Emerging Market View: What Our Analysts Are Reading

EM View

On Friday, Iraqi Prime Minister Nouri Maliki resigned, according to the BBC. Despite hopes that a resignation would help end the political crisis in Baghdad, FSG’s Practice Leader for Middle East & North Africa says it’s not over yet.

“Iraq’s political crisis is not over yet, but Nouri al-Maliki’s decision to step aside is a critical development. Companies should watch for whether PM-designate Haider al-Abadi is able to to form a new government that promotes cross-sectarian cooperation. A new government would need to usher in political reforms that ease sectarian tensions to bring Iraq back from the brink of civil war,” says Matthew Spivack.

In Latin America, Mexico’s government has outlined a plan to open oil fields to private companies, providing opportunity for foreign investment, according to the Wall Street Journal.

“The Mexican government is quickly moving forward with the first round of bidding starting early next year, which should provide an early infusion of FDI and support higher investment growth in 2015 ,” says Antonio Martinez, FSG’s Associate Practice Leader for Latin America.

This news comes in the same week as The Economist’s story “Mexico’s minimum wage: Stingy by any measure,” highlighting the low interest in the country’s consumer opportunity over the past two decades.

“Over the last two decades the increase in earning power of Mexican workers has severely lagged most of the other large LATAM economies, and is an important reason why the consumer opportunity in Mexico has not been as attractive to B2C companies as the economy’s size would suggest,” says Antonio Martinez.

In the Asia Pacific region this week, good news for Malaysia’s economy as second quarter growth shows unexpected acceleration on exports, according to Bloomberg.

“Malaysia’s impressive Q2 performance bodes well for the country’s growth over the coming months. The government’s efforts to address bottlenecks in the economy and improve the domestic operating environment are clearly paying dividends,” says Adam Jarczyk, FSG’s Practice Leader for Asia Pacific.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Emerging Market View: What Our Analysts Are Reading

EM View

After defaulting on some of its restructured debt on July 30, Argentina has petitioned the International Court of Justice to hear a lawsuit against the U.S. According to the Wall Street Journal, the South American nation claims that decisions by the U.S. courts in the legal battle between Argentina and some of its creditors have violated its sovereignty, but FSG’s senior analyst for Latin America research says it’s merely a stalling tactic.

“Argentina’s lawsuit against the U.S. is a stalling tactic intended to bolster the Argentine government’s political rhetoric. Most likely, its main result will be a further delay in negotiations with holdout creditors,” says Gabriela Mallory.

On Tuesday, South African publication The Daily Maverick asserted that “corrupt, incompetent governments and their repeated failure to protect their citizens” was more to blame for the Ebola outbreak than the disease itself. FSG’s Sub-Saharan Africa analyst Alexa Lion agrees, adding that the virus will have little affect on Western businesses involved in the region.

“Ebola is scary but is fairly isolated from Western economic interests. Its spread speaks more of government inability to contain the virus rather than high risk of contagion. MNCs must be vigilant and articulate health precautions to their partners, but also remain aware that it is business as usual in West Africa’s largest hubs,” she says.

In Indonesia, members of losing presidential candidate Prabowo Subainto’s political coalition are planning to form a special committee, or pansus, in the House of Representatives, claiming electoral fraud. Despite Prabowo’s large presence in the legislature, FSG’s Adam Jarcysk says it is unlikely the court will rule in his favor.

“The Prabowo camp’s decision to begin saber-rattling now about launching a pansus in October suggests that the Constitutional Court is likely to support Jokowi in its ruling later this month,” says Adam Jarczyk, FSG’s Asia Pacific Practice Leader.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Côte d’Ivoire: an Elephantine Opportunity

Cote d'Ivoire Elephant Crest
Côte d’Ivoire is Francophone West Africa’s largest economy.

