There is another interesting IIF chart in the FT article we referenced in yesterday's post. The chart above, provides another context to external sector vulnerability. It provides an inter-temporal look at various emerging economies' reserves to short-term external debt. The rationale for this ratio being that a country should have the ability to pay off its short-term debt with its reserves in case such a situation arises and not default on it.
The X axis plots various levels of reserves to short-term external debt in 2008, and the Y axis plots the same for 2012. The 45 degree line passing through the graph is essentially a reference line where the ratio is the same for both 2008 and 2012. The data points for various economies above the 45 degree line depicts those economies whose ratio for reserves to external debt is more robust as of 2012 in comparison with 2008. In other words, these economies have accumulated proportionately more reserves than debt. The economies represented below the 45 degree line are those that have proportionately grown debt faster than reserves and thus have a lower reserves/debt ratio in 2012 than in 2008.
From the graph, we can assess which countries' positions are most different in 2012 from what they were in 2008. The closer the data points are to to the 45 degree line, the less has been the movement in the ratio and vice-versa. From the graph it is evident that across emerging economies India has seen maximum movement away from the line, followed by China among those countries that lie below the line. This suggests that India and China have considerably depleted their external debt cover by 2012 in comparison with 2008. India's ratio, for instance, has climbed down from 500% to less than 300%.
Nevertheless, that by itself does not necessarily mean that the countries compare unfavourably with those economies that have seen a relatively unchanged position. This is because, countries like Turkey, Indonesia, Malaysia and Mexico have seen little change in the ratio, the ratio by itself remains lower than that seen in the case of China, India and Russia, ranging between 100 and 300%.
At any rate however, India's external situation should ideally be above the 45 degree line and not below it. In other words it is far better if the debt coverage increases than declines, since it only adds to India's existing external sector vulnerability.
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