Indian risks eclipsing other BRICs
India’s first-quarter GDP growth report was a shocker this morning at +5.3 percent. Much as Western countries would dream of a print that good, it’s akin to a hard landing for a country only recently aspiring to double-digit expansions and, with little hope of any strong reform impetus from the current government, things might get worse if investment flows dry up. The rupee is at a new record low having fallen 7 percent in May alone against the dollar — bad news for companies with hard currency debt maturing this year (See here). So investors are likely to find themselves paying more and more to hedge exposure to India.
Credit default swaps for the State Bank of India (used as a proxy for the Indian sovereign) are trading at almost 400 basis points. More precisely, investors must pay $388,000 to insure $10 million of exposure for a five-year period, data from Markit shows. That is well above levels for the other countries in the BRIC quartet — Brazil, China and Russia. Check out the following graphic from Markit showing the contrast between Brazil and Indian risk perceptions.
At the end of 2010, investors paid a roughly 50 bps premium over Brazil to insure Indian risk via SBI CDS. That premium is now more than 200 bps.
Moreover, at the end of 2010, SBI CDS traded on par with Russia. Now they are 130 bps higher. The premium over China is now about 250 bps, widening from less than 100 bps 18 months ago. (Markit quotes current 5-year Russian and Chinese CDS at 255 bps and 133 bps respectively)
Some of the premium is of course down to the fact that SBI is a quasi-sovereign with problems of its own. But that is insuffiicent to explain the widening gap. Clearly India’s underperformance even amid a general emerging markets rout shows this is payback time for poor policymaking.
Last year Goldman Sachs Asset Management head Jim O’Neill named India as the country that had disappointed him the most in the ten years since he coinced the BRIC investment concept.
Last month he was even more blunt, telling a conference: India is the weakest link of the BRICs