Côte d’Ivoire is once again open for business. After a brief civil war in 2010-2011 that all but halted the economy, the country is witnessing a large stream of FDI targeted at a wide variety of sectors. The government is pushing Côte d’Ivoire, and especially its economic capital Abidjan, to become a hub for the wider French-speaking region.  Côte d’Ivoire was once Francophone West Africa’s most prosperous country, and it is poised to reclaim its title as the region’s economic powerhouse. This is due to a variety of reasons:

  • GDP Growth: Côte d’Ivoire is one of Sub-Saharan Africa’s fastest-growing economies, with GDP growth expected to reach 8.5% YOY in 2014. Its strong economic performance is driven by infrastructure developments, exploration in the mining, oil, and gas sectors, and growth in the telecom, banking, and consumer goods industries.
  • Stable macroeconomic environment: Unlike many Sub-Saharan African countries, Côte d’Ivoire displays low inflation, relatively low interest rates, and little currency volatility. The CFA Franc, also used in seven other French-speaking West African countries, is pegged to the euro and partially held in the French treasury. Companies therefore benefit from low exchange rate risk and transactions costs.
  • Business reforms: The government is aggressively promoting Côte d’Ivoire as a preferred destination for investment in West Africa. It has passed a series of reforms that increase transparency, decrease bureaucratic delays, digitize registries, and improve accessibility to relevant information. Moreover, major infrastructure projects will further open up the country to trade and promote new distribution channels as private consumption increases.

Although the country is on the right track to reconstruction, it still faces several challenges to reaching its goal of becoming an emerging economy with a robust middle class and an open market by 2030:

The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
  • Political risk: Society in Côte d’Ivoire remains divided in the wake of the 2010-2011 civil war, which erupted when then-president Lauren Gbagbo refused to concede to president-elect and current incumbent Alassane Ouattara. The conflict around Gbagbo’s refusal to give power was the culmination of years of tensions between adherents to opposing political parties and the legal status of Ivoirians of foreign descent. Now that Gbagbo is indicted at the ICC and Ouattara is expected to re-run for president, uncertainty prevails over the security situation ahead of the October 2015 presidential election. The common sentiment on the ground is to avoid war at all costs, but the process of reconciliation has been slow, old wounds remain, and skirmishes are likely.
  • Wealth gap: Poverty is acute and the gap between wealthy and poor is very wide. The middle class remains small and concentrated in Abidjan. Government policies that target small and medium enterprises (SMEs), the agriculture sector, and value-added industries are vital to bridging the wealth gap and encouraging inclusive growth.

As such, Côte d’Ivoire is most attractive when taken in context. It is part of the West African Economic and Monetary Union (WAEMU), a common monetary, legal, and interbank market of eight French-speaking countries: Mali, Niger, Benin, Togo, Burkina Faso, Guinea Bissau, Senegal and Côte d’Ivoire. As the wealthiest, most developed country in this group, Côte d’Ivoire is an attractive hub for companies seeking to tap into less accessible, yet rapidly growing Francophone countries.  As more companies such as Standard Bank, Carrefour, and Accor Hotels enter Abidjan, a wider range of business infrastructure will become available and boost Abidjan’s attractiveness.

Côte d’Ivoire is a long-term game. While wealth is not widespread and politics are sensitive, Côte d’Ivoire has the macroeconomic fundamentals, business reforms, and infrastructure projects to become the first stop for companies entering Francophone West Africa.


FSG clients can access our full report, “Market Spotlight: Cote D’Ivoire,” on the client portal.  Not a client? Contact us for more information.

Nigeria: Insecurity and its impact on business

Despite ongoing violence in Nigeria, opinions about the country’s security challenges and what they mean for investors differ widely among local entrepreneurs and international business leaders.

Some executives, whether in Lagos or other commercial centers like Abuja or Port Harcourt, say they aren’t concerned. They believe business will continue as usual and that the threat from militant group Boko Haram will subside after the elections in February next year.

Boko Haram is generally believed to be sponsored by a few political forces who are keen on influencing election results. The group’s terrorist activity has increased dramatically since the election of President Goodluck Jonathan, the country’s first Southern and Christian president, and some believe that Boko Haram was able to emerge because traditional power structures were disrupted in many of the northern states when the central power shifted to the South.

Other business leaders are deeply troubled, not only by the rising violence but by its underlying dynamics.

“We don’t understand why Nigerians are blowing themselves up for a cause. It simply isn’t part of the Nigerian psyche,” a senior manager of a consumer goods company told me.

The head of marketing at a Nigerian bank echoed these sentiments, before adding: “The dynamics here are changing. Everything is getting more expensive because most of our food comes from the north, prices have been going up and what the average Nigerian earns is simply not enough anymore. I fear this may impact the balance here in Lagos, particularly as we get more refugees from the north. Our infrastructure can’t cope with it.”

