Summary
– At a time when the BRICS countries, with the exception of China, are experiencing a slowdown in growth and showing signs of vulnerability, interest is beginning to grow in the « new emerging economies. » Focus on these exceptional opportunities.
– Despite their different profiles, three demographic powerhouses with considerable natural resources stand out: Indonesia, Nigeria, and Mexico.
– Despite the current institutional crisis in Turkey and security tensions caused by the Colombian guerrilla movement, Turkey and Colombia also have substantial growth potential.
– Despite their weaknesses in terms of infrastructure, governance, and, for some, the excessive specialization of their economies, these five countries have all the assets to become the BRICS of tomorrow.
Although the BRIC concept, coined by Goldman Sachs’ Jim O’Neill in 2001 and expanded to BRICS ten years later with the addition of South Africa, is now more than imperfect given the heterogeneity of its members, for nearly a decade it brought together the new generation of « emerging » countries supposed to take over from the advanced countries. Economic literature has devoted a great deal of attention to the subject. There are countless publications dealing with the potential and development models of Brazil, India, Russia and, above all, China. The common distinction was then « advanced countries-emerging countries (BRICS)-developing countries, » with no real distinction between developing countries.
However, with the notable exception of China, these BRICS countries showed some fragility in 2013, particularly following the Fed’s announcements in May. The declaration of intent by Ben Bernanke, then chairman of the Fed, to reduce the pace of US Treasury bond purchases (which would lead to an increase in their profitability and therefore a relative decline in that of investments in emerging countries) led to significant capital flight in these countries. The combination of their seemingly sustained slowdown in growth, social tensions, and the relative decline in the profitability of investments in these countries led to this capital flight and, ultimately, a sharp depreciation of their currencies. Investors are therefore looking for new El Dorados, and interest is beginning to grow in the « new emerging markets, » the countries that will drive global growth over the next 20 years. From the « Next Eleven » to the « BENIVM, » acronyms are multiplying, and analysts disagree on the members of this new club of emerging countries, given the fragilities and uncertainties weighing on these countries.
First and foremost, it seems essential to establish the key assets required for a country to achieve « emerging » status. These vary depending on the source. However, four characteristics seem essential: a large and dynamic population; sustainable growth that is significantly higher than the population growth rate over the next five years; a developed and robust financial system; and sound public finances that allow for fiscal flexibility.
Without claiming to provide an exhaustive list, five countries appear to meet all the criteria to be the « new emerging » countries of tomorrow: Indonesia, Mexico, Nigeria, Turkey, and Colombia. Let’s take a closer look at these potential future giants with feet of clay.
Indonesia, a demographic giant impervious to the global economic slowdown
Indonesia, sometimes even included in the BRIICS, is experiencing strong growth, which is expected to continue at a rate of 6% per year (with a population growth rate of less than 1.5%) until 2020. The country is one of the few that did not suffer from the global crisis (+4.6% growth in 2009, a year of recession in advanced economies), proof of its resilience. This is mainly due to its low openness and low exposure to the economic situation in Western countries. Its exports accounted for less than a quarter of its GDP in 2013, with the majority (70%) going to Asia. In addition, Indonesia has exceptional natural resources, enabling it to offer an extremely diverse range of products: oil, gas, coal, copper, but also textiles, electronics, rubber, and a growing tourism industry.
This low exposure can also be explained by Indonesia’s very large domestic market. With nearly 250 million inhabitants, the Indonesian market represents an extremely important and rapidly expanding outlet. More than 1.7 million cars are expected to be sold in Indonesia by 2020. Household consumption is the main driver of the economy and is fueling growth in sectors such as transportation and communications. Private investment, with an annual growth rate of around 10%, is also particularly dynamic, especially in the construction sector. Well capitalized and low risk, the banking sector, whose credit supply to the private sector is growing strongly (+26% in 2012), supports this dynamism. Finally, the working-age population will continue to grow in the medium term, with 45% of the population under the age of 25.
However, low levels of public spending on education (2% of GDP in 2013) and investment (3% of GDP) could hinder the country’s definitive emergence. The lack of infrastructure, both road and port (the archipelago has more than 10,000 islands), is a definite obstacle to even greater development. In this regard, the World Economic Forum ranked the country78thout of 144, behind Sri Lanka and Thailand. Finally, the Indonesian rupiah has depreciated by more than 20% since the Fed’s announcements in May 2013, which revealed its relative fragility. However, the strength of the Indonesian economy should not be called into question.
