Desi Back to Desh

Between airports, airplanes and transit lounges

The rise and fall of the Pakistani Rupee

Us actuaries are a dreadful lot.

Being a student of mortality tends to do funny things to your outlook. While as a nation we specialize in two national pastimes (bitching and complaining), our real talent lies elsewhere. Morbid outlooks and panic – no one does morbid outlooks and panic attacks like good old thoroughbred educated professionals from the land of the pure (now also free and from what I hear, democratic).

Which is one reason why I wasn’t surprised when a few days ago, another fellow actuary glumly told me that the end of the world was here, that the rupees had broken 65 in the open market and that there was no way this country is going to survive this most recent mess, financially, politically or economically. And that I would be well served to sell everything I had and get out as early and as quickly as possible. He himself had spent good money in buying a Mauritius passport and was looking forward to his early retirement by his villa on the ocean.

For added measure and traditional arm-chair globetrotting desi taste he also threw in the Zionist-Hindu-Buddhist-Russian-Afghan-Iran-Fiji-Australia-WestIndies-English-French-Cuban axis of evil bit and how everyone was out to get us now that we are down and out and we could never win against such enemies. Sell and run, he said. Sell and run. Buy a Mauritius passport while they are still giving them out cheap…

I am sure you are having many such conversations today since the dollar broke 70 last evening.

I had mine (the cheerful chat above), a few days ago, in May (here it comes) 1998.

Yup that is right. Remember May 1998. Nuclear explosions, international sanctions, frozen dollar accounts, a state of near war with India, and an incompetent government – it took all five to push the rupee past 65. It was the end of the world.

Last time I checked we survived that.

I know I tend to sound like a broken record but let’s take a look at some very basic facts before we all get carried away.

In times of volatility one interesting measure is Purchasing Power Parity (PPP). How much will it cost you to buy a liter of petrol, a loaf of bread, a roof on your head, clean clothes, a meal for your family, decent underwear, education for your children and an occasional well done steak with a virgin pina colada … you get the message. So if you were to sell everything and move to Mauritius, like my earnest actuarial peer, how will that impact your standard of living. If your family consumes 10 kilos of mangoes in the summer, a day, what would you need to maintain the same lifestyle in your oceanfront paradise?

Purchasing Power Parity is not a short term indicator for trading. But it certainly is long term indicator for gauging your standard of living and the strength of the economy you live in. Wikipedia has a great piece on global GDP numbers using purchasing power parity using comparative numbers from the IMF, the World Bank and the CIA fact book. Take a look see or for quick reference see the global GDP table at the end of this post (source Wikipedia).

Our poor, broken, sad, miserable, worthless country that you should dump for a Mauritius passport is the 25th largest economy in the world. To put that in perspective Thailand is 24th, Saudi Arabia is 22nd, Malaysia is 29th. And in case you were wondering you are ahead of Hong Kong, Singapore, UAE, Ireland, Israel, Hungry, Egypt and New Zealand. Mauritius is a sad 125.

If you are getting jealous of Saudi Arabia, please remember that you can walk to work or share a bus ride in Karachi, but you really can’t eat oil.

This doesn’t stop here. In bad years we grow at 4.5%. The big guys don’t grow at all or do a percent a year. In good years we grow at 8%, the big guys grow at 3%. Over a period of time, everything else being equal, your ranking can only improve, not decline. With these numbers, it will take us about 30 years or half a generation to overtake Canada on a PPP basis.

Purchasing Power Parity is sometimes also used as a factor for identifying Alpha or excess returns. One oft quoted measure is the Big Mac Index run by the Economist. The Index tracks the prices of a Big Mac across 122 countries to determine relative value. Once again while not a short term indicator over the long term the Index does a reasonable job on predicting direction.

Here is what the Big Mac Index has to say about the strength or weakness of the Rupee in July 2007. Using current numbers as of May 2008, the Rupee is about 60% undervalued. If you are wondering what that means, here is a hint. Hold on to your rupees, sell your dollars.

If you are wondering what the Rupees should be worth over the long term the Index prices it at 41 to a dollar. To be fair, you are not going to see that anytime soon. But it certainly tells you that once this current panic is over and sanity returns, the exchange rate can only come down, not go up.