Business Impact

The volatile state of Nigerian security has also lead to varied experiences among business leaders. As the owner of a distribution company explained: “In our annual sales meetings, one of our local representatives stood up and pronounced huge losses due to the instability in the North. In response, another representative exclaimed that his major customer sits in Borno state!”

Consumer goods companies tend to be the businesses that suffer most, selling low value, high volume products in the populous yet poor northern states. State-imposed curfews mean less people are going out to buy things, and many traders in neighboring Niger, Chad and Cameroon have ceased buying their products in bulk from Northern Nigeria.

Still, businesses operating in affected areas are developing creative ways to address the challenges.

We just had to adapt to the environment. When Boko Haram destroyed the mobile phone masts, we couldn’t call our local representatives anymore. So we just invested in VoIP (Voice Over Internet Protocoll) technology, which is a little more expensive, but now we can communicate frequently with our local representatives, and business is flourishing,” the CEO of an FMCG distribution company told me.

A Common Enemy

While the threat resulting from Boko Haram is still geographically contained around the Northern and central states, the country’s commercial capital has been spared. It is believed that those funding Boko Haram have business interests in Lagos they do not want to be undermined.

Many business have refocused their attention to safer and more prosperous parts of the country to capture the abundant commercial opportunities Nigeria has to offer, but there is till concern that what led to the rise of Boko Haram is not just political maneuverings but real socioeconomic grievances which if left unaddressed could incite insecurity in more stable places.

Some business leaders stress the need for the government to take action. But as Nigeria enters what is only its fourth electoral cycle, others are more patient. They believe that more time is needed for democratic processes to mature and for the disrupted traditional structures to be corrected, calming the power struggles that lie at the heart of the Boko Haram threat.

And still a few try to look at the situation with a typically positive Nigerian attitude:

“In history, the unifying factors of nation states have often been the existence of a common enemy. We have that now, and it could help us focus less on what divides us as tribes and regions, but what unites us as a country.”


Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group, a Washington headquartered information services provider advising multinationals on doing business in emerging markets. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

*This article is Part 1 of an ongoing series, originally published in conjunction with How We Made it in Africa.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

Multinationals must build contingency plans for Russia

European foreign minister
European foreign ministers gathered in Brussels on Tuesday. Associated Press

The EU has decided to impose more sanctions on Russia. For now, these fall short of the so-called Level 3 sanctions that could be against whole sectors of Russia’s economy and crucially, its banking sector. However, the international fallout from the downing of flight MH17 and the growing tensions between Russia and the West mean that Level 3 sanctions are increasingly a possibility.

For an MNC executive, this means that it’s time to plan. Level 3 sanctions would dampen Russian growth further, reducing demand across industries; they would cause significant problems for customers and distributors to access finance, affecting operations; and are likely to be met with Russian retaliation that could make it more difficult for MNCs (especially American ones) to do business in Russia. All of this will have an impact on a company’s customers, finance, supply chain, people, and marketing strategy and MNCs should be building step-by-step play books on how to respond to spillover across their Russia operations.

martinachart2This is not to say that MNCs should be pulling out of Russia. In fact, planning is so important because of the significant role that Russia plays in many MNCs’ EMEA and even global portfolios. Companies that have stuck with Russia through crises have historically reaped significant benefits and this could be an opportunity for MNCs to strengthen partner and customer relationships and to make low-cost investments.

Meanwhile, larger strategic questions are looming in the background for EMEA and global leadership teams. With the likely opening of Iran for business, a Russia that is increasingly closing in on itself could lose out in the competition for corporate investments.

For a full report on Russia contingency planning, FSG clients can click here. A full report on preparing for a post-sanctions Iran is also available.

Preparing Your Business for Post-Sanctions Iran [Infographic]

Iran_Infographic_PostSanctions

International negotiations involving Iran’s nuclear program were extended until November 24, which is good news for Western multinationals. Senior executives should use this extra time to lay out plans for entering or expanding in the Iranian market. Today, FSG released a report for our clients that outlines actions to take in order to prepare for major challenges and capitalize on huge opportunities in post-sanctions Iran.

Many companies are preparing to enter or expand in post-sanctions Iran, and 40% of FSG clients surveyed already view it as a priority market. A comprehensive nuclear deal and the subsequent opening of the Iranian market would represent the biggest shake-up to the MENA portfolio since the Arab Spring erupted between late 2010 and early 2011. Iran’s population is the second largest in MENA, and its oil and gas reserves are the 4th and 2nd largest in the world, respectively.

