The credit crunch has highlighted a tectonic shift in the global economic landscape as investors poured more money into emerging markets instead of the once-favoured developed economies.
Investments into emerging markets have remained buoyant over the past years, according to statistics published in June by the
Institute of International Finance (IIF). Net private capital flows in 2010 has been recorded at $990 billion (Dh3.64 trillion), up by nearly 54 per cent from $644bn in 2009. This uptrend is anticipated to continue in 2011 with $1 trillion and in 2012 with $1.06trn.
Made famous by catchy acronyms, emerging markets such as Bric (Brazil, Russia, India and China) and Mena (Middle East and North Africa) have already caught investors’ attention. However, a relatively new group of economies have started to appear on the investment radar and their fundamentals could prove appealing to petrodollar-rich GCC financiers, analysts say.
Civets – representing Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – holds massive potential for Gulf investors seeking alternative markets to park their money, says Khalid Howladar, Vice President-Senior Credit Officer of the Financial Institutions Group at the Dubai office of
Moody’s.
“[Civets economies] are fast-growing and relatively populous countries that, in most cases, require significant capital investment in both the public (particularly infrastructure) and private sectors. Capital is something the GCC has plenty of, which, when coupled with the lack of economic diversification at home, means that they need to look to overseas markets for wider investment opportunities,” Howladar told Alrroya.com.
An indication of the high stake that fund managers are placing into this group was the launching of
Standard & Poor’s (S&P)
Civets 60 Index in May, which provides exposure to 60 leading companies through 10 highly liquid stocks trading in each of the Civets countries.
Charbel Azzi, Director and Head of Client Coverage-Middle East and Africa for S&P Indices, says they believe the six countries are second-generation emerging markets characterised by dynamic, rapidly changing economies and young, growing populations.
“The Civets 60 Index will provide GCC investors exposure to new markets beyond Bric, which have been [in] play for some time. Asset managers are always looking for new ideas to create a product around or even launch a fund benchmarked to the Civets. As of June, the [annualised] return of the index [has been] 22.8 per cent,” Azzi said.
Rosy economic outlook for 2011, 2012
The
International Monetary Fund (IMF), in its World Economic Outlook released in April, predicted significant real GDP growth rates for the Civets economies in 2011 and 2012, with the exception of Egypt, which has suffered serious fiscal backlash due to the political turmoil that erupted in the first quarter.
Colombia’s economy is seen growing by 4.6 per cent this year and 4.5 per cent in 2012, according to the IMF forecast. Indonesia, the largest economy in Southeast Asia, will expand by 6.2 per cent in 2011 and 6.5 per cent next year while Vietnam is expected to register the highest growth figure among the Civets economies at 6.3 per cent and 6.8 per cent, the IMF noted.
Unsteady political climate, coupled with mounting public discontent and high unemployment rate, will see Egypt’s fiscal growth stifled at a measly one per cent this year. However by next year, provided that the political situation improves, Egypt’s economy will likely record a four per cent growth, the global lender predicts.
Turkey, which holds strategic geographic importance as it sits between Europe and Asia, could see its GDP jumping to 4.6 per cent and 4.5 per cent, as per the IMF estimates. Jarmo Kotilaine, chief economist at Saudi-based
National Commercial Bank (NCB), said their in-house forecast for the Turkish economy has also been optimistic, putting the growth rate at 5.9 per cent this year and 6.4 per cent in 2012.
Last but certainly not least, South Africa’s economic growth level is predicted to be equally healthy at 3.5 per cent and 3.8 per cent in 2011 and 2012, respectively.
Aside from their robust economies, Civets nations – like many emerging markets – have rich demographics and strong policies that prove enticing to foreign investors, says Maria Laura Lanzeni, Head of Emerging Markets Research at
Deutsche Bank.
“Those countries offer superior economic growth rates (compared with developed markets) [and] in some cases, large and growing populations with rising incomes and increasing consumption, much-improved macroeconomic policies and relatively low debt levels,” she explained.
