India immune to Greek tragedy, say economists

Stock markets in Asia, including India, are shedding tears of blood over the unfolding debt crisis spreading from Greece to other countries of Europe. But economists say that Asian economies — including India — are totally immune to the Greek tragedy. “Asia — including the most frequently asked about India, Indonesia and the Philippines — is not financially exposed” in the way that Greece is, says Credit Suisse economist Cem Karacadag. Greece, points out Karacadag, “Suffers from a classic twin deficit problem: high fiscal and current account deficits, which makes it reliant on foreign financing.” Greece’s government debt to GDP ratio is estimated at over 120% in 2010 — and near-term financing pressure is “acute”.  No country in non-Japan Asia suffers from a twin deficit problem, says Karacadag. “India has a small current account deficit — which is financed by foreign direct investment, if nothing else — whereas Indonesia and the Philippines run current account surpluses.” And although India has a high government debt to GDP ratio — about 75% in 2010 — it is “Almost entirely financed domestically, thanks to India’s high domestic savings rate,” he adds. India does face financing challenges that have the potential to put upward pressure on government bond yields, “but this is more of a crowding out issue than a potential fiscal crisis… We don’t expect ratings agencies to downgrade India, thanks to its high savings and real GDP growth rates — unless the fiscal deficit widens, which we don’t expect.” Similarly, the Philippine government’s debt to GDP ratio may be high — at 57% in 2010 — but its financing situation is manageable thanks to the Treasury’s high cash reserves and ample liquidity. And Indonesia’s government debt to GDP ratio — at 30% in 2010 — is much lower and its gross financing requirements are less than half of them. “We do not think Asia has material financial exposure to the volatility in credit markets. Instead, its growth and policy prospects will largely be a function of global output growth, on which we remain constructive,” says Karacadag, If global growth slows, “We think Asia has fiscal and monetary policy flexibility to keep stimulating growth at home.” Even within Europe, the “serious fiscal issues” that Spain and Portugal face are “nowhere close to those in Greece.” Spain’s government debt to GDP ratio is 66% in 2010; Portugal’s is 85%.