Back to the Future for Emerging Markets?

“Back to the future”

Despite recent volatility, emerging markets remain in traditional positions within the global economy.  As in the past many emerging markets can be characterized as low-cost production and export hubs, with favorable exchange rates, cheap company valuations, and attractive demographics that can support domestic consumption growth.  While these emerging markets drivers are largely familiar in aggregate, not all emerging markets are created equal.

H2 2014 GPD Blog Post Image #1

The recent period of emerging markets volatility changed corporate perceptions of emerging markets.  Emerging markets went from star “outperformers” to high-risk markets, with companies refocusing resources on recovering developed markets.

H2 2014 GPD Blog Post Image #2

However, the revival of developed market growth will benefit emerging markets as many retain the traditional producer-consumer relationship with develop markets.  That said, the rising tide may not lift all ships. Emerging markets where costs of doing business have increased find that companies are reallocating investment toward lower-cost production centers and/or markets with a more vibrant domestic consumer base.  For example, Samsung recently announced plans to invest $4.5 billion into building two production plants in lower-cost Vietnam in an effort to preserve margins. FSG clients can read more about our emerging markets framework and country-specific management actions by downloading the latest Global Performance Drivers report.

Turkey set to slow down in 2012, but ripe for investment

Turkey GDP

Turkey had a strong 2011, with GDP growth exceeding 8% for the year. However, we expect a noticeable slowdown in 2012 to 1.7% YoY. The main drivers of the slowdown are weakening industrial production as eurozone demand for Turkish exports slows, tightening credit conditions in the eurozone, and rising inflation in Turkey. These factors will come together to put downward pressure both on business and consumer demand and will affect multinational companies across a wide variety of sectors.

However, Turkey has consistently surprised on the upside over the past several months, and a very gradual slowdown of the economy in 2012 is becoming increasingly likely. What is more, as the Turkish lira remains relatively weak, the exchange rate will favor companies exporting from Turkey and will partly offset the declin in export demand from the eurozone. We expect Turkish growth to accelerate once again in 2013 as the effect of the eurozone crisis wears off and Turkey’s current account deficit narrows, improving market confidence in the country’s economic stability.

Meanwhile, 2012 is a year of opportunity for companies looking to invest on the Turkish market. With tighter credit conditions and low export demand putting pressure on the local companies’ financial stability, a weak currency, and lower investment from the eurozone, MNCs will have more targets to choose from for M&A this year, at a lower cost of investment, and facing weaker external competition for priority targets. With the market expected to rebound next year, companies that invest in Turkey this year will find themselves positioned for stronger growth in 2013 and beyond.

Risks Looming Over Russia’s 2012 Outlook

As Western Europe continues to struggle with the sovereign debt crisis and currency depreciation, declining exports, and lower 2012 growth prospects engulf Central and Eastern Europe, the outlook for Russia seems surprisingly solid. Despite a slow downward revision of 2012 growth forecasts from earlier this year, Russia is still projected to grow at about 4% in 2012.

However, the 2008-2009 crisis made it painfully clear that Russia is not and cannot be an island of stability when European and potentially global markets are in turmoil. Since 2009, Russia has grown even more dependent on energy exports, with its 2012 budget balancing at oil price of over $110 per barrel.

In the short term Russia is growing on the back of strong consumer demand, but this in no way eliminates the significant downside risk of an oil price decline. With the Eurozone already heading into a mild recession and the possibility of global financial market contagion, a significant decline in oil prices is a real possibility. A drop in oil prices could unleash a chain reaction (see graph) that would undermine Russia’s economy and, at best, depress Russia’s GDP growth.

For MNCs, this means having contingency plans for a significant downturn in Russia over the next 6-8 months to address ruble depreciation and declining demand on the domestic market.

On the positive side, MNCs should also be prepared to take advantage of M&A opportunities as attractive local assets will be priced at a discount.

In the long term, the Russian market continues to hold significant opportunity for foreign companies, especially after the country joins the WTO later this year. However, MNCs need to account for the significant risk the Eurozone crisis is posing to Russia’s performance in 2012 and be prepared to respond to rapid changes in the market.

India’s Growth to Exceed China by 2014

China-India-Flag

Frontier Strategy Group appeared in yesterday’s Financial Times in an article titled, Gems: Making the case for Gems

According to the Frontier Strategy Group, while China’s growth may be slowing down, India’s is increasing, and by 2014, India’s growth rate will outstrip China’s, at 8.6 per cent compared with 8.2 per cent. This has prompted fears of a hard landing for China.

For much of the past year, China’s policymakers have been grappling with how to temper sharply rising asset and consumer prices and dampen the ill-effects of an unprecedented economic stimulus following the global financial crisis – without torpedoing strong economic growth.

