By Arijit Barman
Earlier this month, IL&FS Transportation Networks, a developer of toll roads, had to withdraw its $ 350 million bond issue, even at 7%. The vast global reach of investors and the support of a genealogical parent company simply failed to reduce it.
State-owned NTPC struggled to clear the ropes last week to raise $ 400 million. Closing 10 basis points wider than the initial expectation, bond execution was hardly smooth and an order book barely oversubscribed.
This is exactly what hedge fund billionaire Ray Dalio, founder of Bridgewater Associates, warned about this newspaper when he said the biggest risk to India and the world was not the price hardening of the oil but interest rates. Being prescient became second nature to Dalio who called for an end to the US real estate boom, the impending collapse of banks and the implosion of credit markets in 2007-08.
What is worrying is that Dalio’s predictions seem to come true sooner than expected.
Basically, where the equity and bond markets differ is their perceptions of risk. Bond investors are generally greedy. It’s a market where everything balances out for a price, unlike stocks. Investors who buy bonds assess them for risk.
So when IL&FS stumbles or NTPC stumbles, it is indeed bewildering. In a good cycle, Indian paper would sell at 5-5.5%, and even last August, revolving newbies could raise $ 1 billion from all investors at 4.87%. Today, in the midst of a volatile market with expectations of central bank pullbacks and rate hikes, investors are pulling away. Our cost of debt is already around 150 to 200 basis points higher than last year, and for a country still looking for $ 100 billion to build its highways, airports, ports and other infrastructure. base, one wonders if the music has not just stopped. Aggressive offers for solar parks, wind farms or toll roads will backfire on us again if we’re not careful or make exit clauses harder for developers to drop them halfway. .
As always, we would be wiser in hindsight, but if there is increasing talk in the United States of a 75-100 basis point hike in the current year, we are unlikely to let us have too narrow a spread here with the rupee rates where they are. Even if RBI reverses the trend, real rates will rise.
Dalio’s prognosis is based on what he calls America’s sugar rush, thanks to President Donald Trump’s tax cuts. It would mean a world – from businesses to investors – inundated with more liquidity, forcing central banks to tighten liquidity by raising rates. When US rates rise and bond prices fall accordingly, it would have a negative effect even on global stock markets. And sooner rather than later, this effect will spread to other economic activities as well. The recent market collapse is arguably the forerunner of a much larger global pullback of all emerging markets.
It’s already happening. Despite the momentary status quo of our central bank, we are witnessing a tightening of rates, including in the short term, one indicator being deposit rates at the personal level. We all know that infrastructure finance should be primarily debt financed, but so far Indian banks have funded it. Most often, the debt is refinanced by local currency loans equivalent to the dollar or by external commercial loans. Contrary to previous expectations, even Japanese private companies have borrowed locally. It is only in government-to-government (G2G) projects that we have seen cheap, yen-dominated project finance come in.
Six months from now, as we prepare for the 2019 election, decision-making will slow down, possibly leading to slippages on the fiscal front – another trigger for the rate hike. So when Macquarie’s recent bid for a large number of NHAI highways shocked everyone – being 25-50% higher than others – the government may have been thrilled with its asset recycling strategy. But for the others, including the new managers, we have only one thing to say: beware of the Ides of March.
The opinions expressed above are those of the author.
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