Expansion of rapid-growth markets to slow but quick rebound expected
- Most RGM economies have scope to loosen policy to boost growth
- Positive structural reforms to promote foreign direct investment in some RGMs
- Indonesia, Vietnam and Turkey rising stars among RGMs, offering opportunities for both domestic and international banks
Singapore, 14 November 2012 – Although the global economic environment has deteriorated since the start of this year – impacting the outlook for rapid-growth markets (RGMs) exports and their ability to attract foreign direct investment (FDI) – this will be a temporary phenomenon, according to Ernst & Young’s recently released quarterly Rapid-Growth Markets Forecast (RGMF).
Despite the forecast of 25 leading rapid-growth countries being revised down for this year and next, growth in RGMs looks set for a quick rebound in 2013. For example, China’s growth rate is expected to accelerate from 7.2% in 2012 to 8.1% in 2013 and 9.1% in 2014. This will be spurred by both infrastructure spending programs, particularly in Asia, and rising demand from their own consumers which will help to offset the weak external environment. The majority of RGM economies will also have the scope to loosen policy should they need a further boost. However, downside risks to the forecast remain as rising commodity prices and the US Federal Reserve’s new round of quantitative easing could create new inflationary pressures.
Gerard Dalbosco, Managing Partner, Markets Asia-Pacific at Ernst & Young says: “Structural reforms are also back on the agenda in some RGMs. In India, for example, the government has relaunched reforms to promote economic growth and overhauled rules governing FDI in mid-September. China also appears to be taking an accommodating attitude to FDI in sectors where foreign expertise can accelerate growth.”
The relative strength of the RGMs also remains striking particularly when compared to their developed counterparts. Overall, RGM economies are likely to expand by 4.5% this year and to 5.5% in 2013. RGMF indicates that growth rates will accelerate over the next two years – as long as the Eurozone economy stabilizes, the US recovery gathers pace and the RGMs continue to gradually loosen monetary policy.
Regional variations in terms of economic expansion are evident across the RGMs but the majority, including all of the BRICs – Brazil, Russia, India and China, will experience subdued growth this year. The East Asian economies will be impacted by the slowdown in Chinese growth, and Central and Eastern Europe will be hit hard by the ongoing Eurozone crisis. However, robust growth is expected to resume across most countries in 2013.
Alexis Karklins-Marchay, Co-Leader of the Emerging Markets Center at Ernst & Young comments: “The long-term relative attractiveness of rapid-growth markets for business is undiminished. Their growth has slowed a little more than expected this year but a quick recovery is anticipated. As global rebalancing continues, business must adapt nimbly to evolving and emerging opportunities.”
Dalbosco explains: “Strong growth is expected next year however. To stop what has been a fairly mild cyclical slowdown from becoming something worse, the RGMs – with a few exceptions – have scope to ease fiscal policy. To this end, their scope to ease monetary policy may be limited in coming months by higher food prices. Although this is not currently a major concern, further marked rises would be a risk to RGM growth outlook in the short-term.”
Medium-term growth to come from infrastructure investment
Exports are being displaced by domestic demand as the engine of growth in many of the RGMs. As concerns about overheating recede, governments in some RGMs are taking steps to rekindle expansion. Alongside more relaxed monetary and fiscal policies, large infrastructure investment programs are looming in China, India, Brazil, Indonesia and Colombia. In some countries, these programs may help increase trade, and make it easier to find new markets for exports to replace slack demand in developed economies. Spending on roads and railways, ports and airports, can facilitate trade and reduce the costs of doing business for companies in both domestic and overseas markets.
Karklins-Marchay comments: “Increased spending in infrastructure in rapid-growth markets is a welcomed development. To ensure that this is beneficial in the long term, it is necessary that, as well as government spending on infrastructure, authorities should encourage private investment too by making credit available at cheaper rates.”
An increasing focus on meeting fast-growing domestic demand is also expected to sharpen the appetite of emerging multinationals from RGMs to acquire technology through M&As. The forecast assumes acceleration in M&A activity in Europe by cash-rich national and regional champions, from Asia and elsewhere, keen to acquire knowledge and technologies that will improve their ability to compete with western rivals.
This trend has already been seen in sectors including steel, computing, automotive and cleantech. RGMF expects it to extend to sectors where domestic demand in RGMs is likely to grow especially quickly, such as pharmaceuticals.
Slow growth in developed economies offers business a timely opportunity to develop strategies for RGMs with exceptional potential. The forecast highlights that Indonesia, Turkey and Vietnam – which merit close study in particular – all fit the criteria alongside India and China. All five countries are expected to grow by at least 5% p.a. over the next 25 years. All have large domestic markets, favorable demographic trends and rising household incomes. And all are expected to contribute a much greater share of global GDP over the next 25 years.
The market has been on the radar of international companies given its fast growing population (approaching 250 million), a broadly positive policy environment and GDP running at 5.9% this year. Larger investors with the resources to stay the course are especially attracted to the potential of the automotive, mining and utility industries.
Vietnam’s targeted economic growth for 2013 is 6%, and there is scope for further economic restructuring. The market’s long-term attractions for foreign investors are underpinned by improvements in the economic environment and expectations of sustained high growth.
At the crossroads of Europe, Asia and the Middle East, Turkey’s sustainable strong growth provides a convenient platform for exporters combined with an internal market of 75 million. FDI inflows have been strong in industries ranging from automotive to finance, but many Turkish companies seek out overseas markets and its construction companies are very active in Asia and the Middle East.
Real opportunities for both domestic and international banks
RGMs boast positive outlook for the banking and capital markets sector has been instrumental for the economic development for markets such as Indonesia and Vietnam in today’s interconnected world. Commenting on this growth trend, Dalbosco says that a market like Indonesia offers opportunities in project financing given that its government will be looking to develop a more robust national infrastructure. “Continued improvement of skills in the workforce will help the economy of Indonesia focus on higher-value industry sectors that will fuel the growth in domestic consumption and exports,” he adds.
The 25 leading rapid-growth countries covered in the report are not only economically significant now, but will be the growth engine for the global economy going forward. Last year, almost two-thirds of the world’s population lived in one of the 25 RGMs, but only a third of world GDP in nominal terms was produced by these economies. Fast forward 25 years to 2037 and the RGMs will enjoy a bigger share of global GDP that will exceed their share of the population. They will have large, young, well-educated populations with fast-rising spending power.
The forecast for GDP over the next 25 years also illustrates the RGMs’ phenomenal growth prospects – with nine of the RGMs expected to grow by at least 5% p.a. for the next 25 years, in contrast to Japan and Germany, which will both grow by less than 1.5% p.a. These RGMs will also see their per capita income increase by a multiple of at least five over the same period.
According to the forecast, in 25 years time, the BRICs will be among the six largest economies in the world. Indonesia will be one of the top 10, with Vietnam expected to grow by almost 6%, making it the third fastest-growing country among RGMs. South Africa and Nigeria are also expected to have joined the top 20, while Turkey, Mexico, South Korea and Saudi Arabia will also have significantly moved up the rankings.
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