China first set about reining in credit in April 2010, following a record RMB12.2trn (£1.1trn) surge in bank lending since the start of 2009, according to China Economic Research.

The Frontier Strategy Group predicts that China will have trouble in tackling its public debt and its debt to GDP ration will rise from 16.2 per cent in 2011, to 16.3 per cent in 2012, 2013 and 2014, before going back down to 16.2 per cent in 2015.

 

Scenario Planning: Preparing Your Nigeria Operation for a Downturn

With 155 million people and projections of 7.4% GDP growth in 2011, Nigeria is already a “can’t miss” consumer market opportunity. That said, in the next several years there will be multiple bumps on the road as Nigeria transitions from a corrupt, ethnically divided, oil driven economy, to a modern, diversified powerhouse.

In 2012 in particular FSG believes there is a 50% likelihood of a double dip recession. The following outlines what the potential impact of a recession could have based on your current Nigeria footprint:

Remote Exports to Nigeria

  • Volumes could decline as currency weakens
  • Distributors may be crunched for credit
  • Lower logistics, fuel costs as oil prices moderate
  • Greater flexibiliy to increase/reduce export volumes
  • Indicators to watch: Exchange rates, Oil prices, Credit growth

South Africa Exports to Nigeria

  • Volumes could decline as currency weakens agains rand
  • Distributors may be crunched or credit as oil prices moderate
  • Greater flexibility to increase/reduce export volumes
  • Indicators to watch: Exchange rates, Oil prices, Credit growth

Nigeria as a Regional Hub

  • Distributors may be crunched for credit
  • Lower logistics, fule costs as oil prices moderate
  • More protection from volatile exchange rates when assessing domestic market
  • Greater responsiveness to market dmeand
  • Indicators to watch: Domestic food prices, Oil prices, Exchange rates

Pan-Africa Business Units

  • Distributors may be crunched for credit
  • Lower logistics, fuel costs as oil prices moderate
  • More protection from volatile exchange rates when manufacturing in domestic market
  • Greater responsiveness to market demand
  • Indicators to watch: Pan-Africa GDP, Exchange rates, Oil prices

Monitoring the Global Economic Recovery

In a stable year, Q3 is a time MNCs use to adjust strategic plans and finalize budgets for 2012. However, 2011 is not a stable year. Volatility in the global economy has generated significant uncertainty in all planning processes. GDP growth projections for 2012 in Argentina range from 1.2% to 6.5%. For Russia, executives are making decisions based on GDP forecasts that range from -8% to 5.4%. These figures are critical to budget allocation, target setting, and strategic planning for 2012, and will continue to fluctuate in the coming weeks and months.

It will be increasingly difficult for MNCs such as Apple (Nasdaq: APPL) and General Electric (NYSE: GE) that have large exposures to volatile markets to manage through various scenarios. Through working with over 200 of the world’s most progressive multinational firms, Frontier Strategy Group understands what matters most to executives operating in emerging markets. In response to the economic slowdown Frontier Strategy Group launched FSG Monitor, and online resource  for senior executives around the world to track the impact of the economic slowdown on their business performance in real-time.

For a limited time, FSG Monitor is available to the public, for anyone to access and view our proprietary intelligence platform.

Click on this link to view FSG Monitor yourself, or contact us for additional information.

Will India’s growth rate outpace China’s?

In the wake of the Mumbai bombings, concerns remain over the business environment in the commercial and entertainment capital of India. That said, India ranks among the largest and fastest-growing markets in the world, and it has weathered the economic downturn substantially better than Brazil and Russia. It also continues to attract investment due to its market size, economic diversity, and future growth potential.

  • India’s steady growth will place it neck and neck with China in 2013

o   India’s economy is expected to expand 8.0% this year and 8.4% next year. The country’s GDP growth is expected to continue rising through 2013 when it will begin to outpace China

o   India’s rapid economic expansion will be reflected in the growth of its people’s spending power. Personal disposable income per capita is set to rise by 13.2% this year and 12.4% next year.

  • Favorable demographics

o   India is the third-largest market in Asia, after China and Japan

o   More than 65% of its 1.2 billion people are under 35 years of age

  • Improving infrastructure

o   New Delhi is devoting more attention and resources to infrastructure development in an effort to eliminate bottlenecks and attract investment

o   The portion of India’s budget allocated to infrastructure increased by 23% this year to US$48 billion.

o   Improved infrastructure is attracting investment in automobile manufacturing, metals, chemicals, textiles, and food processing from multinationals which are increasingly looking to use India as a supplier to the rest of Asia.