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 25^th largest economy in the world. To put that in perspective Thailand is 24^th, Saudi Arabia is 22^nd, Malaysia is 29^th. 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.