FT-EY Global CFO Forum: Emerging Markets
What’s currently happening
- Oil on troubled waters: the economic outlook
The Forum offered delegates an overview of the outlook for emerging markets from various perspectives.
One clear message was that emerging markets will continue to drive global growth in 2016. Yet, overall, the recovery remains fragile and slow, with continuing headwinds across some emerging economies.
Surging financial flows
Capital flows have been a major story over the past couple of decades. Much has changed since the global financial crisis, underlined by talk of de-globalization and changes in the banking industry. And yet, the flow of capital and investment across borders has generally held up quite well, said Eswar Prasad, Tolani Senior Professor of Trade Policy and Professor of Economics at Cornell University.
Hedging against volatility
However, predicting currency movements has become more difficult. At a fundamental level, currency appreciation remains driven by productivity growth, which happens faster in emerging markets. But central banks no longer dictate currency valuations.
Professor Eswar Prasad, Tolani Senior Professor of Trade Policy and Professor of Economics at Cornell University
Commodity price cycles and implications
Prof. Prasad explained that commodity prices are low partly for structural reasons, but there is a cyclical element added in as well. This creates difficulties for many commodity exporting countries, triggering both economic and political instability in those countries.
“Productivity growth during this recovery has been exceptionally weak. If productivity doesn’t recover, then it is going to be very difficult to sustain good growth.” – Prof. Eswar Prasad.
Francois Conradie, Head of Research at NKC African Economics, offered some detail on the dynamics of how economies with strong commodity reliance will experience a downward spiral of inflation and government borrowing.
Drawing on the case of Dubai, Dr. Ali Al Sadik, Senior Economist and Project Manager at the Dubai Economic Council presented some thoughts on how these economies might strive for diversification, which would serve to break this cycle. The lessons of success from Dubai that he drew attention to were the level of leadership with vision, an able team and accountability within that team for delivery.
Awaiting Asian reforms
Economic growth in China and India, now two motors of the world economy, is likely to remain strong in the short term, said Prof. Prasad. He noted, however, that further ahead, there were questions over whether each country would press ahead with necessary reforms. China’s drive to rebalance its economy has made progress, but the pace of reforms in terms of state enterprise restructuring, freeing the labor market and lifting services sector restrictions has been slow.
For India, meantime, “it’s a potentially golden time. All the circumstances are as good as they could possibly be — yet the speed of implementation of reform needs to accelerate,” said Prof. Prasad.
- Making it happen: the role of government
Despite the many disparities between emerging markets, there are also many common factors: young, sometimes large populations; volatility; and over-reliance upon natural resources and commodities. Governments in these economies are, therefore, focusing on leveraging the power of market forces and creating a framework for developing sound institutions, and are on the bumpy but rewarding path of deregulation.
While emerging market governments are facilitating change through initiatives ranging from infrastructure development to fostering economic efficiencies, they are also wrestling with sudden and substantial shifts in their revenues. Many are striving to diversify their economies. They are building both their own capacity and the level of skills in the workforce, taking advantage of new thinking and new solutions to enhance the quality and sophistication of their institutions and businesses alike.
In a keynote address, His Excellency Hani R. Al Hamli, Secretary General of the Dubai Economic Council, paved the way for a wide-ranging discussion on the role of government as a growth enabler.
Acting as an enabler
His Excellency went on to state that governments should go beyond their traditional remit of taxing, regulating and intervening where necessary.
The goal today is “about how to maintain the viability and sustainability of businesses, but at the same time, how to secure the public welfare and happiness.”
“Governments should act not merely as an enabler, but as a partner to the private sector in the pursuit of development.” — His Excellency Hani R. Al Hamli
His Excellency Hani R. Al Hamli, Secretary General of the Dubai Economic Council
Service industries, especially those enabled by digital technologies, will play a growing role in this drive to achieve more economic diversity.
Meantime, as they expand services to citizens, many emerging market governments are successfully applying new thinking and resources to enhance administration, education and health care. They are also focusing on financial inclusion. Reforms on this scale offer many opportunities for companies, and CFOs need to be scanning the horizon to ensure they partner with institutions and participate in this growth.
- Changes in global tax: facing a historic upheaval
CFOs must also manage reputational risk and the prospect of increased government levies as international taxation rules undergo the biggest upheaval in history. There has been a very strong sense among citizens around the world that some global companies pay too little tax, said Matthew Mealey, EMEIA International Tax Services Leader at EY.
BEPS rules — everywhere
The BEPS action plan is extremely broad, Mealey explained. EY describes this in “The latest on BEPS — 2015 in review: a review of OECD and country actions in 2015”.
“It was quite easy for countries to agree that somebody should tax the missing US$2 trillion dollars of income. It remains very difficult for them to agree who.” — Matthew Mealey
Squabbling over the spoils
The changing tax regime reflects a changing world. Some nation states built economies based upon attracting financial investment flows, but today many economies have grown to be far more substantial. Such economies may benefit, while those once dubbed “tax havens” are likely to lose out.
Interviewees Tobias Lintvelt, International Tax Services MENA Leader, EY, Matthew Mealey, EMEIA International Tax Services Leader, EY with interviewer John Gapper, Chief Business Commentator and Associate Editor, Financial Times