Kenneth Akintewe is a portfolio manager on the fixed income Asia Pacific team at Aberdeen, responsible for the local currency interest rate strategy. The team is one of the largest dedicated Asian fixed income teams, managing approximately US$4.5 billion in assets. The team of 27 professionals, who are based throughout the region, has been managing Asian fixed income portfolios since 1997 and first got a Foreign Institutional Investor licence specifically for the Indian bond market in 2007. In this interview Akintewe goes over the progress on reforms in India.
Are you happy with the pace of reform in India?
We would like to see reforms move forward as quickly as possible – new land acquisition legislation is crucial – but we’re also aware of the magnitude of the task that faces Prime Minister Narendra Modi and his team. While there have been setbacks (such as a defeat in local elections earlier this year) we’re encouraged by progress that’s best described as “slow and steady.” Sure, some of the more ambitious reform legislation hasn’t been approved yet, but since Modi became premier last year, some 47 bills have been passed into law by Parliament and the administration’s commitment to reform remains unshaken. Not all of those bills would have been linked to the reform agenda, but this statistic shows that things are getting done despite political opposition in the upper house of Parliament. Beyond the headlines, quiet progress has been made on the devolution of economic power to state governments and on improving policy coordination between the capital and the regions. That’s in addition to measures to boost government efficiency and streamlining the approval process for infrastructure projects.
Can we see the benefits of reform in the economy?
The economy is in much better shape than it was even a couple of years ago – inflation is down, as are interest rates, and fiscal consolidation remains on track. Foreign exchange reserves of more than US$350 billion are at record levels and the rupee has seen better performance versus the majority of G104 and emerging market currencies. While the country has been a key beneficiary of the windfall gains from cheaper oil, policymakers have also taken the initiative to reduce fuel subsidies (subsidies for diesel and petrol were abolished, although those for liquefied petroleum gas and kerosene remain). The number of stalled investment projects has been declining as the government continues to try and clear the backlog that built up, while the value of new projects has been increasing. Foreign direct investment has also been on the rise. There are, of course, good reasons for caution. For example, corporate earnings have disappointed and many companies aren’t yet confident enough to invest in their businesses.
Why is infrastructure so important?
Decades of under-investment means India has appalling infrastructure. This is a major obstacle to the nation’s growth ambitions, especially if the country wants to become a manufacturing hub like China. Even a casual visitor will quickly realize that there is a desperate need for more of everything – better roads, modern railways, efficient ports. Power outages are a regular feature of daily life. Therefore, some of the most ambitious elements of the reform agenda are linked to infrastructure development. However, making this happen will mean changes to the law that have run into political opposition. From a fixed income investor’s perspective we think there are opportunities in the energy, power utilities/transmission and railways sectors. To start with, public spending will do the heavy lifting as private sector investment remains weak. If the government can harness the savings from lower oil prices (plus scale back fuel subsidies) and invest that money into public works, this could spur more investment from the corporate world.
Isn’t red tape still a problem?
Excessive, incompetent and/or corrupt bureaucracy is notorious in India. But this government is well aware of this and has been quick to address the problem. For example, Modi quickly clamped down on chronic absenteeism in the civil service and ordered the country’s so-called “babus”5 to tackle the backlog of work that was gathering dust in many government offices. There have been other administrative measures to improve government efficiency.
Why do local currency bonds look attractive?
In an unprecedented move, the Reserve Bank of India has started to target inflation as a key component of monetary policy. If reforms are successful, this could lead to a structural decline in inflation over the long term, which will likely drive down local currency bond yields. We believe Indian bonds pay an attractive yield even as the country’s economic prospects improve. Credit rating agency Moody’s Investors Service revised India’s sovereign outlook to “positive” from “stable” in April. Despite a year-long rally, 10-year sovereign bonds yield around 7.7%, while corporate bonds can yield some 60 to 140 basis points (bps) more than the government benchmark. Another attraction is the low degree of correlation with other bond markets. That’s because quotas and other market restrictions mean foreign participation is minimal and therefore this market is largely insulated from changes in foreign investor sentiment. The rupee, a currency that we think is undervalued, should continue to exhibit better stability and deliver better performance than a large number of other global and emerging market currencies. Meanwhile, central bank governor Raghuram Rajan has plenty of room to cut interest rates once there is greater clarity on issues such as the timing and impact of U.S. Federal Reserve (Fed) interest rate normalization, the direction of global commodity prices and the monsoon rains in India.
What are the key risks for investors?
Investor sentiment may be damaged if the reform program loses momentum in the face of stubborn political opposition, while lingering uncertainties over the tax liabilities of foreign investors are also unhelpful. After years of unproductive investment, state-owned banks and other companies have limited capacity to support Modi’s reforms. Inflation (which is largely driven by factors outside the control of Indian policymakers) could bounce back, particularly if there are unfavorable monsoon conditions that negatively impact agriculture. Meanwhile, investors need to be more careful when selecting so-called “quasi-sovereign” government-linked credits. A rush to find proxies for sovereign debt means some investors may have overlooked important differences in government-ownership levels and/or company fundamentals.
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