHE | FINOMENA
But this time, people of India gave a majority mandate to Narendra Modi led BJP. Election of Mr. Modi helped to improve market sentiments. Everybody from investors to businessmen is expecting to have better environment for doing business. With single party in majority, firm decision taking should be easy. The euphoria was so loud that market increased across all the sectors on counting day (except banks). Around 192 stocks touched 52 weeks high on that day.
E) Oil Prices: Global Oil prices have come down in recent past. The oil prices dropped from a level of $110 a barrel to $98 a barrel. It will help India to reduce trade deficit. With reduced oil prices, inflation is expected to come down. As RBI is looking to tame inflation, reduced level of inflation may prompt them to cut rates. A rate cut can boost the equity market. F) Global Economic Condition: Global economic condition is also poised favourably for India. US might hike interest rate in the near future. These would have an adverse effect as it would reduce money from the market. But European Central Bank (ECB) has reduced rate amidst double dip recession in Italy recently. Investors are avoiding Russia for Ukraine issues, China for credit bubble, Brazil for slow economy and South east and MiddleEast Asia because of political problems. Hence India emerges out as the most stable and favourable investment destination.
B) High P/E for the companies: Indian markets have got out of the cheap P/E multiple. Previously it was 12-13 time forward. Now it is ranging around 16-17 forwards. The overall valuation is also a little better than 20 year average.Nifty P/E has reached 21. This basically indicates a high investor confidence in the stock markets. C) Corporate Earnings: India Inc.‟s latest annual result was good overall. Aggregate profit of 965 companies showed a strong 62.2% year on year growth. With slowing economy for a few years companies have streamlined their operations, reduced debt and developed marketable product. These will help companies in future by earning profits. Shareholders will also get more return on their investment because of less interest expense. D) Major Disinvestments: Government is ready with some big pocket disinvestments. Coal India, ONGC, NHPC etc. will get disinvested. These companies are part of “Maharatna” companies. With shares of these companies in market, investors will be keen on investing them.
G) Macro-Economic Factors: Macro economic factors are also showing good signs. FDI and FII have increased quite a lot. Also, laws are being framed which are favourable to FDI and FII (like 100% FDI in single-brand retail and easing of norms in the multi-brand retail and insurance sector). This indicates improved investors‟ faith in the Indian economy. Inflation is also coming down. Inflation is expected to be around 7% by March 2016. Unemployment rates have also reduced which is a positive sign. All these factors are clear indicators of India moving on the track of achieving multiyear bull run.
CY 2007 200712-31
CY 2008 200812-31
CY 2009 200912-31
CY 2010 201012-31
CY 2011 201112-31
CY 2012 201212-31
CY 2013 201312-31
2014-09-20
21.94
11.67
23.48
20.24
13.87
15.91
16.03
18.56
Price/Earnings, Positive
21.65
10.81
20.37
20.02
13.53
15.42
15.38
18.43
Price/Earnings before XO Price/Book Value
22.10 5.78
11.70 2.22
23.61 3.44
20.26 3.48
13.87 2.35
15.95 2.70
16.02 2.48
18.66 2.90
EV/Sales
3.76
1.75
3.04
3.05
1.99
2.25
2.31
2.60
EV/EBITDA
15.48
7.66
13.12
13.46
9.76
11.31
10.66
11.76
Dividend Yield
0.84
1.83
0.96
1.19
1.62
1.50
1.50
1.40
12 Months Ending Valuation Metrics Price/Earnings
July-September 2014
Current
Page 6
FINNICHE | FINOMENA
Indicators
2014
2013
FDI
8167.62
909.54
FII
12439.8
9258.07
CPI
7.8
7.96
Unemployment
8.8
9.9
Table 1: Macro economic factors DAMPENERS A) Coal Block Allocation Problem: Recently, the Honourable Supreme Court of India declared all the coal block allocation from 1994 -2013 as illegal. The government has to auction these coal blocks again. Though the coal blocks are still working, but once they have been auctioned off, new owners might take some time to take charge. This may cause a severe production hit. As a result India power sector might face severe crisis. B) Credit Policy of Banks: With a look to reduce Non-Performing Assets (NPAs), Bank‟s might stiffen their credit policy, hence, it would
July-September 2014
be difficult for the businesses to raise debt from the banks. Even if they get, they might have to pay hefty interest amount which would have direct impact on return to the shareholders. C) Recent Political Result: Recent by-poll elections have shown “Modi Magic” might be fading away. With BJP winning only 1 out 4 seats in Rajasthan - very worrisome situation for BJP. This may cause another policy paralysis. Also, BJP is still a minority in Rajya Sabha. Hence any policy change will face problems in getting approval as we have seen this in the recent Insurance Bill. Government may not be able to pass the bill in the session. With so many hindrances in the way to speeding reforms, it poses a problem to achieve required governance. Hence, reforms that are expected and necessary might not take place so easily. Indian equity market has not always responded according to fundamentals or economic factors. It is more dependent upon sentiments which are majorly driven by the government policies. Even though there are many leading indicators of a bull run, one has to be cautious about the hindrances.
