Daily Archives: May 1, 2012

Political attention in recent years has focused on the renminbi’s nominal exchange rate with the dollar, with pressure on China to let the renminbi appreciate.

In fact, over time the renminbi has appreciated against the dollar, particularly when the real exchange rate – which accounts for domestic inflation relative to foreign inflation – is calculated. But the appreciation against other currencies has been much milder, especially the euro.

This interactive graphic explores how China’s real and nominal exchange rates against its main trading partners have fluctuated over time using data constructed by Eswar Prasad, professor at Cornell University and a senior fellow at the Brookings Institution.

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The news that rating agency Standard &Poor’s has put India on negative watch, with a possible downgrade to come, has caused some alarm.

With favourable demographics and growth at a rate the developed world can only dream of, an Indian downgrade doesn’t fit the EM script. What’s going on? Chart of the week takes a look.

When it comes to credit ratings, the emerging markets have been on the rise for a while. As the chart below shows, ratings from the three big credit rating agencies for the six countries we look at (the Bric nations plus Indonesia and Turkey) have trending upwards since 2003.

During that time, Russia, Brazil and India have all joined China as investment grade, with Indonesia and Turkey not far behind. (Indeed, Indonesia is rated as investment grade by two out of the three agencies.)

But the EM trajectory is not, in fact, relentlessly upwards. As the chart also shows, India and Russia have started to flatline in the last few years. Russia’s downgrade in 2008 by S&P, and then Fitch the following year, was based on falling foreign exchange reserves. The country’s position has been buoyed by high oil prices since then but a lack of diversification from hydrocarbons has stopped the agencies changing their stance. The country retains investment grade status, though.

India made a return to investment grade across all agencies in January 2007 when S&P made what was seen as an overdue upgrade. Since then, however, the country’s economic engine has stalled and it now faces a downgrade for the first time in a decade.

Indonesia, too, is on a less certain path than the chart at first suggests. Over the past decade it has recovered most of the ground it lost so precipitately following the Asian crisis of the late 1990s. But its economy, too, has shown signs of stalling. S&P – alone among the three agencies not to rate it as investment grade – recently confirmed its junk status.

Of course, credit ratings are opinions – you can disagree with them, and argue for instance that the rating agencies didn’t see the financial crisis coming. But you can’t argue with the fact that investment grades matter. Once a country gets an investment grade rating, its debt is automatically included in various funds and investment strategies. Which makes borrowing cheaper and easier.

Which is why India’s negative watch by S&P is so troubling for the country. It is sitting slap-bang on the investment grade line, with BBB- from S&P and Fitch, and the equivalent Baa3 from Moody’s. A notch down from S&P could prompt the other agencies to follow suit. Not being investment grade would be a big embarrassment – and more worryingly, India would find it more expensive to borrow, causing a further deterioration in the country’s fiscal position.

India doesn’t want the dubious accolade of being the first Bric to lose investment grade status.

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