Archive for August 13th, 2007

Sovereign Wealth Fund Primer

August 13, 2007

Peterson Institute of Economics is a terrific research centre. It has some great economists doing superb research.

Read this primer on Sovereign Wealth Funds by Edwin Truman. This is emerging as the hot topic of discussion amidst economics and finance experts.

Why the attention? These are funds formed by sovereign itself,  are pretty large and mostly have a global portfolio, and a problem with them could send financial markets for a toss. Hence, there is a need to understand the nature of these funds and build regulation to monitor the same.

Read the primer for details. I just wished the font-size was larger. It is too small to read.

Update 1: Ajay Shah shares his thoughts on the same and provides  number of links on the subject.

Update 2: Simon Johnson, Chief economist at IMF, shareshis views on the same in Sep-07 Finance & Development Issue. He does number analysis to understand their impact. Interesting.

Update 3: IMF has taken up research on SWFs. The GFSR Sep 2007 issue hasan excellent classification of SWFs. See Page no 45 of the report.

Update 4:Dr. Reddy gives an interesting speech on the same.

Update 5: WSJ Blog points to this article by Matthew Lynn where he says concern about SWF’s is overstated.

Update 6: Knowledge @ Wharton’s view on SWF  

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India’s Foreign Trade update: Q1 2007-08

August 13, 2007

A. V. Rajwade (his articles are pretty good) has lately been focusing on problems with India’s Balance of Payments. Earlier he had written in BS that RBI does not include data for trade credit (as it does not have a record of the same) which means our current account deficit is much larger than we would think it to be. It was a very intriguing piece of analysis.

In today’s BS, he points out to India’s growing trade deficit. Commerce Ministry has released the recent foreign trade data covering Q1 2007-08. The findings:

1. Exports have increased by 18% to $ 34.3 bn. In Q1 2006-07, the growth was 14%.
2. Imports by 34% to $ 54.9 bn. Oil imports by 4% to $14.8 bn and non-oil imports by 50% to $ 40 bn. In Q1 2006-07 the growth was 37%.
3. As imports have increased faster, Trade deficit has increased by a 75% to $ 20.6 bn. Last year, Q1 it grew by 100%.

Hence, all is within the trend. So what is the concern?

1. With rupee appreciating and since it works with a lag, exports would slow down and imports would increase.
2. That would mean higher trade deficit
3. We would need higher service exports to manage the deficit.
4. As rupee is appreciating, getting higher service exports would be tough.
5. Hence, most likely we would see higher current account deficit and to finance it, the capital flows would be higher, compounding the problems further.

Further AVR criticises EAC report which has underestimated the trade deficit and overestimated the growth in exports.

It would be sad if the EAC is taking a “politically correct” stand in its projections, by not analysing the impact of a rising rupee on the trade and current account deficits. Surely one expects a more analytical stance from such an august body. This apart, measures like tinkering with interest rates on export credits, tweaking duty drawbacks, micromanaging ECB end-use, and so on, would do little to correct the sharply growing deficit. We seem to be going back to the old habits of micromanaging the external sector, avoiding facing the root problem, namely the exchange rate. It did not work then, and is unlikely to work now!

I share similar feelings for EAC for its analysis here. Keep watching this space for more developments.

Articles on Basics of Sub-Prime Mortgage Markets

August 13, 2007

Sub-prime is the flavor of the season and every second article in Indian news papers focuses on the same (every other article is on rupee appreciation). I had posted about some academic papers covering the same topic.

I came across 2 pretty-good articles explaining basics of sub-prime mortgage markets. One in BS and the other in ET.

Assorted Links

August 13, 2007

1.Nouriel Roubini in his excellent blog, raises concerns overt the current crisis.  He says this crisis is worse than the LTCM crisis in 1998.

2. WSJ Blog has a primer on how Fed injects liquidity. Econbrowser has an excellent explanation as well.

3. Read Central Bank’s response to liquidity crisis.

4. Read the new war of words amongst blogging economists.

5. PSD Blog points out to comics from World Bank addressing global issues.  I read one, not as good as the one by RBI to improve Financial Literacy.

6. Ajay Shah points out to interesting posts on Indian education system.

7. ET has a nice interview of R.H. Patil, in which he says there is no will to reform corporate debt market in India. He expresses his strong views on many current topics- rupee appreciation , MIFC etc.

8. ET reports SEBI supports dedicated selling channel for MFs. 


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