Resilient Rapid-growth Markets to Fend Off Strain of Eurozone Crisis

Michelle Remo, “Big 4″ observer
January 23, 2012 /

Slackening demand, turbulent and volatile markets and credit liquidity problems in Europe are beginning to squeeze rapid-growth markets (RGMs) but not to the extent of derailing robust economic performance, experts from Ernst & Young said.

The RGMs are expected to grow collectively by 5.3% this year, in contrast to the mild recession expected in the Eurozone in H1 2012 and modest growth in the US, according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF).

While RGMs will remain a major destination for investors, in the near term, they are showing the strains from the falloff in demand from the Eurozone, as well as the buffeting to financial markets and business confidence over the past few months. As a result growth in 2012 is expected to be lower than forecast by RGMF in October.

However, these markets will continue to contribute nearly half of the world’s growth over the next three years.

Rain Newton-Smith, Senior Economic Adviser to Ernst & Young’s Rapid Growth Markets Forecast explains, “Any escalation of the Eurozone debt crisis would have serious short-term consequences for the rapid-growth economies.

“But RGMs are much more resilient than in previous decades. Government debt is low across most of these economies and improved macro management means these economies are in a much better position to use well-targeted government spending or monetary policy to offset weaker growth.”

Alexis Karklins-Marchay, co-Leader of the Emerging Markets Center at Ernst & Young comments, “The outlook is not universally bleak, despite growth in the RGMs being slightly lower than the forecast predicted in October.

“The overall outlook is solid particularly given the more positive recent news from the United States and offers a promising platform for those businesses ready to seize their opportunities.”

Outlook bullish in medium-term for RGMs

A growing labor force, a catch-up in productivity and improved fundamentals will continue to drive strong growth in RGMs. According to RGMF, emerging markets in Asia will lead the way, with average growth over 6% p.a. over the next decade.

Sub-Saharan Africa will not be far behind, with a young population and foreign direct investment (FDI) inflows contributing to growth close to 4.5% p.a. over the next 10 years. This period of growth is almost unprecedented for Africa, which, in the past, has been beset by political instability, commodity price volatility and low levels of investment.

But as Alexis explains “with commodity prices set to remain relatively strong in real terms, and a steady improvement in economic policies, Africa is becoming more open for business. In particular hi-tech sectors, such as telecoms and IT have been growing very rapidly in recent years in most African countries, and this is set to continue.”

While political uncertainty will hamper growth in the Middle East and North Africa in the near-term, the Arab Spring provides an opportunity to put in place structural reforms to improve growth prospects, and in particular the development of the non-oil sector. As a result, growth should average 4% p.a. but growth in the region could be even stronger if more economies are successfully diversified, creating high-skill jobs for the next generation.

The more subdued outlook for oil and commodity prices will lower the growth potential in Latin America, but there too the forecast predicts that there should be strong infrastructure investment and education contributing to higher growth prospects.

FDI inflows major contributor to growth

FDI inflows have been an important driver of growth in RGM countries over the past few years. Countries such as Chile, the Czech Republic, Kazakhstan and some of the Gulf States have been particularly successful at attracting investment.

However, the BRIC economies remain some of the most important destinations with FDI inflows to China and Brazil, in the first six months of 2011, at US$111b and US$32b respectively also proving that FDI inflows have held up remarkably well despite turmoil in financial markets.

With RGMs set to grow much faster than the developed world in the coming years, rising economic and trade links within RGM countries will see a continued flow of FDI from Asia and Latin America to Africa and other RGMs, improving infrastructure and technology across these markets.

Alexis comments, “With prospects in the advanced economies weaker, particularly in the euro area, RGMs will need to look to resources within their own economies to drive growth, including fostering entrepreneurship.

In particular, across the Middle East and Africa, a fast-growing labor force will provide a set of skills for innovation but also a pressing need for employment-generating growth.”

Threats to growth in RGMs

Despite a bullish outlook for the medium-term RGMF is expecting a significant slowing in growth in the near term for RGMs with growth well below the buoyant recovery in 2010.

Rain comments, “Given the pressures of overheating in many RGMs, this slowing in growth is welcome in some cases and is partly the result of deliberate policy tightening, although it also reflects the turbulent global financial markets.”

The slowing in growth across the RGMs reflects several factors including the Eurozone crisis which will remain the most damaging until it is resolved. The business impact of an escalation of the crisis would be particularly serious for RGM exporters who are exposed to significantly weaker demand from Europe.

RGMF also observed a reversal in portfolio flows since July as investors became increasingly risk averse. Threats to liquidity and lending by European banks with a wide global reach are particularly disquieting for RGMs.

Banks are selling assets and cutting back on loans under pressure to strengthen their capital which is weakening financial flows into and within RGMs with potentially depressive impacts not only on business operations but also business investment.

Business operations in Eastern Europe are seriously threatened by a credit crunch triggered by banks headquartered in the Eurozone that are responsible for three-quarters of lending in Eastern Europe. RGMF warns that shrinking credit could yet push some Eastern European economies into recession.

Alexis comments, “While growth prospects in the short-term have been dented by the turmoil in global markets, and could be further affected by the events in the euro area, growth in RGMs is set to rise about 6.5% in 2013-14, a pace of expansion that will be significantly higher than in advanced economies.”

Long-term prospects brighter

Although the picture for the near-term for the RGMs is bleaker than expected the longer-term view is much more positive. If they wish to continue to enjoy growth at the pace of recent years, many RGMs will have to try to exploit their own economic resources.

Alexis concludes, “The long term outlook for RGMs is bright and at is not possible to look at them from a business perspective without a feeling a sense of opportunity and excitement. Most of these economies are more resilient than their developed counterparts which adds to their attractions to major global businesses.”


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