External Sector Comparisons

We did this study at the request of a client on 5th November, 1997, at the height of the Asian crisis. The Rupee was trading around 36.35 after having seen a sharp fall from 35.70 to 36.70 since August. There was general sense of dismay. The client wanted to know whether there was any credence to the calls for a Devaluation of the Rupee in light of the Asian crisis.

The study tried to take an objective look at the External Sector indicators for India and how they fared in comparison to countries in South East Asia and East Europe. We found that India's External Sector indicators were stable and well within comfort zone, especially when compared the other countries.

In our opinion, India's external sector position was not a reason for devaluing the Rupee. At the same time we acknowledged that these numbers would deteriorate over the years and projected that the Rupee could come under severe pressure around 1999-2000.

Macro External Sector Comparisons - India looks OK (for now)

Countries	GDP ($ Billion)	CAD as % of GDP	CAD ($ Billion)	Reserves ($ Billion)	Import Cover (Months)	Budget Deficit as % of GDP	M3 % rise over past 12 months	Short Term FX Debt to Total FX Debt (%)	Total Forex Debt ($ bn)	Debt Service Ratio (%)
Poland	82.14	5.6	-4.6	19.80	4.4	-3.0	28.0
Czech Rep.	51.02	9.8	-5.0	10.80	3.8	-2.0	8.0
Slovakia		10.4			2.7	-4.6	14.0
Hungary	28.57	4.2	-1.2	8.30	5.6	-5.1	26.0
Estonia		13.7			1.8	-1.0	61.0
Latvia		9.5			2.8	0.1	38.0
Lithuania		9.0			1.6	-1.9	29.0
Ukraine		3.3			1.0	-6.1	36.0
India	371.43	1.4	-5.2	28.00	7.5	-5.0	16.0	7.37	90	25.6
(KCS estimate)		(KCS estimate)		(KCS estimate)		(KCS estimate)
Malaysia	80.00	5.5	-4.4	26.60	3.6	0.9	21.0	21.2	30	7.7
Indonesia	197.50	4.0	-7.9	20.30	5.2	-0.3	27.7	20.7	110	30
Philippines	92.68	4.1	-3.8	8.30	2.3	0.5	24.2	13.4	40	14.5
Thailand	125.00	8.0	-10.0	28.60	6.1	3.0	14.0	32.2	86	15.6
Hong Kong	520.00	0.5	-2.6	85.30	3.9		24.7	Nil	Nil	Nil
South Korea	1140.00	2.0	-22.8	3.00	0.0	0.5	14.5	70	115	6.8
China	799.20	0.3	7.2	132.30	12.0
Mexico, 1994		7.0			0.8	-0.3	36.0			33.9
Thailand, 1996		8.0			5.5	2.3	13.0

Sources:

All figures for East European countries are from "The Economist"
Figures for East Asian countries are from the October 1997 issue of Bank of America's "Asian Financial Outlook" and from Morgan Stanley's "Global Economic Forum", Hongkong Bank, Citibank NA, IMF and World Bank
Figures for India are derived from RBI sources and newspaper reports

Observations:

The ASEAN countries (Malaysia, Indonesia, Phillippines and Thailand) have been running large CADs (In excess of 4% of GDP), M3 growth in excess of 20% and have a very high proportion of Short Term FX Debt, the perfect recipe for disaster
The CAD (as % of GDP) and M3 growth figures for East Europe are horrendous, even by ASEAN standards

In the case of India:

The Current Account Deficit and ratio of Short Term FX Debt to Total FX Debt are both at very manageable levels
However, these are STOCK figures, and do not represent FLOWS
It is our estimate that the ratio of Short Term FX Debt to Total Debt has risen to 9.6% in 1997-98 from 3.9% in 1993-94
We would reckon that a sizeable amount of Private Sector ECBs would be bunched for repayment in the period 1999-2001
Also, we expect the Trade Deficit (not shown above) to more than double from the 1997-98 level of about $ 13 billion to about $ 28 billion by 1999-2000 (assuming Export growth of 5% p.a. And Import growth of 20% p.a.)
Even if we expect continued healthy Private Transfers into India (averaging $ 15 billion p.a.) upto 1999-2000, we would still be looking at a CAD level of about $ 13 billion, an estimated 3% of 1999-2000 GDP, approaching Danger levels
The FX Reserves can be expected to grow more slowly and be at a level of around $ 37 billion in 1999-2000
As such, the "Months of Import" figure can be expected to come down to around 6.35, from the present 7.5