As Barack Obama gets into 50s, his popularity ratings is dipping into 40s – quite the opposite of what happened when he was elected as the first black President in 2008, after 8 years of economic catastrophe under George ‘Dubya’ Bush’s presidency. Standard & Poor’s historic decision to downgrade US economy’s rating a notch lower to AA+ is unprecedented and does not really speak well of the future ahead for United States in particular. Reasoning given: US Political leaders have not been able to come in grip of the economic situation/ budget deficit. And this is going to be the main issue in the political battle for the forthcoming Presidential elections in the year 2012. Another reason, GDP numbers in the US have dipped too! GDP has come down due to poor nation building efforts within the US. Well, beyond United States, European economies will bear the brunt of this historic decision. And to take it further, downgrading of US economy reflects on global standing too – it means in a way, the global economy is getting downgraded! What does this decision mean to India? to China?
Well, in the short term, it will mean pressure on markets like India, China, Japan, Brazil, Taiwan and UK. There is going to be volatility in the markets. BSE (Bombay Stock Exchange) fell by 700 points as an expected reaction, though it recovered very fast by the late evening on Friday (5th Aug) itself. Factually speaking, India has only 0.9% share of the US debt burden while China has 25.7%, Japan 20.2%, UK 7.7%, Brazil 4.7%, and Oil exporters 5.1% . The rest of the US debt burden is spread across the globe. India has more chances of winning FIIs in this situation since it has been maintaining a growth rate of 9% despite the US recession since 2008. Felling of BSE points was only a knee-jerk reaction! In fact, it is China who will be most affected by S & P’s decision to downgrade US economy. But, as long they have the global markets to sell their ‘competitive priced’ goods, they need not worry and most likely Chinese yuan will appreciate as a fall-through. However, if any of two other ratings’ agencies – Moody’s and Fitch – also cut US sovereign ratings, volatility and uncertainty will definitely increase.
In essence, under the present situation, FII inflows into India is bound to increase. Euro will not be affected as far as Germany does not walk out from euro-zone and go alone. Well, Germany cannot walk out since it depends on European markets to sustain its exports growth. Hence, in conclusion, emerging markets will continue to grow. Probably, more Indian and Chinese companies will open their shop in United States creating more local employment, boost foreign trade, if the USD starts sliding south. The sooner the USD depreciates, better it is for the US economy to get out of the recession mode. Globalization will take precedence then.