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1. Emerging markets and the growth outlook
2. Differentiation in performance among emerging markets
3. Risks to the outlook
4. Changing FDI patterns
5. FDI and political risk
Emerging markets resilience during crisis
• Early 2008-2009 very sharp falls in trade, commodity prices, capital inflows; fears of global meltdown
• However, no emerging market crisis and performance was far better than expected
• Growth acceleration in 2010 and 2011• Normal rule – ‘when the rich world sneezes,
emerging markets get flu’; but not any more; partial ‘decoupling’ from developed world
• Better fundamentals than in earlier crises; debt/GDP ratio of 20 largest ems half of that of 20 richest nations. Will be one third by 2016
• Accelerated shift in economic power to East
Surging ahead
-10 0 10 20 30 40 50 60
UK
France
US
Japan
Germany
South Africa
Russia
Turkey
Brazil
India
China
Sources: National governments, Haver, EIU
The cost of the crisisDifference, in % terms, of real output per head before the recession started in 2007 compared with 2012 (forecast)
%
Where’s the growth?
-8
-4
0
4
8
China
India
Mid
dle
East
ASEAN
Africa
Latin
Am
eric
aCIS
E Eur
ope US
Japan
Euro
zone
2010 2011 2012
Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2012. Source: Economist Intelligence Unit, CountryData.
Key stuctural points
• Emerging markets the place to be Favourable costs; rising
productivity Generally young populations Slowly shifting to reliance on
domestic demand Competitive multinational
companies• Rich countries: slower growth
Battered financial sectors Fiscal austerity Poor demographics
Contribution to global growth, %
0
10
20
30
40
50
60
70
80
1991-2000 2001-2008 2012-2016
Developed
Emerging markets
BRICs
China
Real GDP growth, %
0
1
2
3
4
5
6
7
8
2001-08 av 2009-2011 2012-2016
Developed
Emerging markets
Eastern Europe
Developing Asia
Latin America
Middle East and NorthAfrica
Sub-Saharan Africa
Emerging markets regions
• Asia: will continue to enjoy the fastest growth; regional growth driven by China and India; strong exports; high rate of domestic savings. Most attractive for FDI among ems.
• Eastern Europe: hit very hard by crisis in developed world; impact of EU membership less than hoped; becoming less attractive for foreign investors; Russia still dominates.
• Latin America: Fundamentals better than in the past. But still heavy dependence on primary commodities; low domestic savings.
• MENA: good business in parts of MENA on the back of high oil prices. But political turmoil and uncertainty, huge commodity dependence and questions about growth sustainability.
• Sub-Saharan Africa: fastest growth in decades but dependent on commodity prices; South Africa and Nigeria account for 60% of regional GDP – minus South Africa the rest is the size of Austria.
Key risks to the outlook
• The global economy falls into prolonged recession
• Sovereigns default as public debt spirals out of control
• Euro zone breaks up• China’s economy experiences a hard landing• Social and political unrest• Protectionism takes hold• Geopolitical shocks
Changing global FDI patterns
Sharp decline in global FDI in 2009 (34% in US$ terms); weak recovery in 2010, stronger in 2011
For the first time ever in 2010 emerging markets attracted over 50% of global inflows
Not only because of differential impact of recession Impact of improving business environments Increasing competitive pressure on companies
increase opportunity cost of not going into more dynamic and lower-cost destinations
EIU surveys: strong positive link between firm performance and presence in emerging markets
Increased outward FDI by emerging markets; disproportionate share to other emerging markets
Global FDI inflows (% of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Global FDI inflows (US$ bn)
0
200
400
600
800
1,000
1,200
1,400
1,60020
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
Developed
Em markets
Inward FDI flows, US$, % change
-50
-40
-30
-20
-10
0
10
20
30
40
50
2009 2010 2011 2012
World
Emerging markets
Eastern Europe
Developing Asia
Latin America
Middle East and NorthAfrica
Sub-Saharan Africa
Small em club (FDI inflows, US$ bn)
0
50,000
100,000
150,000
200,000
250,000
Ch
ina
Bra
zil
Ru
ssia
Ind
iaS
aud
iA
rab
iaM
exic
o
Ind
on
esia
Tu
rkey
Co
lom
bia
Ch
ile
Kaz
akh
stan
Po
lan
d
2011
Medium-term FDI outlook 1
• The positivesBack to growth Competitive pressuresImprovements in business environments in
some countries• But constraining factors
Policy tighteningPolitical risksFinancial sector weakness
• Downside risks Global macroeconomic imbalancesCommodity markets volatilityProtectionism
Medium-term FDI outlook 2
• Global recovery from recession sluggish and fragile; no quick return to pre-2008 trend
• Global FDI inflows will recover slowly• Supply side damaged by recession; appetite
to invest in new plant and equipment is down• Weakened banks and tighter regulation will
dampen foreign capital flows; will affect FDI too, although less seriously than other forms of flows
• South-South FDI will be more resilient• Medium-term FDI flows to ems to decrease
from previous boom-period 3.5-4% of GDP to about 3% of GDP at most
FDI and political risk
• Despite global macroeconomic concerns, political risk is still near the top of the list of perceived constraints on investment into emerging markets.
• The economic crisis has brought to the forefront again some traditional concerns for investors in emerging markets, including the risk of the non-honouring of contracts and transfer and convertibility risk.
• Some surveys also reveal a significant concern about the risk of conflict and civil disturbances.
• Risk of trade and FDI protectionism around the world in response to the global crisis.
EIU-MIGA definition of political risk
• Covers breach of contract by governments; adverse regulatory changes by governments; restrictions on currency transfer and convertibility; expropriation; political violence; non-honouring of sovereign guarantees.
• Political risk measure based on EIU Risk Ratings and EIU-MIGA definition (based on the ratings of the risk of armed conflict, terrorism, violent demonstrations, social unrest, various measures of governmental instability, external tensions, enforceability of contracts, expropriation, and the risk of the imposition of current and capital account controls).
Political risk, 2008-2012, EIU measure
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2008 2009 2010 2011 2012
Emerging markets
Eastern Europe
Developing Asia
Latin America
Middle East and NorthAfrica
Sub-Saharan Africa
Economic weakness and political risk
• Clear trend of rising political risk since 2008• Interplay of underlying vulnerabilities and
economic weakness.• Political instability and social unrest follows
economic downturns with a lag.• Severe social impact in many countries,
primarily in the form of rising unemployment.• Increases in the number of people in poverty
and reduced size of the middle class in some.• Weak state of many countries' politics. Support
for democracy is fragile in many regions; public trust in institutions is low.
• Reduction in access to foreign funding and unpopular austerity policies.