Krishna Memani On The Virus Crisis, Hidden Risks And India Recovery
The largest hidden risk of the coronavirus pandemic is really the dollarisation of global markets, Invesco’s Krishna Memani says.
The Global Covid-19 Crisis is not just bigger and more overwhelming than the Global Financial Crisis of 2008, there are other distinctions as well, that will determine the post-crisis recovery, said Krishna Memani.
Growth rates were higher then, as were policy interest rates and the fiscal situation in many western economies was far better, the former vice chairman of investments at Invesco, pointed out. “So while everyone is committed to doing whatever they can, the options that they have are significantly fewer than they had in the global financial crisis.”
More importantly, according to Memani, the largest hidden risk is really the dollarisation of the global markets.
While the U.S. Federal Reserve had done a good job of dispersing liquidity to counter the shortage of dollar, there may soon come a breaking point, the former investment fund manager told BloombergQuint in an interview. The shortage of dollar is actually probably more acute today than it was while coming out of the financial crisis, he said. “I think that’s something to worry about a great deal.”
I worry about the fact that the dollar is more of a global currency today than it was in even the financial crisis. That’s the burden that the Fed carries and there are a whole lot of risks associated with that.Krishna Memani, Former Vice Chairman, Invesco
The Covid-19 outbreak has already infected more than one million cases (10 lakh) worldwide. It has stalled global trade and equity benchmarks tumbled more than a third in India, tracking the worst global selloff in more than a decade, before recovering some losses as large economies started announcing stimulus. The International Monetary Fund has already declared a recession.
And as the virus wreaks havoc on a global economy, investors are fleeing emerging markets in record numbers and piling into the safe-haven greenback. The Fed, in an attempt to prevent a liquidity squeeze amid a worldwide rush into the dollar, provided temporary repurchase agreement facility to allow foreign central banks to swap any treasury securities they hold for cash.
“The Fed has found a way of managing it by doing by providing, repo financing and doing dollar swap and things like that. But at some point there is a risk of one of those things breaking where the Fed incurs a significant loss because one of the central banks that it lent some money to cannot repay,” Memani said.
Capital Flight From Emerging Markets
For money to return to emerging markets like India, developed markets will have to see some sort of a bottom, Memani said.
In March Foreign investors withdrew a net Rs 1.2 lakh crore from both equity and debt markets in India, according to data available with the National Securities Depository Ltd. The rupee depreciated 5.5 percent in the first quarter, leading to a 33 percent loss for the benchmark stock index in dollar terms.
Memani, however, said while a three-week lockdown in India would have an impact on the economy, it was a prudent step. He also expects the nation to see a quick recovery. “If India somehow comes out of it with a significantly lower spread for all sorts of reasons, I think the recovery in India can be V-shaped.” Also, the Indian economy is likely to come out of the crisis with relatively higher growth than developed countries, he said.
As for the stimulus measures, they were on the “ligher side rather than overwhelming”, he said.
Watch the full interview here:
Here are the edited excerpts of the conversation:
How do you view the impact of this virus crisis across the global economy and the response of governments and central banks to it?
As far as the state of the economy is concerned, it’s extraordinarily dire. This is a global sudden stop. We’ll be lucky if we come out of it with just low double digit type contractions in the in the second quarter, and hopefully we come out of it. But it’s too early to tell as to how all of this will work out.
The fiscal responses vary from country to country. Do you think these are sufficient and when combined with the central bank responses? Do you think these will help and to what extent?
So the response from policymakers both monetary and fiscal so far has been extraordinary. Even during the financial crisis, it took the Fed a long time- almost a year to get to this point. They actually in this round, they got to it over a weekend. So everyone recognises the gravity of the situation. Everyone recognises the fact that if they are not supporting the economy, the consequences for the global economy are going to be extraordinarily bad. So people are acting in good faith, people are acting appropriately. Whether the response so far will be enough, again remains to be seen.
For us, to kind of figure out what the outlook will look like when we come out of this, we have to have a good handle on what the level of spread of the virus is going to be and how long we are going to be in the situation. Right now, we just don’t have any handle on that. Having said that, I think the commitment from policymakers couldn’t be any stronger. So if there is a silver lining in all of this, it is that everyone is on the case and hopefully if men can help the situation in the global economy, then I think there is reason to have hope.