Before committing significant resources to overcome operational challenges in Iran, senior executives must first determine whether their organizations are even willing to take the risk by reassessing market potentialsanctions exposure, and indirect vulnerabilities, such as reputational risk. Iran’s opportunities will not outweigh the risks for every company. However, pharmaceuticals, medical devices, and consumer goods companies are especially likely to prioritize post-sanctions Iran given its attractive demographics and future spending power.

For companies focused on entering or expanding in post-sanctions Iran, it is imperative to prepare for the top three challenges identified by FSG clients in a recent poll: a lack of access to bank services, compliance risk, and difficulties in becoming a first mover ahead of competition. FSG clients can read our report on post-sanctions Iran to learn about actions for overcoming these challenges and many others.


FSG Poll Results

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Emerging Market View: What Our Analysts Are Reading

EM View

India’s newly elected Bharatiya Janata Party (BJP) government announced its first budget last week, and according to the Wall Street Journal, it proved a letdown for those expecting big-bang reform, MNCs included.

“While it is a well-balanced fiscal plan with focus on reviving consumption and investments, markets have not been overly pleased and experts find certain growth targets to be quite unrealistic. The absence of specifics on several big-ticket items and lack of an overarching vision should rightfully disappoint companies,” says Shishir Sinha, FSG’s Senior Analyst for Asia Pacific.

(Readers can view FSG’s original expectations for India’s BJP government here.)

Last week, Portugal’s Banco Espirito Santo SA bonds hit record lows after parent company Espirito Santo International reportedly missed a debt payment, rekindling market fears and reminding investors that the eurozone’s woes are far from over.

“Executives should be wary of headlines for recovery in WEUR, and prepared for the heavy downside that could accompany bank failure. Banco Espirito Santo, a Portuguese bank, delayed payments on some securities, reminding us that just because banks have not been in the news does not imply that they are healthy. FSG’s WEUR Regional Outlook outlines how banks could impact MNCs throughout the region,” says Lauren Goodwin, Senior analyst for Western Europe.

In Latin America, Argentine presidential hopefuls are dealing with the issue of debt negotiations and exploring opportunities for business-friendly reform, according to Reuters.

“As Argentina strives to negotiate with holdouts to avoid default, executives should consider the potential for improvement as elections approach in 2015. The current frontrunners favor negotiating with holdouts and would likely be more pragmatic and business-friendly than President Fernandez,” says Christine Herlihy, FSG’s Senior Analyst for Latin America.

In global news, Forbes recently released an article on local companies competing with foreign investors in emerging markets, citing a new study by Boston Consulting Group and echoing past FSG reports.

“Echoing the same message in FSG’s report Winning the Race For The Market Diamond, local competition gaining market share in emerging markets is an increasing concern for multinationals, particularly for MNCs that focus on the burgeoning emerging market middle class. Read the report to understand the strategies other companies have used to battle the evolution of growing domestic companies,” says Sam Osborn, Associate Practice Leader for FSG’s global analytics.

What the Latest Sanctions Against Russia Mean for MNCs

The latest rounds of EU and US sanctions against Russia fall short of imposing restrictions on entire industries, but they do have a number of hidden spillover effects for Western multinationals operating in the market. Beyond the obvious impact on MNCs selling to the energy and defense companies directly targeted by sanctions, a broader set of MNCs operating in Russia should be concerned about the banks that have been included in the sanctions list.

Impact on MNCs:

MNCs selling business goods and services are most likely to be indirectly affected by the sanctions, because some of their customers may face a higher cost of credit. Beyond businesses that directly work with the sanctioned banks, Russia’s financial market as a whole is likely to see more expensive credit as more international banks try to restrict new lending out of cautiousness. In the long term, higher lending costs contribute to the contraction in domestic investment, which will prolong Russia’s economic stagnation and reduce demand across all industries.

Actions for executives:

Executives whose business may be affected should speak with their local teams and identify key customers who may work with the sanctioned banks. Such customers may face the risk of rising borrowing costs, particularly if their credit lines need to be rolled over in the near future.