Page 7
FINNICHE | FINOMENA
Can Eurozone Survive its Triple Dip Recession?
About the author: Nitish is pursuing PGDM Finance 2014-16 at IMT Ghaziabad. He has a work experience of 1 year as Deputy Manager in Maintenance department at ACC Limited and 1 year as an insurance consultant. He is a passionate follower of Formula 1.
The perfect indicator of an interlinked economy is “2008-US Sub Prime Crisis”, wherein the real estate market crashed in US and the trend of bullish markets reversed around the world. This started a crisis, effects of which are still visible in few countries. With mind boggling stimulus, the central banks have tried to bring their respective economies back on track, but only few have succeeded. As of late, US economy has showed signs of revival. Fed‟s latest announcement of cutting down the stimulus package by $10 billion per month is also an indication of a positive sentiment in the American economy whereas Eurozone has strolled down a different path altogether. As the events of 2008 crisis unfolded, Eurozone economies started feeling the pressure of recession. The first dip coincided with this period (2008-2009), wherein the Eurozone GDP fell by an astonishing 35% and the net retail sales by 148%, marking the highest declines in almost three decades. Roots of this dip lie in the weakening currency rate, which made it very difficult for the governments to refinance their debts. Eurozone countries started borrowing money from ECB and IMF. Increase in demand of money caused the interest rates increased to new highs and the cost of borrowing became more expensive (in Greece the interest rates reached 30%). Along with this, rising government debts prompted huge withdrawals from European markets, as investors speculated lower returns in future. This lead to a cash crunch in the Euro market. To compensate this Eurozone countries increased money supply by pumping in money in the form of stimulus through central bank (ECB) and also decreased the interest rates to
July-September 2014
Page 8
FINNICHE | FINOMENA
to promote investment (interest rates dropped to 9% in 2013- a drop of almost 70% within 1 year). These bailout stimulus were of the order of €490 billion. About 50% (€245 billion) went to Greece, with rest of the economies receiving equivalent amounts. This disparity in the money distribution originated from a basic flaw in the foundation of Eurozone, wherein currency union existed without a fiscal union. Some economies among Eurozone were rich (Germany) and some were poor. Without a central fiscal union controller, every country had individual capabilities to finance their debts. With the reports of Greece understating its financial debts (in 2009), the Euro crisis
Greece to junk investment category along with Ireland & Spain. Increase in debts of Ireland started resembling Greece and analysts pointed out that if Ireland does not control its debts, it is set to become the next Greece within a couple of years. With almost all economies starting to face crunch of money supply and social unrest in their territories, Eurozone slipped into second depression within a span of three years. Meanwhile, all other Eurozone economies like Portugal, Italy, and France faced downgrading in investment rating. This further dented the sentiments of investors, adversely affecting cash flow. This phase is marked by the rise in debt of all Eurozone nations.
further intensified. Debts went up to the extent of 120% of GDP, which is unsustainable for any economy. Thus to support Greece, European Union decided to provide a stimulus of about €150 billion, through EFSF (European Financial Stability Facility).
