Sunday, January 5, 2014
Nepali Stock Bubble
Below is my observation of the Nepali Stock Market Bubble that we are experiencing currently.
Nepali Stock Bubble
By: Mukesh
Khanal
Successful elections like the
recent one in Nepal accomplish a number of things. They bring changes in
government by ousting incumbents and bring opposition forces back in control of
government. A renewed optimism spreads through the economy when the new
government is presumed to be more democratic, free-market oriented, and
investor friendly. As a result, the stock market rallies to record highs. The
same has happened in Nepal according to Nepali media. Nepse, the Nepali stock
market index, jumped by over 200 points on December 19 to reach 805.65 points, highest
level in the last five years.
Recent unusually high stock index
increments suggest that investors feel more confident to invest, and have
started pouring in money into the economy. It means they have added more
liquidity to an economy that is already going through a case of excess
liquidity. Throughout this year, our economy has observed increasing liquidity.
Nepal Rastra Bank (NRB) has already issued reverse repo five different times
this past year to rein in excess liquidity. The NRB does this by selling
treasury bills (t-bills), which are interest-paying promissory notes sold by
NRB and bought by banks and financial institutions (BFIs) with the extra cash in
their vaults. This way, the NRB absorbs or “mops” excess money supply from the
market. However, the optimism that has been created among investors with recent
election results has started to hurt the NRB’s efforts.
In addition to optimism from
recent election results, there are four other reasons why excess liquidity has
persisted throughout this past year. First, 0.2% return rates on t-bills are low
while average interest charged on consumer borrowing in the market is around 4%-6%. Most BFIs
are making this comparison and are deciding that they would rather wait for
consumers to come asking for credit than invest in t-bills. However, consumer
borrowing is at a much lower level than supply of liquidity. But, that doesn't mean t-bills are not selling; they're all sold out. However, that is not an indicator of good news. It shows the desperation among the BFIs. They don't know what to do with excess money in their vaults. So, they're buying the t-bills as the only remaining option.
Second, the financial market is
still afraid of lending, in general, because it has only just recovered from a
liquidity crisis that started in late 2009 and lasted for three years. The
market could be practicing caution in identifying investment opportunities.
They definitely do not wish to lend to real estate and housing markets which
are going through a recession.
Third, even if BFIs were in an
investing mood, they are facing difficulty due to NRB’s new criteria: at least
20% of available liquidity in financial market has to be invested in
“productive sector” in addition to 12% that have to be invested in hydro and
agriculture. Our BFIs are so accustomed to lending their entire supply to
housing and real estate that they are unable to identify which sectors are
productive sectors. As a result, cash has stayed in their vaults instead of
being invested.
Fourth, political instability has
affected Nepal’s economic prospects as entrepreneurs and businesses have been
reluctant to start new projects due to instability. As a result, they have not
had the need to borrow funds. However, a semblance of political stability in
the months to come may encourage them to start taking on new projects and
risks. That would mean renewed demand for loans and borrowings which, in turn,
would reduce excess liquidity from the market.
A general understanding among
economists is that a return of risk-taking behavior among borrowers takes care
of excess liquidity. If we achieve political stability in coming days, this
risk-taking behavior will likely increase, and thus excess liquidity will be
used up. So, why worry?
Rallying stock market is not a
worry for developed economies that have low inflation. For them, increase in
money supply due to rallying market increases the price of investment
opportunities such as stocks, bonds and real estate without affecting prices of
basic commodities such as rice, milk or vegetables. However, for a developing
economy like ours, which already suffers from high inflation, a rallying stock
market and subsequent increase in money supply will push prices of everything
in the market higher. Everything—real estate and basic commodities—will become
more expensive for consumers.
There is a second reason why we
should be worried. Historical data shows that liquidity creation is always high
right before a liquidity crisis. Money supply decreased after Nepali economy
was liberalized in 1990. After 2001, it increased right up until the end of
2009 when a liquidity crisis hit our economy hard. Unusually rallying stock market
this year is clearly a sign of another impending liquidity crisis. Some of this
buoyancy will be corrected due to stabilizing remittance in the near future.
Remittance has increased every passing year for last two decades, and is about
25% the size of GDP. However, because it is already huge, it will grow only marginally
over the next few years, thus blunting some of its impact on money supply and
the stock market.
Any emerging economy like ours
relies on cheap credit to undertake development activities. Risk takers today don’t
have cheaper access to credit which, in turn, is hurting our economic progress.
On top of that, we have a stock bubble in the making due to excess liquidity in
our financial market. If history has taught us anything, we know the bubble is
going to burst because fundamental values and principles of the financial
market are going to assert themselves eventually. We have two options: the NRB
should devise better monetary policies than what we have today, or we better
get ready for our financial market to crash in 2016.
Labels: bubble, liquidity, nepse, stock market
Tuesday, August 23, 2011
Links for August 23, 2011
.