Three consequences of the new round of sanctions:

  1. They could reduce demand from small and medium enterprises.

Both the European Bank for Reconstruction and Development (which the EU will ask to halt new lending in Russia) and VEB, a bank sanctioned by the US, lend extensively to small and medium businesses. A cut in their lending will result in reduced investment and demand for B2B goods and services at a time when investment activity is already deeply depressed.

Chart: VEB will be prohibited from borrowing at maturities longer than 90 days on US capital markets

  1. Multiple industries could be see more expensive credit.

VEB and Gazprombank, the two banks the US sanctioned, lend extensively to the corporate sector, including industries such as oil and gas, metallurgy, machine-building, chemicals, and others. 40% of VEB’s lending in 2013 was for infrastructure. Interest rates for corporate customers of both banks are likely to increase, hitting multiple industries at once.

  1. Lending in Belarus could also be hurt.

Subsidiaries of VEB and Gazprombank hold almost 10% of the Belarussian banking market and are largely dependent on parent-bank financing. Their lending activity and cost of credit is likely to be negatively affected by the US sanctions, affecting some MNCs’ corporate customers in Belarus.

Understanding how the new US sanctions work:

The banks sanctioned by the US – VEB and Gazprombank – are among the largest in Russia. They lend primarily to corporate customers across multiple industries and much of their portfolios consist of long-term loans. To finance these loans, they need to borrow at long maturities on international financial markets, which is exactly the kind of borrowing that US sanctions have restricted. Their alternative sources of long-term capital are notably more expensive and would require them to increase lending interest rates, hurting the businesses to which they lend. Because of the size of these banks, increases of their interest rates are likely to have a spillover effect across the Russian banking sector as a whole.

View the video below to see FSG’s Martina Bozadzhieva discuss investing in Ukraine and Russia on CNBC yesterday.

Iraq Crisis: Reacting Rashly to Instability Could Hurt Your MENA Business

Photo: Iraq Crisis: A Kurdish soldier with the Peshmerga keeps guard near the frontline with Sunni militants on the outskirts of Kirkuk, an oil-rich Iraqi city on June 25, 2014.  Spencer Platt, Getty Images

Right now all eyes are on the conflict in Iraq. However, political instability is the regional norm, as seasoned senior executives can attest. Companies must avoid making rash decisions in response to regional volatility. Otherwise, there is a danger of cannibalizing long-term prospects for MENA growth.

Senior executives must be proactive in controlling the conversation with their corporate office to counteract the steady stream of negative media attention that is focused on the region. Despite the terrible human toll from the Iraq crisis, and increasing links to the devastating Syrian civil war, only 11% of MENA GDP is derived from markets that are highly exposed to spillover from the conflicts.

Senior executives should assess how deteriorating stability in Iraq impacts their MENA strategy, but a measured response is required. FSG suggests considering three actions for your regional business:

1. Course-correct your MENA strategy, but do not waste resources on a complete overhaul.

Risk-tolerant companies can gain long-term market share as others freeze investments or pull out of Iraq and surrounding countries. At the same time, MNCs can focus on a profitability-driven strategy in stable countries such as Saudi Arabia and the UAE. Our clients can use FSG’s market prioritization tool to aid in reassessing where to concentrate regional resources. They can also track signposts in our Iraq report and updates from FSG’s MENA Monthly Market Monitorto help decide when changes are appropriate.

2. Leverage local partners to maintain a foothold in affected areas in the MENA region.

Risk-averse companies can maintain a foothold in unstable markets by relying on local partners to reduce financial and security risks. It will be important to work with partners to monitor changing regional perceptions of Western brands if there is a sustained Iraq conflict in which foreign intervention is possible. Clients can review FSG’s Managing Distributors in MENA for additional strategies.

3. Count on de facto or de jure Kurdish independence, which brings opportunities and risks.

Kurdistan’s capture of oil-rich Kirkuk puts it on an accelerated path toward de facto or de jure independence. Kurdistan could become even more of an investment destination as a result. But manage expectations, as there are new challenges, including potential fuel shortages as a result of disruptions to the Baiji oil refinery and Erbil’s exposure to a rise in terrorist attacks. Clients can read our Iraq Frontier Market Access report for more on Kurdistan and use our monthly MENA report to track developments.

(Image courtesy Getty Images, Scott Platt: A Kurdish soldier with the Peshmerga keeps guard near the frontline with Sunni militants on the outskirts of Kirkuk, an oil-rich Iraqi city on June 25, 2014.)