To finance this debt, Eurozone economies have gone for short term financing. The European banks have continued to provide economic stimulus and reduced interest rates to stimulate investment. The situation has reached a stage where Germany is charging 0.5% as interest rates, to promote demand in the economy. EFSF was created in 2010 with agreement of all Inflation has reached dangerous levels across Eurozone members, to provide financial aids to the Eurozone, and the scare of deflation looms fellow Eurozone economies. Even with this debt over the European economies. financing, the position of debt plagued economies didn‟t improve. In turn it indented The world financial history stands as a the coffers of cash rich nations. This coupled testimony to the fact that whenever with a continuous slip of Euro, caused distress governments try to revive the economies by among European Union nations. In 2010 providing large stimulus‟, and reducing interest Germany questioned, whether it was right to rates to near zero/negative levels, the revival is provide stimulus to Greece. S&P downgraded unsustainable. The two dip that was witnessed July-September 2014
Page 9
FINNICHE | FINOMENA
by the Eurozone is a recent example of this phenomena. But the story does not end there. Eurozone is still financing its debts through stimulus. This financing has not been able to generate substantial demand in the market for goods. Rather the production has gone down on an average by 8.3% yearly post 2008 and the demand for products and services (DMC) has complemented this by decreasing at the rate of 7% Y-o-Y.
July-September 2014
Thus I would like to conclude, although a central financial institution was created as a result of this crisis- which seems to be the only positive from 2008, unless Eurozone creates a positive private investment sentiment, which would not only push the GDP up (by creating demand in the market) but also prevent national coffers from drying up, it would end up dooming itself by planting seeds for third “DIP� and hence lead to its own demise.
Page 10
FINNICHE | FINOMENA
Growing Role of Analytics in Finance
About the author: Himanshu Chauhan is pursuing his MBA in Finance from IMT-G and is currently in second year. He has more than 3 years of experience working with a technology company and has undertaken many projects in IT and ITeS domain.
IS INTUTION GOING TO DIE? How many of us remember a famous quote from Sherlock Holmes stories written by Sir Arthur Conan Doyle “I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.” If we change the context to a typical business scenario then we find that most of the business decisions are taken based on intuition. Decisions might prove right by chance but still it is a shot in dark. In today‟s competitive and complex world no big company can afford to take decision merely on intuition.
Data analysis is not something which has been adopted recently. It has been an eon long practice in many domains including finance. How has this become more challenging? In last few years businesses have seen exponential growth in digital data. This data is in structured, semistructured and unstructured from. Traditional data analysis techniques can handle only structured data. So we need modern data analysis techniques that can analyze structured, semi-structured and unstructured data and can help managers to gain important business insights BUSINESS ANALYTICS—WHAT DOES IT OFFER? Business Analytics is the buzz word in the market. IBM has explained the importance of analytics with the help of an analytics triangle. The bottom of the triangle is Descriptive Analytics which tells a manager what exactly has happened to the business. The middle part of the triangle is Predictive Analytics which tells what is going to happen to the business. The topmost part of the triangle is Prescriptive Analytics which focused on what should a manager do in the current situation. Analytics is used in many industries like finance, retail, healthcare etc. But the most matured industry in terms of using analytics is finance. This is reason why most of the analytics related work is being done in finance domain. July-September June-September2014 2014
Page 11
FINNICHE | FINOMENA
DRIVERS BEHIND FINANCIAL DATA GROWTH 1) Digitalization of Financial Services and Products: Most of the financial services and products are now offered online. Digitization of services and products saves huge costs for banks. At the same time it is easy and comfortable for consumers as well. According to an estimate in 2011, annual volume of electronic payment was $260 billion and is growing by 15%-22% annually. So it has resulted into a huge volume of online data which can be very critical in decision making.
collateral? This analysis can be done in realtime and cost effective manner. 2) Fraud Detection and Anti-money Laundering: According to an estimate, healthcare insurance frauds cost $60 billion to US annually. In traditional analysis, only 20% data is analyzed for fraud pattern detection. Additionally, this analysis takes so much time that it is not possible to stop fraud in real-time. Fraud is detected long after the transaction is complete and recovery becomes almost impossible. With modern analytics technologies, fraud patterns can be detected in real-time and potential frauds can be stopped even before the transaction is completed. Another interesting application of analytics is in anti-money laundering through social network analysis.
