Poorer countries face being locked out of global capital markets, but for canny investors there are some emerging bargains to be had
These days, the biggest threat to growth in emerging markets is probably financial markets. While investors are right to reconsider their blind enthusiasm for all countries with low incomes and grand prospects, blind pessimism would harm countries which could really benefit from foreign help.
The three countries currently under the most market pressure deserve to be punished. Argentina and Venezuela have had unsound economic policies for years. Turkey had a current account deficit of over 7 percent of GDP in 2013 and the currency weakened 22 percent against the dollar in the past year, helping to push the inflation rate up to 7.4 percent.
However, some emerging markets really are emerging. Take Nigeria, long written off as an oil exporter beset by poverty, corruption and mismanagement. Its GDP grew at a 6.8 percent annual rate in the third quarter of 2013, with the non-oil sector growing 8 percent. Inflation is modest, and the country consistently runs a surplus on its current account.
What’s more, the past record is probably better than the published statistics suggest. The first substantial revision of the country’s statistics since 1990 will be published in a few weeks. According to the National Statistics Agency, it is expected to show Nigeria’s GDP is 65 percent higher than previously thought.
Sri Lanka is another country on the rise, despite ranking 91st, just above India, on Transparency International’s Corruption Perceptions Index. The International Monetary Fund expects more than 6 percent annual GDP growth between 2013 and 2015, with inflation below 10 percent. While the current account and government budget are showing deficits of around 5 percent of GDP, the ratio of sovereign debt to GDP, raised by its lengthy civil war, is now below 80 percent of GDP and declining steadily.
Mexico is a more familiar investment story, but well worth retelling. Commodities account for only 20 percent of exports, and the country has just undertaken an opening of its oil sector, after keeping it fully domestic and not very efficient for 75 years. Government finances are strong, and the policy interest rate is above the inflation rate — a more sensible relationship than many developed markets can manage. The IMF recently raised its GDP growth projections for Mexico to 3.0 percent in 2014 and 3.5 percent in 2015, with manufacturing buoyed by a quickening US recovery.
For all developing countries, the low wages which keep people poor can be a competitive advantage. The trick is find ways to turn unskilled labour into competitively priced exports.
New shipping and communications technologies have made that easier, and some countries have been able to reduce the drag from inefficient institutions and wasteful governments.
Indeed, Mexico has lower budget deficits, less debt and higher real interest rates than the major economies of the developed world, not to mention the benefits of North American Free Trade Area.
The catch for many poor countries, especially those with few natural resources and small pools of domestic savings, is their need for outside capital to finance the investments which make rapid growth possible. They can simply lack the funds needed to build infrastructure and production facilities up to a global standard.
When poor countries are closed out of global capital markets, as many were in 2008-09, even sound emerging markets suffer badly. A similar investor freak-out is a serious risk right now. But where there is folly there is also opportunity. Smart investors will be able to pick up some emerging bargains.