As the European Union mulls another year of economic stagnation and the United States a year of lacklustre and uncertain economic recovery, will emerging markets take the lead in global economic recovery?See the Slide Show >>> In Pictures: 12 Fastest Growing Economies for 2013
The year 2012 ended on relatively flat note. The United States had the world on its toes as its leaders negotiated a crucial last minute budget deal, narrowly avoiding automatic budget cuts and tax hikes that had the potential to send the world’s largest economy into recession. But even with that out of the way, failure to raise the debt ceiling and, on a large scale, rein in government spending, would keep another generation of Americans trapped in a vicious spiral of unsustainable debt and decline.
From today’s vantage point, we also appreciate the return of credibility in Euromarkets. In 2012, two events helped to secure the region’s and the euro’s stability: The establishment of the European Stability Mechanism, a permanent bailout fund that allows for the direct recapitalisation of banks, thus severing the link between vulnerable sovereigns and weakly capitalised banks; as well as the European Central Bank’s decision to intervene in money markets with its “unlimited” bond purchases.
However, despite the relative calm that markets now enjoy, it is certain that neither global economic growth nor leadership will stem from the West, or any G8 countries for that matter.
In 2011, the eight growth market economies – the BRICs plus MIST, Mexico, Indonesia, South Korea, and Turkey – created close to $3 trillion, more than the United Kingdom in one year. The combined size of these economies is now approximately that of the US economy, with total annual output reaching $16 trillion, about 25 percent of world economic output.
Barring any major contraction, if the “Growth 8” economies expanded by an average of 10 percent, they would add $1.5 trillion to global GDP next year, the equivalent of creating another Greece every 10 weeks, or an economy the size of Spain’s every year.
Are the BRICs Becoming Irrelevant?
But the economic miracle of the BRICs, who collectively hold a large portion of global foreign exchange reserves and make up nearly half of the world’s population, could be coming to an end.
According to the Wall Street Journal, the problem with the BRICs is they tend to promote themselves as an alternative to the G7, often failing to recognise that the economic fates of the BRICs and the G7 are interlocked. “When the U.S. financial crisis spread to Europe, it didn't stop there. The BRICs nations weakened because they lost big export markets and sources of financing and investment.”
Furthermore, while the BRICs accounted for more than half of global growth in the last four years, “only China has the economic heft to make a major difference internationally on its own, and it is just now starting to come out of a slowdown. The other three nations face a variety of economic challenges, ranging from inflation to inadequate foreign investment to labour unrest,” the Journal said.
Similarly, the hope that the BRIC countries would help one another through increased trade, investment and political support hasn't quite materialised. Observers say the BRICs act as much as rivals as allies, and their lack of cohesion adds to their economic problems. Fyodor Lukyanov, an analyst who chairs an influential Kremlin foreign-policy advisory board, told the Journal:
Perhaps it was this dreadful realisation that inspired the creation of Goldman Sach’s new rhetorical acronym: MIST – Mexico, Indonesia, South Korea, and Turkey – which are the four biggest markets in the bank’s Next-11 (N-11)* equity fund.
In an interview with Bloomberg last August, chairman of Goldman’s asset management arm Jim O’Neill said he came up with the idea for an N-11 fund as a way to help investors benefit from growth beyond the BRIC nations. Opened in 2011, the N-11 fund climbed 12 percent in 2012, compared with a 1.5 percent gain in Goldman’s corresponding BRIC fund.
With populations that for the most part are younger than the U.S. and Europe and have higher birth rates, fuelling economic expansion, the N-11 nations are emerging from the shadow of the BRICs, where growth is slowing and investors are pulling out funds. In 2011, a net $5.4 billion of investor money flowed out of the BRIC offerings tracked by EPFR Global. An additional $1.3 billion leaked out through the end of August last year.
So when compared with the BRICs, the MISTs appears to have a bit more upside potential, said Larry Shover, chief investment officer of Solutions Funds Group, who added that the total GDP of the MIST countries is less than a quarter of the BRICS – $3 trillion compared with $13 trillion.
“People are recognising that there is still a lot of room for improvement in these economies,” Shover added.
The Asian Tiger Cubs
Meanwhile, on the other side of the world, Asia’s Tiger Cubs – Indonesia, the Philippines, Vietnam and Myanmar – are looking to emulate the economic success of Hong Kong, Singapore, South Korea and Taiwan.
In a special report on emerging markets, MarketWatch said of Indonesia and the Philippines:
With rapidly growing economies and rising incomes, the two countries are home to a large and young labour force, an expanding middle class and have stable, elected governments with policies inspiring investor confidence. They also have sturdy banks and enough foreign-exchange reserves – more than a year’s imports in the Philippines’s case – to rebuff a misguided run on their currencies.
In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as the region’s “New Tigers” with the potential to leave a bigger imprint on global growth for years to come while the developed world struggles with excess debt and traditional regional heavyweights China and India lose momentum.
Each has also received credit rating upgrades since 2011, with Indonesia now rated investment grade by Moody’s and Fitch. Their stock markets are among the world’s best performing since the end of 2008 –Indonesian shares tripled during the period from beaten-down valuations, and are closely followed by Philippine equities.
On the other hand, for a country once ravaged by war, Vietnam has been one of Asia’s lesser-known economic success stories. Since the introduction of Doi Moi, or Renovation Reforms in 1986, Vietnam has expanded faster than any other Asian economy except China's, posting an average annual per capita GDP growth of 5.3 percent. This growth continued even through the Asian financial crisis in the 1990s and the recent global economic downturn (the economy grew 7 percent per year from 2005 to 2010) – faster than many other Asian economies. Vietnam is expected to grow at a rate of 6 percent this year, according to data from the International Monetary Fund.
But there is no larger growth potential in Southeast Asia other than the opening up of Myanmar. With the upgrading of diplomatic relations, subsequent removal of international sanctions and an influx of foreign aid and investment, foreign businesses are ramping up interest in the long-isolated but potentially lucrative market of Myanmar, whose opportunities abound in raw materials such as gems, timber, rubber and gas, and also in services for a population of 55 million in need of everything from healthcare to telecommunication.
Vinod Chugani, an American-educated Singaporean, said:
Check out the complementary slideslow 12 Fastest Growing Economies for 2013 here: http://bit.ly/XxJEfB
*Besides the MIST nations, the N-11 countries include Bangladesh, Egypt, Nigeria, Pakistan, the Philippines, Vietnam and Iran. However, Goldman Sachs does not invest in Iran because it isn’t an open market for foreign investors.
By Michele Lin, EconomyWatch.com
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