2) New data sources: Todayâ€&#x;s customer has many tongues, many eyes and many ears. Customers can use any online medium which generates valuable data for the company. So data can come from many sources like social media, blogs, news, article, web pages, videos 3) Personalized Banking: Big data is one of the etc. Many companies have already started using most exciting areas under analytics. It helps to this data for decision making. understand the customer better. Retaining the customer is very critical aspect for any financial 3) Increased Regulations: After 2008 crisis company. Banks rely on big data to perform business environment has become even more customer sentiment analysis which helps to challenging. Banks need to follow stringent solve the problem of customer attrition and to guidelines set up by the regulating authorities. develop new financial products. These regulation guidelines require banks to keep data of past 5-10 years. Banks need to 4) Regulatory Compliance: Regulatory closely watch its transactions, assets and framework has become very complex. Any liabilities to meet the standards of banking noncompliance can cost a bank millions of framework. dollars in penalty. Analytics make this huge 4) Trading Activities: Today almost every stock exercise simple and reduce the risk of error. market has online trading platform. That is why each year trading volume is going up. Analysing 5) Treasury Analytics: Many companies use this trading data could bring some important analytics extensively in treasury related insights for investment companies. activities like market risk analysis, derivative valuation, asset liability management etc. HOW COMPANIES ARE USING ANALYTICS IN FINANCIAL DOMAIN? There is no doubt that in coming years analytics 1) Credit Risk Analysis: While giving loans to is going to play an important role in businesses. individual a thorough background check is After all, business environment is a war in required. Analysis of this kind consumes a lot of which information is the key. The organization time and resources. The process does not end which understands the information well will here. The bank is also required to continuously have competitive advantage over other players. monitor its customers during the loan period to Analytics just make this job easier. make sure that the loan is safe. In this whole process, most of the banks use only 10% of the available data and still it takes a lot of time and money. Analytics through credit scoring and credit review helps to deal with this problem. This answers questions like: Should I give loan to a customer? What kind of financial risks the customer is taking? What is the volatility of July-September 2014
Page 12
FINNICHE | FINOMENA
Coal Block De-allocation and its Impact Analysis
About the author: Ravi Teja is pursuing his MBA in International Banking from IMT-Ghaziabad, currently in 2nd year. He is a senior member of the club FinNiche.
The country‟s apex court has yet again cracked its whip by delivering a landmark judgement on coal blocks allocation. As per its ruling all the 214 coal block licenses issued since 1993 stand cancelled herewith, which it terms were illegally awarded for mining the country‟s natural resources. Added to this an additional levy is also imposed on all the 40 operational mines which accounts to almost Rs. 100 billion from their respective miners. Eventually post this judgment there is a lot of buzz about how it could deter the India‟s nascent recovery of GDP growth, as it is expected to have severe impact on few sectors. Thereby we tried to do a brief impact analysis of this ruling on the following sectors: Metals sector is expected to witness a drastic fall in its profitability margins owing to an increased dependence on imported coal, which would be almost four times costlier than the captive coal. In addition to this, all these players are expected to bid aggressively during the next round of allocation given their proximity to end user plants and quality of coal. The worst hit would be the players of the sponge iron and aluminium sector (as depicted in the table below) will be losing out on almost 90% of their captive production and also because the Coal India Limited (CIL) may not be able to deliver their requirements given its existing agreements with various power sector companies. In the aluminium sector, Hindalco is expected to be worst hit by the court‟s ruling, as now it has to source most of its coal through the e-auction route or import from Indonesia which would entail higher cost to the company.
