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.
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Enjoy your flight to Mauritius. I will see you back home in 30 years.
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Table 1.0: The IMF PPP GDP Index – 2007, Published April 2008 |
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May 10, 2008
Posted in: Uncategorized
19 Responses
Excellent blog post! I wish somehow I could put message of this article in a water, stir it well and make whole nation drink it. Hopelessness, lack of patriotism is in such abundance here, particularly in senior lot, which brings even we young ones down. Pakistan is facing economic problems but fall of dollar and food crisis is affecting all other nations as well, including US. And I am so glad to learn we stand tall in these economy lists.
Thanks so much for writing this, Jawad.
Thank you Ali. I have always been a contrarian investor and now is as good a time as any to buy.
Finally some hopeful read.
I just got a three day break from university and I came back home to spend the weekend. Considering I had nothing to do than to just switch channels all day and see reports how Pakistan is about to go down from like every politician, columnist, reporter, channel etc. The channels are full toss of shit spreading so much disbeleif and disparity among the people.
Muneeb
Bad news sells better.
Hi Jawwad
Nice Post. Though I don’t understand PPP and all but I like your optimism and the belief with which you have said good things. It was a much needed review to get some idea about the ongoing situation.
May Pakistan come out of this crisis sooner than expected.
I would take the opposite trade – the greenback is getting whacked because Bernanke keeps cutting rates while the ECB holds them steady. If the current recession is anything like past recessions then the rest of the world will slow down, inflation will moderate and other central banks will cut rates in the 2nd half of 2008.
As for GDP, I think per capita GDP growth is what matters, and per capita GDP growth over the longer term would seem to hinge on productivity growth.
Jawwad, doom and gloom is what people in this country apparently thrive on. Optimism is lacking. Whenever any of us look at things positively we are told to be realistic. Yes there is a lot that we need to work on but let us not let the doom and gloom obliterate the good that is taking place. If we focus on only the negative then we will never find reason to smile. Thanks for pointing out that all is not lost and that there is a bright light on the horizon.
@ Jehan: “let the doom and gloom obliterate the good that is taking place.”
Very well said!
State of the Pakistani Rupee « ‘mair - May 13, 2008
[...] State of the Pakistani Rupee Great article on the devaluation of the Rupee here. All is not as bad as it seems! Give it a read! [...]
Thanks JAF! Very well said …
We need to become incurable optimists … it is definitely a better quality existance
Trouble will always find us … as somebody said …
YOU MAY NOT BE INTERESTED IN WAR; BUT WAR IS INTERESTED IN YOU
but we need to push back!!
well i guess we both share a soft spot for your mauritius-bound actuary friend in question and sympathise with his prediliction for conspiracy theories
to be fair to us from the land of the pure, perioidic panics hit Wall Street (with their ‘000s of PhD’s, billionaires etc) and all developed markets and nations from time to time. We can be forgiven for having ours.
What we cant forgive anyone for, is not having enough faith in us and in how tough we are. If we are cursed with KESC we are blessed with a breeze that blows like it doesnt anywhere else in Pakistan. If we spend 4 hours out on the street battling traffic, God gave us the psychological DNA and the brains to accomplish stuff in half the time it may take someone else. I mean, its a lot like boxing. You dont worry about what you dont have, once you’re in the ring you just go at it with what you have. And if we look around us and inside us, we have a lot.
SALUTE!!! 2-finger wala….policeman SALUTE!!!
I must say that Jawad has presented a very interesting perspective of the prevailing situation which reinforces the belief that there is light at the end of tunnel. Nevertheless, just to be doubly sure that the light is not from a train approaching us, we need to act now. At the risk of sounding pessimistic, I have to admit that we still have a long way to go to get our country face the global challenges.
Instead of relying on subsidies and putting pressure on the government to continue with that, I believe that we need to address the issues one step at a time. Let us analyze what we are good at (I am not referring to lip servicing here) and proudly present Pakistan story to attract petro-dollars.
For example, being a predominantly agrarian economy and in the wake of global food commodity crisis, we may present Pakistan as a potential investment opportunity in this sector. Also, our vast coastline may be offered to various marine related businesses. As regards the increasing electricity shortage, we can instantaneously adopt daylight saving timeline. We are also blessed with abundant sunlight which may be utilized to run solar power units for various purposes, including street lights etc.
Well, the list goes on and on. I am just glad that the inspiration provided by Jawad is compelling me to think on these lines and act accordingly. I request everyone else who reads this to join in.
Together we can make a difference, let the candle lit by Jawad light many others…….
Thanks!
Jawwad, excellent analysis. We should send it to Shahid Masood.
As an excellent economist once told me, when I was complaining about the declining Rupee, that I should let go of my ignorant pride and patriotism, and think about it in practical terms. A declining Rupee means that our products become much cheaper in the world markets, which means more countries will want to buy them from us, rather than from other countries. Hence, a declining Rupee may make European vacations more expensive for us elite Pakistanis, but it ends up helping Pakistan and its economy grow at a faster rate.
As far as Daylight Savings Time is concerned, here’s an article that questions the real benefits of it:
http://tech.yahoo.com/blog/null/83073
And really, how can we impose it in a country where 60% of the population is illiterate? How do we propose explaining to them how time can be different? How can 9am today be 10am tomorrow?
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