Are there any tools that as yet have not been used either by governments or by central banks that you think ought to be used at this point in time, to help ameliorate the impact of this virus on the real economy?
So I think from an economic policy-making standpoint, a lot has to unfold for sure. But if it just continues for some period of time, and today doesn’t look like it won’t, so I think there’ll be more that they will have to do and more would be in terms of effectively doing a lot on the monetary front; at least from a liquidity provision standpoint, even more than what they have done so far, and on the fiscal front.
So, $2 trillion, which is 10 percent of GDP seems like a lot, and it is a lot. But if this continues for three, four or five months, then it won’t be enough. So, I think it’s the same set of tools, but the magnitude will have to increase substantially and would have to be on a coordinated global basis. I think that’s the next step of policy-making.
We’ve seen a large volume of foreign investment outflow from emerging economies like India. What do you make of what the impact of this will be on countries like India? I do want to talk a little a bit later about how you view India’s response to this current crisis.
The outlook for emerging markets, as we have found out- we found that out in the global financial crisis as well - that this is a global flows story far more than anything else. That is investments that go into emerging markets, at least in the equity market, are basically flows that come out of U.S. domestic markets or other developed country markets. As long as the situation in those markets is not good, as is the case in the U.S., the likelihood is that these flows resume for more risky and perhaps higher returns in the long term. But definitely where things are far more uncertain like India, I think that’s just not going to happen.
How are you assessing India’s response to this crisis, both from a monetary policy point of view, as well as from the initial moves made on the fiscal front?
Well, so I think that the three-week lockdown in India, I think from a growth perspective, is extraordinarily impactful. The positive thing that India had going in, that it still despite growth slowing down substantially probably had a 6 percent type growth rate for the year without the impact of the virus that certainly helps. Then you know, the first priority ofcourse has to be containing the virus, because given 1.3 billion people, if things get bad, then they can get bad really quickly. So, I think the government of India has done the right thing, perhaps slightly later than they should have, but they have done the right thing. I expect, while they may be saying otherwise, that it may actually get extended and may actually make sense for it to get extended.
So the impact of the virus is going to be substantial, somewhat moderated by the underlying trend growth rate. What they have done both on the fiscal and monetary side, I think relative to what the rest of the world has done, is, I would say on the light side rather than overwhelming. Though this may be the initial gambit and if this lasts longer than April 15, I think they will have to do a whole hell of a lot more than what they have done so far. The constraining factor on that side - the fiscal deficit is high to begin with. But I think if push comes to shove, that would be a consideration for later, and the government will probably spend more money to soften the blow, then they have done so far.
So you are, as let’s say, a global investor in favour of India substantially expanding its fiscal balance sheet at this point in time - if that’s what’s needed to fight the impact of this virus on the real economy?
Yes. The challenge for India on that front is if they go overboard, the currency can depreciate. But at the same time recognise that oil prices are at $20 - which is the largest advantage that India has. So I think the timing of all of that may be really bad for the U.S. shale producers. But for India, that is a very good outcome. So if oil prices remain where they are - and given the demand level that we will see on a global basis, it’s kind of difficult to see how oil gets meaningfully higher - I think the impact of fiscal deficit is going to be a little less than it would have been otherwise.
Is it possible at all at this point in time to look out maybe one or two or three months down the line and try and figure out or understand what a potential recovery might look like?
As investors, we always have to figure that out. Let’s assume for a second that the apex of the U.S. spread gets here by end of April and slowly but surely we start reopening the economy. Expecting it to be a V-shaped recovery I think is somewhat unrealistic. Until we find a vaccine or a cure, the likelihood that people will get on planes the same way that they used to before is pretty small. And I think savings rate in the U.S., even as people start going back to work, is going to go up as well.
Do you expect this to be a multi-speed recovery across the world - for instance, countries like India will recover at a different pace and a different timeline than let’s say a country like the U.S.?
Yes. To some extent, if the spread of virus in India is as low as it is today, and again, we can talk about the testing and things like that. But if India somehow comes out of it with a significantly lower spread for all sorts of reasons, I think the recovery in India can be a V-shaped recovery. In the U.S., with the debt load that we already have and the trend growth rate, which was 2 percent going in, given all that has happened, is probably down to 1 percent. That’s a very U, where the base is getting extended kind of recovery. It doesn’t have to be that way in countries where the trend growth rate (is higher). With the right policy mix the growth rate can actually recover much quicker.