July-September June-September2014 2014
Page 13
FINNICHE | FINOMENA The company has estimated an incremental cost currently have a double digit exposure to the of Rs. 600/tonne will be incurred hereon, in country‟s power and mining sector assets. addition to the Rs. 5000 million fines which it would be paying as fine. Coal mining sector would now witness further growth in the coal imports, as some estimates say that country‟s import bill would be US $22 billion by 2016 (40% increase). Firstly it would further widen the fiscal deficit of the country by increasing the current account deficit. Secondly, the ability of our country‟s infrastructure (ports and railways) to handle this additional coal imports is also questionable. Lastly the requirement of 50 million tonnes of coal from the international market would steeply impact the prices of the market, which would further burden our economy and may even stroke „Indian power sector’ is in a woeful state both inflation. One way of averting this crisis could in the raw material (coal linkage & gas pricing be, if the PSU behemoth Coal India Limited (CIL) issue) perspective and also with the insufficient will be able to supply all the effected parties at a power tariffs offered to its players. However the competitive price. However for the past three Supreme Court ruling is expected to have only a years, CIL has been missing its production minimalistic impact, because the de-allocated targets (FY13: by 2.5%) and the ruling capacity is being used by only 7 GW of necessitates it to ramp up its capacity by almost electricity generation (<5% of total production). 8.4% within a year which seems equally Although there will be few pockets of stress improbable. created in particular with the states of West Bengal and Punjab where cost of production is expected to go up marginally and eventually further burden their ailing distribution units. In addition to these state utilities, private players like GVK power and Essar power would also be stressed, as they have competitively bid for their existing projects where they cannot transfer any incremental cost of production to their consumers. Thus they cannot even resort to importing of coal as the additional cost would have to be borne by the company itself, which would force these players to run their plants at low plant load factor (PLF). Lastly the Government of India is going to The commercial banks of India are expected to witness a wind fall gain from the imposed levy have an exposure of Rs. 370 billion to these coal on coal mining and also from the fresh round of blocks, which is almost 0.6% of total banking allocations, and this would also help in meeting sector loans. Though the number seems to be its fiscal deficit target for the near term but the small, the eventual ripple impact which it may long term business viability scenario in the eyes have on the power sector would only worsen the of international investors is deterred. Also, few condition. Given the scenario that currently the of the state government finances would be Indian banking sector is grappling with very stressed as the coal blocks allocated to them not high Non-Performing Loans (NPL) and only stand cancelled but also additional levy will restructured assets, this would come in as have to be paid out by them. Henceforth, the another big blow particularly when the onus is on the Government to not only move country‟s GDP growth is beginning to look quickly to limit the impact of this ruling but north. Players like Andhra bank & Syndicate also to take proper steps to avoid recurrence of bank are expected to be the worst hit as they such issues in the future.
July-September 2014
Page 14
FINNICHE | FINOMENA
Effects of Geo-Politics on Financial Systems
So far there has been huge uproar in 2014, whether of Russia annexing Cremian Province or Iran using its allies to dominate the Middle East or the tussle between China and Japan claiming its coastal waters. It seems that old political power plays are back in international relations. This isn‟t what people‟s perception was with the 21st century. Let‟s observe the impact of some recent geopolitical events on financial markets: Ukranian Revolution: The problem in Ukranian Province started when in 2010 presidential elections, Viktor Yanukovych won with 48.95% (supported by population of southern and eastern region who favour Russian government) with close competitor Yulia Tymoshenko gaining 45.47% votes (supported by proUkranian population). Protests erupted when in November 2013, Viktor Yanukovych backed out from signing a political association and free trade agreement with European Union at the eleventh hour. Instead, the President took loan from Russia for its financial obligations. Rallies were initially peaceful but eventually became violent in January 2014 after parliament, dominated by Yanukovych's supporters, passed laws intended to repress the protest. It was suspected that Russian officials served as advisers in how to carry out the operations against protesters. This had an adverse impact on Russian economy.
