Business - Q&A;Alex Patellis, head-international economics, Merrill Lynch

Deeptha Rajkumar and Gayatri Nayak

ongoing global crisis better than most economies, believes Alex Patellis, head-international economics, Merrill Lynch. In a chat with ET correspondents, Mr Patellis spoke of how Asian economists find India to be the least-exposed in Asia. Yet there is no escape in the absolute sense. A global recession could possibly pull growth down to 6% next year, he says.

You have said BRIC nations are the least vulnerable economies in the world. Where does India rank among these nations and why?
India ranks slightly riskier than Brazil, Russia and China in our ranking, though not by much. On the margin, this is because of the current account deficit and the lower level of bank capital to assets. However, we wouldn’t differentiate much between the four countries based on our rankings.

According to our risk ranking, the most vulnerable regions are Europe, the Middle East and Africa (EMEA), Americas and Emerging EMEA, exhibiting worse balance of payments positions, stretched external debt service ratios and overleveraged financial systems. By contrast, BRIC, Latin America, and Emerging Asia emerge as the safest. Asia is less vulnerable, primarily due to its large external surpluses.

India is perceived to be on the riskier side despite ranking fairly high on banking parameters like capital strength.
Generally speaking, a crisis of excess leverage and too much debt is likely to impact developed countries more since those have more developed financial systems and more levered consumers. In that sense, India is less risky. This is something that most investors are not accustomed to. In past global financial crises, emerging markets were often in the driver’s seat. Yet, this time is different. Since the crisis is mostly centred on complex financial architecture, a mismatch of short- and long-term liabilities, and excess consumer debt, developed countries are more vulnerable, in our view.

In India, the growth is largely driven by domestic demand. Do you believe that the India growth story would still be sustained?
True, the India story is driven by domestic demand. This will also buffet the ongoing global crisis: our Asian economists find India least-exposed in Asia. But there is no escape in the absolute sense. A global recession could pull growth down to 6% next year.

IMF has scaled down the global growth forecast to 3.7% for 2008 and 2.2 % for 2009. How much will the growth prospect for emerging markets be impacted?

Emerging markets are part of the global economy. We are looking for emerging markets growth to slow to 5.4% in 2009, primarily as a result of a negative contribution for next exports. Notably, emerging markets are on track to contribute over 100% to global growth, given, of course, that the developed world is now contracting. Emerging markets remain a very important component of the global economy.

What is your GDP growth forecast for India?

We expect India to clock 7.5% growth this fiscal. As I said, things could, however, get tough next year in case of a global recession.

There is a perception that money will always look for growth. And if India shows strong relative growth, would this prompt FIIs to reconsider India in their portfolio?

It would be our view that next year, investors will flock to those countries/companies/sectors that can still deliver growth. In that sense, flows into India should resume, though the quality of the flows could be different. In turbulent times, investors re-discover the ‘old-school’ ways of analysing country risk. This time is no different. In fact, over the past few weeks, we have received several data requests from clients for key-risk indicators for all major world economies.

A current account deficit, a fiscal deficit and an electoral process waiting to happen. These are being touted as the three major negatives for India in terms of attracting FII interest.

We think risks from India’s current account deficit are overblown, given falling oil prices and high forex reserves. In fact, we expect the INR to retrench ahead. We never shared concerns about the fiscal deficit because the liquidity impact would be counterbalanced by parallel unwinding of MSS sterilisation bonds as is now happening. We certainly expect the investor community to watch the summer 2009 polls with keen interest.