Emerging markets such as Brazil, Russia, India and China (Bric), as well as the Middle East and North Africa (Mena), are taking the financial centre stage as the world economy’s geographical structure undergoes a massive change, according to analysts.
Private capital inflow into emerging markets have been estimated by the Institute of International Finance (IIF) to reach $722 billion (Dh2.7 trillion) in 2010, up from its earlier forecast of $672bn, according to a report published in January by Bank of America Merrill Lynch (BofA ML).
Daniel Tenengauzer, head of Global Emerging Markets Fixed Income Strategy at BofA ML, wrote that there is “strong anecdotal evidence” that investors see emerging markets as a conducive place for their businesses.
“In its latest report, IIF underscored that they are starting to see what could be a substantial multi-year upswing in international capital flows to many emerging markets in response to sound policy management, solid economic prospects and significant returns relative to investments in mature economies,” he mentioned.
The report underscored that “mini-crises” in the emerging markets such as the Dubai debt standstill, the socio-political clashes in Greece and excessive policy tightening in China could affect the pace of growth, but not at an alarming level.
“At this stage, we do not think the [Dubai and Greek issues] constitute a major threat to emerging markets. In the case of Greece, the contagion risks are present, but we believe will remain limited overall,” he noted.
While China’s strict implementation of policies is of concern, Tenengauzer wrote that in the view of BofA ML’s Asia economics team, Beijing authorities are maintaining an “accommodative bias” by reaffirming its relatively loose-money policy in a bid to maintain stable and relatively fast growth while managing inflation expectations. This method is also part of an extensive exit strategy that will eventually lead to an end to stimulus packages for its financial sector.
Reversal of economic positions
Dr Nasser Saidi, chief economist of the Dubai International Financial Centre (DIFC) Authority, said emerging markets have been challenging mature markets since the late 1970s.
This steady development, however, had been outside the radar of international financial observers as coverage was basically biased toward advanced economies like Japan, United States, and European countries.
Quoting a Standard and Poor’s report, Saidi mentioned that in 1999, the US equities accounted for 46 per cent of the world equity market while emerging markets represented only 8 per cent. By 2009, the US contribution dwindled to 28 per cent and the emerging markets accounted for a substantial 32 per cent of global equities.
“In the past, most of the investment flows, whether portfolio, equity or direct investments come from the north-south axis. Increasingly however, over the past 10 years the flows are moving south-south [meaning] emerging markets are [increasingly] investing in each other,” he said.
Saidi added that in the foreseeable future, the large capital exporters such as China – which is sitting on gross international reserves worth $2.4trn – are expected to be the world’s large importers.
EEMea outlook up, GCC lackluster
The Eastern Europe, Middle East and Africa (EEMea) region is expected to post a 7 percentage points (ppt) fiscal growth in 2010, according to a forecast by BofA ML published in December 2009.
“After a horrible 2009, the [EEMea] region is emerging in much better shape. External financing needs have contracted. Rate cuts, which have been delayed due to the crisis, are finally feeding into the real economies. Stronger exchange rates are supporting domestic demand. Global demand for manufactured goods is increasing. Finally, oil helps Russia and several others,” wrote David Hauner, head of emerging Emea economics at BofA ML Global Research.
Meanwhile, the Dubai World’s $26bn debt standstill will likely dampen growth forecast for the six-member Gulf Cooperation Council (GCC), the BofA ML report suggested.
The research emphasised three risk factors that may contribute to a “significant downgrade” to growth outlook for the Gulf region: lengthy deleveraging/ consolidation, asset deterioration in banks/corporate balance sheets and bruised investor sentiment.
Saudi Arabia is expected to lead the GCC economically with its huge savings and oil reserves, moderate leverage and little excesses, while Qatar’s gas revenues are sure to place it as a safe haven for foreign investors, the report said.
The BofA ML global research, however, noted that the direct negative spill-over from the Dubai issue to other GCC states, except Bahrain, is limited since “Dubai has been the most levered entity in the region and the only one lacking the all-important excess savings.”
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