INFLATION RATE –RUSSIA (2013-14)
June-September 2014 July-September 2014
Page 15
FINNICHE | FINOMENA
INTEREST RATE - RUSSIA (2013-14) Moscow benchmark MICEX index declined by 10.8 % on a single day wiping off around £34 billion of the value of companies Ruble declined by around 13% against the U.S. Dollar since the beginning of the year (2014) Russian Central Bank announced 1.5% rise in its benchmark interest rate to 7% further increasing it to 8% in July‟14
Crisis in Syria: Syria‟s economic conditions were aggravated by political unrest and foreign sanctions imposed on it. Although the economy‟s average growth rate was 5% before the uprising erupted, this was attributed to oil revenues, underpinned by the increase in oil process since 2002. There was a steady contraction in real economy exacerbating negative shocks. Syria received a severe blow due to international sanctions imposed on its crude oil. Economy was dragged into structural deficits due to shortfalls in oil revenues estimated at $4 billion. Deteriorating trade and capital accounts, exponential price increases and currency devaluation have been serious consequences of foreign sanctions and the domestic political crisis. Inflation rate hovered at 30 percent and economic growth rate declined to negative five and a half percent in 2012.
There was a loss of 3 million jobs since the uprisings began. Most money transactions were curtailed due to sanctions imposed on banking sector. Public and private entities faced problems in carrying out their businesses smoothly. Syrian pound (£S) depreciated to 74 per dollar in February 2012, a fifty percent drop since march 2011 which pushed market prices up and dampened the purchasing power of the majority of Syrians. Arab investments have dried up more than six fold between 2002 and 2007 exacerbated the economic squeeze. As there was a suspension of the free trade agreement with Turkey, Syria increased its trade with Russia and Iran to generate alternate revenues. It has also relied on its alliances for Increase in investments in assets considered financial support it needs to rehabilitate some of safer: its infrastructure and restore services destroyed The increase in price of the US 10-year by violence. Treasury Note pushed the yield to 2.6% from 2.0% Geopolitical risks in Oil and Gas Sector: Gold prices rose by $29 to $1,350.60 per The energy industry depends highly on global ounce economic and political conditions. It is observed Impact on Stock Markets – all over the world: The German DAX fell to 9,358 points with a decline of 3.44%, its biggest one day fall since November 2011, when the euro zone crisis was raging Italy‟s FTSE MIB also shed 3.3% with Unicredit Bank dragged down almost 6% by fears over its exposure to Ukraine Dow Jones industrial average lost 153.68 points (0.9%) S&P 500 stock index and NASDAQ fell by 0.7%
Impact on Crude Oil Prices: Benchmark West Texas crude spurted to a five-month high of $105.22 a barrel before settling at $104.63 Brent crude oil jumped nearly 2% to $112.39, a two month high, before settling at $111.20 a barrel
July-September 2014
that oil prices are very volatile with respect to the political or economic decisions taken worldwide. As India is highly dependent on energy supply from abroad, we face a major problem of trade deficit due to geopolitical risks. India is the third largest oil importer in the world with imports of around 3.86 million barrels per day. Major oil demand of India is
Page 16
FINNICHE | FINOMENA
met by Saudi Arabia and Iraq. Geopolitics have Major reasons for change in oil prices are: played a significant role in influencing Brent Due to civil war and disturbances, productivity of a country decreases prices since the Arab spring in 2011. The Arab Spring refers to revolutionary wave of Workers are not able to work and produce energy due to security reasons demonstrations and 11111 protests (both nonviolent and violent), riots, and civil wars in the Transport charges become high as nobody wants to travel to a country with disturbing Arab world that began on 18 December 2010. situation It spread across the Arab League countries and Government is busy controlling the war they find it difficult to regulate prices surroundings. While the wave of initial revolutions and protests expired by mid-2012, To appease the citizens government starts spending extravagantly on them by taking some refer to the on-going large-scale conflicts loans in Middle East and North Africa as a To repay the loan or interest they increase continuation of the Arab Spring, while others the petrol prices refer the second wave of revolutions and civil wars post mid-2012 as the Arab Winter. During Arab Uprising prices of oil soared to very high Hence, we see that geopolitical risks are very level. The political crisis in Libya erupted important in regulating and controlling oil and sporadically, leading to Crude oil production gas prices throughout the world. outages or export disruptions.
July-September 2014
Page 17