Strong incentives for attracting FDI
Civets countries, which span across four continents, have a combined population of nearly 600 million as of July this year, according to
CIA World Factbook statistics – making them fertile ground for international companies looking to diversify their product and service reach.
Lanzeni says sectors that cater to domestic consumer or in the case of Indonesia and South Africa, industries related to natural resources, could be top bets for foreign investors.
Martin Kohlhase, Vice President-Senior Analyst at Moody’s Corporate Finance Group, believes that Civets offer opportunities that would attract foreign direct investments from the Gulf region.
“Access to cheap labour, both as a production base as well as the inbound source for GCC production facilities and certain types of commodities (especially food, which GCC countries heavily rely on) are areas that GCC investors will be interested in,” Kohlhase says.
NCB’s Kotilaine says the Islamic background of Egypt, Turkey and Indonesia have been enticing GCC investors, particularly in the fields of Islamic finance and pilgrim tourism, in addition to conventional sectors such as construction, telecommunications, banking, consumer goods and agriculture.
“There is an obvious cultural affinity and concrete existing opportunities in areas such as umrah/hajj [pilgrimages],” Kotilaine says of the three Islamic Civets countries.
“Great opportunities for Islamic finance, which have begun to be explored in Turkey, but the cultural/religious angle will likely mean that many [GCC] investors would consider these countries before [other markets].”
He added that Turkey, which like Egypt has a large population, has been drawing huge attention from the Gulf because of its “greater prosperity and the added advantage of proximity to Europe.”
Kotilaine mentioned likewise that Indonesia, the most populous Muslim country in the world, is increasingly on the radar screen of GCC businesses.
“Some GCC companies have been eyeing the Indonesian market from their current operations in Malaysia. The main opportunities here are similar to Egypt and Turkey: financial services, construction, tourism [and] agriculture,” he said.
Moody’s Howladar agrees that the appeal for these three countries will primarily be economic, but there is undoubtedly a shared and growing empathy for Islamic finance that will strengthen ties between them and businesses in the Gulf region.
Azzi of S&P says to have three Islamic states in an index such as the Civets 60 is a positive indicator for fiscal growth because it reflects the maturity and liquidity of these countries’ bourses.
“GCC investors, [whether] Islamic or conventional focused, will look at these opportunities more closely to generate alpha on their investments,” the S&P analyst said.
Politics highlights risks in emerging markets
With no immediate resolution in sight, Egypt’s shaky political situation appears to be sticking out like a sore thumb among fellow Civets markets’ seemingly sound economic fundamentals. Analysts noted that political risk is not unique to Egypt, but in fact prevalent in many emerging markets.
“Emerging market countries in general are high risk. Not only does investment in those countries have to deal with elevated levels of political and event risk, but the regulatory and investor regimes are quite likely to be underdeveloped and subject to various inefficiencies that can diminish or even destroy returns from potential investments,” says Howladar of ratings agency Moody’s.
Lanzeni of Deutsche Bank says political and institutional risks are some of the last few differences between emerging and developed countries.
“The challenge for Civets and other [emerging markets] in general [is] how to secure the rule of law and develop robust domestic institutions,” says Lanzeni. She was quick to point out, however, that many emerging markets have made enormous progress over the past decades in addressing this concern.
Despite these challenges, recent market assessments by IIF emphasise potential opportunities and financial promises from the emerging economies. Egypt’s political crisis saw private capital flight of about $16bn, which also resulted to a dent in the Mena’s aggregate capital flows for 2011 and 2012.
This contraction, however, will be buffered by an anticipated rise in foreign direct investments, the IIF report said.
“Overall, however, private capital inflows [to the Africa and Middle East region] are projected to slip to $56bn this year from $77bn in 2010. An increase in foreign direct investment to $62bn will help offset an outflow of portfolio equity and a drop in inflows from banks and other private creditors,” the institute mentioned.
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