Speaking Of Asia

Don't believe every magazine cover story on promising nations

The chief global strategist of Morgan Stanley talks about his new book, the 'kiss of debt' and gives his pick of Asian markets to watch.


Embarking on an economics discussion with Mr Ruchir Sharma is a bit like golfing with Tiger Woods. The 42-year-old managing director, chief global strategist and head of emerging markets at Morgan Stanley, the Wall Street firm, has a remarkable ability to approach things off seemingly improbable angles. His reach is long and his short game, well, you don't get to invest billions of the firm's money in financial markets if you weren't good at navigating its gyrations.

Like Woods, it does not matter if Mr Sharma does not always win his duels. It is the way he goes about his business that makes him interesting. In a profession marked by dour punditry, he brings an elan that enlivens his commentary.

Mr Sharma recently released The Rise And Fall Of Nations, a sequel to his much lauded Breakout Nations. In his latest book, which divides the world into BC and AC - before, and after, (global financial) crisis - he examines things from 10 parameters, including the level of a nation's public debt ("The Kiss of Debt") and how far it has progressed in manufacturing. That much is standard economics but it gets interesting when he includes the quality of leadership and whether "good" or bad billionaires dominate industry to judge the quality of a nation's economic health.

Another unconventional idea he puts forth is the "hype watch" - how popular media often get it wrong both ways on economies, either underestimating their chances, or overestimating the potential. In other words, hype portends disappointment.

In a 20-year span until 2010, Mr Sharma says, Time magazine covers that had an upbeat take on an economy proved wrong in two-thirds of the cases over the next five years. As a former writer for Time myself, it is particularly galling when he picks on that great mast to score some easy points: a cover story in 2003 that dismissed Indonesia and other South-east Asian economies as "tigers no more" - only, as it turned out, over the next five years these economies were part of a boom that saw emerging economies expand at 7 per cent per annum.

Newsweek, once Time's great rival, isn't spared either. In October 1989, it wrote a cover on Sony's invasion of Hollywood as one more sign of Japan's "inexorable rise" - only to see the Japanese economy enter a two-decade slide within months. Ouch!


But that is Mr Sharma for you. The son of a naval officer, he was educated partly in Singapore - at United World College, when his father was posted as defence adviser at the Indian High Commission here in the 1980s. He was a journalist and columnist before his stellar insights caught the eye of the Wall Street firm that hired him first for its Mumbai office, then quickly moved him to New York where his responsibilities have consistently expanded. As his career progressed, so did recognition come his way as something of an oracle for the world economy. These days, and partly because he has real skin in the game - all US$25 billion (S$34.5 billion) of the firm's money - he is perhaps more influential than even Nobel-winning economists such as Mr Paul Krugman and Mr Joseph Stiglitz.

Where in Asia should people be putting their money, I asked the intrepid traveller.

Mr Sharma preferred to respond elliptically, like he was curving a golf drive around and across a thicket of trees. The model of exporting to prosperity is certainly over, he believes. That means reducing the baseline for opportunities and dropping the "anchoring bias" of investing only in economies that move at a trot of 7 per cent to 8 per cent. Selective picks - and that might include countries like Vietnam, Bangladesh and Sri Lanka - not nebulous classes of economies, are clearly the answer.


And one country he is eyeing is clearly the Philippines. President Rodrigo Duterte, he says, has a fine economics team and is continuing much of the good work initiated by his predecessor, Mr Benigno Aquino III. But what about all those horrific killings in the name of attacking drug abuse and the harsh words towards the United States that's disappointing investors?

Mr Sharma's advice is to separate the politics from the economics, "for now". Besides, he says, no nation scores consistently across all his 10 categories. If it is doing well on five or six factors, as the Philippines seems to be, take that as good enough.

Another Asian nation in his crosshairs is Indonesia, which, he thinks, is poised to turn a corner under President Joko Widodo. Morgan Stanley research, he says, suggests that Mr Joko's tax amnesty scheme is having unparalleled success.

"My team tells me that the current number is US$230 billion of assets declared. And that US$7 billion in taxes has been paid. This is the most successful scheme ever - anywhere in the world - in terms of assets declared."

What of Singapore? The island state is facing headwinds from a multitude of factors, including poor demographics and slowing global trade. Mr Sharma adds another one as well - a real danger that it has priced itself too high for its own good. He says a friend took him for a vegetarian tasting meal at a restaurant in Tanjong Pagar and he was shocked at the bill - $500 for two people with a glass of wine; and the place wasn't even that fancy, he adds.

In other words, Singapore is taking on the feel of an expensive place and that cannot be too good for itself as a competitive place.

Since 2010, long before most others, Mr Sharma has sounded a bearish note on China. While several of his prognostications have indeed proved correct - there is no denying that economic expansion on the mainland has slowed considerably - Beijing seems to have managed to stanch the flight of capital and steadied the currency, two of last year's big worries. On a recent visit to China, this writer was deeply impressed with the strides the mainland was making in the digital economy and the gathering pace of innovation there. Was he wrong on China?

With the long view of the distance runner that he is in his spare time, Mr Sharma acknowledges that China has a good story in the digital space and that he thinks the mainland could continue to expand, but at a more moderate pace. But he also worries that China's legacy issues are enormous and that its problems are only going to worsen.

One leading indicator is the pace of increase of China's public debt, a warning also recently echoed by the Bank of International Settlements at Basel. It is one thing for a rich nation like Japan or the US to pile on debt, he says, another for a middle-income nation like China to do the same so rapidly. In their anxiety to keep the growth engine ticking over, the authorities in Beijing may have started stuffing the one goose that was relatively healthy and protected from the rampages associated with state-owned enterprises - the housing market.

"There is a housing mania going on, with 70 per cent of lending this year having gone into the household and mortgage sector. That was the only sector that was not so leveraged. You are using every single resource to keep growth at a rate that is unrealistic," Mr Sharma says. And he adds a technical point - the amount of money circulating in China today, or M2 money supply, is 40 per cent more than in the US, although the latter is the much bigger economy.

These are warning signs, although there is no telling when things will come to a head. "They keep playing pass-the-parcel," he muses. "The entire problem is that this is going to keep clogging the system with bad loans everywhere."

At the peak of the US housing bubble, he says, it took three dollars of debt to create a dollar of gross domestic product growth. In China, it now takes four dollars of debt to create a dollar of growth.

Neither is he overly bullish on his native India. The country, he says, disappoints both its most enthusiastic backers and its worst critics in equal measure.

Mr Sharma thinks the future of Asian growth could lie in the big- population countries with their huge domestic markets. This will hold true because more and more nations are trying to do more at home, rather than trade, to power up domestic economies. For the smaller ones, therefore, the future is in plugging sharply into larger frameworks - a Singapore-Malaysia compact if that could be worked out, or the Asean Economic Community, if more life could be put into it. Neither is he too bothered about the march of robotisation and automation affecting employment in Asia.

"For me the robots are coming just in time. They are coming not to replace people but because you need them. Countries with the most rapidly ageing populations have the highest robot density. If you look at employment growth in these countries, it has been disproportionately large to their growth levels. And we are talking here not just about China, but even South Korea and Japan."

Time will tell how right Mr Sharma was in his analyses. Where countries defy his logic, and there will be some, inevitably, he will be accused of having peddled voodoo economics. One thing is for sure, though: You'll never again be able to read a magazine cover story on a nation without feeling a healthy dose of scepticism!

A version of this article appeared in the print edition of The Straits Times on October 14, 2016, with the headline 'Don't believe every magazine cover story on promising nations'. Print Edition | Subscribe