1. Government to expand micro-enterprise programs
2. Department of Revenue Investigation (DRI)moves court against three firms for evading income tax, VAT and excise duty.
3. Government to ban use of plastics bags from next week
4. Over 45,000 Nepalis left for foreign jobs within a month
5. Inter-bank lending on the rise
6. Deposits in co-ops more than doubled last fiscal year
7. Banks see sharp fall in PE ratios
8. Reform process in Rastriya Banijya Bank(RBB)and Agriculture Development Bank Limited(ADBL)take back seat
9. A bizarre project in Nepal, At Buddha’s birthplace: A Chinese development proposal causes disbelief
1. Government to expand micro-enterprise programs
Cottage Industry Development Committee (CIDC) will implement the programs in Tanahun, Baglung, Syangja, Solukhumbu, Illam, Taplejung, Rukum, Dhankuta, Darchula and Bajhang.
Federation of Nepal Cottage and Small Industries (FNCSI) will execute it in Morang, Siraha, Saptari, Dhanusha, Bara, Makawanpur, Palpa, Kailali, Nawalparasi and Kanchanpur.
2. Department of Revenue Investigation (DRI)moves court against three firms for evading income tax, VAT and excise duty.
Bishal Chemical Industries, Samyam Enterprises and Bishal Jarda Factory...together evaded Rs 290 million in VAT, excise duty and income tax.
...as existing laws imposes 200 percent penalty for such evasion, the department has slapped penalty of Rs 580 million for the three firms.
3. Government to ban use of plastics bags from next week
Minister for Environment, Sunil Kumar Manandhar said the government was going to ban the use of plastic bags of less than 20 micron in the country to be effective from the next week.
The offenders will be fined between Rs. 500 to Rs. 50,000
4. Over 45,000 Nepalis left for foreign jobs within a month
...number of Nepalis leaving the country for overseas jobs increased by 52.15 percent, to 45,165 from mid-July to mid-August compared to the figure of the same period last year...A total of 29,685 Nepalis had gone abroad for jobs during that period last year.
Among last month's migrant workers, the number of male and female migrants was 43,163 and 2,002 respectively.
Qatar remained top host for Nepali job seekers, accepting 15,702 workers compared to other countries Malaysia (9671), Saudi Arabia (8538), United Arab Emirate (6873) and Kuwait (2088)
5. Inter-bank lending on the rise
6. Deposits in co-ops more than doubled last fiscal year
Cooperatives are holding deposits of Rs 150 billion as of the last fiscal year, up from Rs 70 billion a year ago, according to the Department of Cooperatives.
Their lending grew to Rs 105 billion last year from Rs 43.46 billion in the previous year.
Saving and credit cooperatives are the biggest receivers of public deposits. As of mid-March, such cooperatives held Rs 97.49 billion, while total deposits in all types of cooperatives stood at Rs 130 billion.
There are a total of 22,646 cooperatives in the country, of which 10,558 are saving and credit, 4,096 multipurpose, 3,144 agriculture, 1,748 dairy and 1,379 consumer. Likewise, there are 371 cooperatives in electricity production, 161 in vegetable and fruits production, 104 in tea production, 67 in coffee production, 61 in health sector, 51 in honey production, 73 in herbal production and 833 in other categories.
DoC statistics show that 2,922 new cooperatives were registered last year.
7. Banks see sharp fall in PE ratios
Price to earning ratio (PE ratio)...one of the major investment indicators of the stock market...is calculated by dividing share price by per share earning.
Stock analysts say an average PE ratio of 15 is justifiable for commercial banks.
...the PE ratio came down sharply over the last year along with the freefall in the stock market.
Currently, Nepal Investment Bank, Agriculture Development Bank, Nepal Bangladesh Bank and Lumbini Bank have PE ratios less than 10.
A majority of the 17 banks that published financial results of the last fiscal year saw their PE ratio standing between 10 and 20. This is a sharp fall compared to the previous year when the ratio was above 20. Last year, Machhapuchhre Bank’s PE ratio was as high as 56.90 followed by Global Bank with 52.48. Now, Global’s ratio has come down to 13.85. The Standard Chartered’s ratio came down to 25.92 from 42.23. Other banks witnessing PE ratio above 20 are DCBL Bank and Citizens Bank International.
8. Reform process in Rastriya Banijya Bank(RBB)and Agriculture Development Bank Limited(ADBL)take back seat
Daily operations of these banks have been affected for the last few weeks due to strikes called by the trade union affiliated to the Nepali Congress (NC)
In both banks, reforms measures have been carried out with foreign aid. RBB is under the reform process as per the World Bank-sponsored Financial Sector Reform Programme, while Asian Development Bank has aided the reforms in ADBL.
Although the financial sector reform programme will end in December, RBB will still remain as a sick bank with negative net worth of billions of rupees.
The central bank has also failed to appoint a CEO in Nepal Bank Limited for the last four years even after five attempts. Currently, NRB’s own management team is running the oldest bank of the country.
9. A bizarre project in Nepal, At Buddha’s birthplace: A Chinese development proposal causes disbelief
Labels: ADBL, cooperatives, evasion, interbank lending, microfinance, migration, RBB, remittance, stock market, VAT
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