 

Enjoy your flight to Mauritius. I will see you back home in 30 years.

 

 

Table 1.0: The IMF PPP GDP Index – 2007, Published April 2008

Rank

Country

GDP (PPP) $MM

World

64,903,263

European Union

14,712,369

1

United States

13,843,825

2

People’s Republic of China

6,991,0361

3

Japan

4,289,809

4

India

2,988,867

5

Germany

2,809,693

6

United Kingdom

2,137,421

7

Russia

2,087,815

8

France

2,046,899

9

Brazil

1,835,642

10

Italy

1,786,429

11

Spain

1,351,608

12

Mexico

1,346,009

13

Canada

1,265,838

14

South Korea

1,200,879

15

Turkey

887,964

16

Indonesia

837,791

17

Australia

760,812

18

Iran

752,967

19

Republic of China (Taiwan)

695,388

20

Netherlands

639,512

21

Poland

620,868

22

Saudi Arabia

564,561

23

Argentina

523,739

24

Thailand

519,362

25

South Africa

467,089

26

Pakistan

409,958

27

Egypt

403,961

28

Belgium

375,993

29

Malaysia

357,391

30

Sweden

334,641

31

Venezuela

334,575

32

Greece

324,616

33

Ukraine

320,126

34

Colombia

319,522

35

Austria

317,807

36

Switzerland

300,186

37

Philippines

299,626

Hong Kong

292,769

38

Nigeria

292,682

39

Czech Republic

248,902

40

Norway

247,416

41

Romania

245,540

42

Chile

231,061

43

Portugal

230,549

44

Singapore

228,116

45

Algeria

224,748

46

Vietnam

221,397

47

Peru

219,015

48

Bangladesh

206,658

49

Denmark

203,677

50

Hungary

191,324

51

Ireland

186,166

52

Israel

185,888

53

Finland

185,485

54

Kazakhstan

167,622

55

United Arab Emirates

167,296

56

Kuwait

130,113

57

Morocco

125,250

58

New Zealand

111,721

59

Slovakia

109,587

60

Belarus

105,246

61

Ecuador

98,788

62

Angola

91,286

63

Syria

87,091

64

Bulgaria

86,317

65

Sri Lanka

81,288

66

Sudan

80,706

67

Serbia

77,277

68

Tunisia

76,999

69

Qatar

75,224

70

Libya

74,752

71

Croatia

68,984

72

Azerbaijan

65,469

73

Uzbekistan

64,149

74

Guatemala

62,528

75

Ethiopia

62,193

76

Dominican Republic

61,792

77

Oman

61,607

78

Lithuania

59,644

79

Kenya

58,883

80

Slovenia

54,669

81

Yemen

52,050

82

Tanzania

48,937

83

Costa Rica

45,765

84

Lebanon

42,271

85

El Salvador

41,652

86

Latvia

39,731

87

Bolivia

39,438

88

Cameroon

39,365

89

Luxembourg

38,555

90

Uruguay

37,188

91

Cyprus

36,533

92

Panama

34,510

93

Côte d’Ivoire

32,181

94

Ghana

31,331

95

Honduras

30,651

96

Nepal

29,040

97

Uganda

29,036

98

Estonia

28,317

99

Jordan

27,986

100

Bosnia and Herzegovina

27,728

101

Paraguay

27,082

102

Turkmenistan

26,727

103

Cambodia

25,900

104

Botswana

25,676

105

Bahrain

24,499

106

Trinidad and Tobago

23,788

107

Malta

21,886

108

Jamaica

20,673

109

Senegal

20,601

110

Georgia

20,499

111

Gabon

20,178

112

Afghanistan

19,840

113

Brunei

19,640

114

Albania

19,621

115

Democratic Republic of the Congo

18,844

116

Madagascar

18,120

117

Republic of Macedonia

17,350

118

Burkina Faso

17,200

119

Armenia

17,151

120

Mozambique

17,019

121

Zambia

15,918

122

Chad

15,902

123

Nicaragua

15,839

124

Equatorial Guinea

15,537

125

Mauritius

14,060

126

Mali

13,465

127

Republic of the Congo

13,229

128

Laos

12,646

129

Iceland

12,144

130

Benin

12,102