Many experts have distinguished this virus crisis from what happened let’s say with the global financial crisis in 2008. What and how do you think some of the hidden risks will show up this time?
There are good reasons to worry on that front. So let’s talk about a few things.
The trend growth rate at the end of the financial crisis was probably close to 3 percent of the U.S., now it was 2 percent probably going lower.
Policy rates were significantly higher. They are at zero right now. They will probably remain at zero.
And the fiscal situation even in countries like the U.S. and looking more, even in Europe and Japan, the fiscal situation is going to be even more dire relative to where we were in the financial crisis.
So I think, if the overall global trend growth rate was going to be let’s say 3.5-4 percent, the likelihood that it stays at that level coming out of this is small. So on a global basis, things are really not looking that good.
The positives are countries like India is the fact that if somehow they come out of it with their trend growth rate intact, the growth differential between developed markets and developing markets like India is going to be significantly higher than what it was coming out of the global financial crisis.
So if there is a silver lining from an Indian growth perspective and from Indian markets’ perspective, I would say that is what we should be hoping for.
Do you see hidden pockets of risk that maybe policymakers have not yet acknowledged? Mounting corporate debt pile, private equity exposures...
So in the U.S., for example, while they have thrown a great deal of money at the problem, they have particularly not supported the CMBS - the Commercial Mortgage Backed Securities market, for example - or the private credit market or the junk bond market. Those markets grew a lot over the last few years. But in the context of the overall debt levels and architecture in the U.S., those are relatively small markets. So, a trillion may seem like a lot, but a trillion relative to 16 trillion of corporate debt, and 10 of that probably out of the high grade market is really not that significant. So, yes, there are pockets of excesses. I don’t think they will bail everything out because they probably want a little bit of cleansing taking place; not wholesale but a little bit of cleansing for sure. And therefore they will do things on the larger markets rather than every market.
The fact that the shortage of dollar is as acute today, is actually probably more acute today, than it was coming out of the financial crisis. I think that’s something to worry about a great deal.So far, the Fed has found a way of managing it by doing by providing, repo financing and doing dollar swap lines and things like that. But at some point the risk of one of those things breaking where the Fed incurs a significant loss because one of the central banks that it lent some money to - cannot repay, there’ll be issues and I think the political reaction to something like that is probably not going to be good.
So I worry about a lot of things, I worry about the fact that the dollar is more of a global currency today than it was in even the financial crisis. That’s the burden that the Fed carries and there are a whole lot of risks associated with that.
I wanted to put one more risk to you. I know it’s a good thing for countries like India that oil is at $20. But that’s a huge dislocation for a very large commodity market. We’re yet to see the full impact of that. U.S. shale is one angle but the impact of that on many African economies, the impact on that on the Middle Eastern economy.
Absolutely. I think the shale producers are definitely going to get impacted. Maybe that’s what the OPEC countries were looking to do. But in the process, they have probably hurt a lot of commodity-oriented emerging markets, just as much. I mean, if you look at Mexico, or if you look at Brazil, or Russia for that matter, despite their assertions, I think the impact of $20 oil for emerging markets is going to be really substantial.
I don’t think we have fully flushed it out because we are far more worried about what’s going to happen in countries like the U.S. and in places like Europe far more, because these are much larger countries in the economy. So I think all of that will become apparent and we may actually see some sovereign debt crisis coming out of it.
The good thing for India in that regard is that it is more of an internal economy, exports are certainly important, but it’s really investments and consumption within the country that matters and maybe it’s sheltered a little bit. But you cannot take away the global context of a potential significant emerging market disruption.
We’ve just seen in an effort to include Indian sovereign bonds on global bond indices, the Reserve Bank of India, open up investment into some of these more liquid bonds series. Is that something that you think the world will read as encouraging at this point in time?
So importing capital is going to be important for every country especially a capital-deficient country like India. So if you think about it, India went down the path of liberalisation significantly when it faced its last significant crisis, of a different kind and a different magnitude in the early 90s. So if they take this opportunity to liberalise their markets, more so than they have in the past - and I’m not sure if that’s possible, given the political situation in the country - now, if they do that, I think foreign investors would look at it far more positively than they would have otherwise.