The inevitable rise of Nigeria, between black gold and consumer potential
As Africa’s most populous country, with more than 170 million inhabitants, 70% of whom are under 40, Nigeria is undoubtedly one of the continent’s most dynamic countries, alongside Angola, Mozambique, and Ethiopia, whose economies are not comparable in size, despite South Africa’s slowdown. With considerable gas and oil resources, Nigeria’s GDP is growing at an average annual rate of around 7%, well above the rate of population growth, estimated at between 2.5% and 3%. Nigeria has the largest oil reserves in Africa. Nigerian oil is particularly prized by American refineries, with 40% of the country’s exports going to the US.
Like Indonesia, Nigeria’s population, and in particular its growing middle class, represents a considerable consumer base that drives the economy and offers it the opportunity to diversify. As a result, the telecommunications sector (+34% per year), services (with an annual growth rate of over 10% and a share of GDP approaching 30%), particularly in distribution and finance, and trade (+14% per year) are booming. Public subsidies for investment in non-oil sectors illustrate the authorities’ desire to promote this diversification. In addition, the Nigerian banking system, which has been developed and stabilized since the 2009 reforms that combated corruption and recapitalized banks in serious difficulty, is now in a position to support this effort by offering increasing amounts of credit. Furthermore, although currently relatively unexploited, Nigeria’s agricultural potential is immense, with 80% of the territory being arable and highly fertile land. In this regard, one of the objectives announced by the authorities is to double cocoa production, of which the country is the world’sfourth largest producer.
The country is the largest recipient of FDI on the continent (20%), and is also the largest recipient of French FDI in sub-Saharan Africa. Portfolio investments, which are more volatile, account for only a small proportion of investments (23%), unlike in South Africa where they are predominant, making Nigeria much less vulnerable to sudden capital movements. Furthermore, these investments are not necessarily destined for the oil sector. Chinese FDI is particularly focused on telecommunications (where South African companies also have a strong presence), energy and transport, and Chinese construction companies are heavily involved in the country’s infrastructure development.
Without calling into question its seemingly inevitable emergence, uncertainties weigh on Nigeria. The population is composed of around 200 different ethnic groups and is plagued by interreligious tensions. Furthermore, corruption remains endemic and inequalities are extremely high. The success of the process of diversifying the economy, in which oil accounts for nearly 80% of exports, will be decisive in the medium term, particularly in view of the likely energy independence of the United States by 2025.
Mexico towards sustainable growth, in the wake of American resilience
Despite its inconsistent growth since the 2000s, Mexico has undeniable assets that make it impossible to ignore when discussing the « new emerging economies. » Like Indonesia and Nigeria, it has a large population of around 117 million. In addition, Mexico’s geographical position and membership of NAFTA make it a privileged partner of the United States, with the US market accounting for 78% of the country’s exports. Furthermore, remittances from Mexican migrants living in the United States are a substantial source of income, and the « maquiladoras, » free trade zones for parts assembly where many American companies are concentrated on the northern border, employ more than one million people.
This heavy dependence on the US economy can be detrimental when the latter deteriorates, as in 2009 when manufacturing activity, particularly in the automotive sector, collapsed. However, the notable economic recovery currently being experienced by the US economy, which is performing significantly better than all other advanced countries, suggests that Mexico’s link with the United States is a valuable asset. In 2011, automotive production in Mexico was already 30% higher than its pre-crisis level. The Mexican economy is relatively diversified, combining significant oil and gold resources with a solid industrial base (automotive production, telecommunications, beverages, construction materials). Finally, major structural reforms (« Pacto por Mexico ») have been carried out by President Nieto with the support of the main opposition parties. These reforms, which affect the labor market (particularly the informal sector), telecommunications, education, and taxation, should lead to sustainable and stable growth (around 3.5% with a population growth rate of 1%) in the medium term.
However, although Mexico has a diversified industrial base, it is currently relatively specialized in the assembly of imported parts. In addition, private credit supply is fairly low, at 25% of GDP, compared to Brazil (50%), Chile (90%), and China (over 100%). This reluctance on the part of Mexican banks, which are nevertheless solid, particularly affects SMEs and can be explained by the economic crisis of 1994-1995. The boom in private sector credit (+25% per year during this period) had exerted strong inflationary pressures and weakened the economy, which then entered into crisis following the sudden devaluation of the peso. Therefore, the move upmarket of Mexican production and the financing of investment will be important challenges for the country.
The dynamism of the Turkish private sector put to the test by the political crisis
The Fed’s announcements last May and the popular uprisings against Prime Minister Erdogan since June have shaken Turkey and also revealed the vulnerability of its currency, which has depreciated by more than 20% over the period. However, provided it does not become mired in a deep and lasting political crisis, the country has everything it needs to become one of the new emerging economies.
The Turkish private sector is extremely dynamic and diversified. The industrial sector is particularly competitive in the production of automobiles and durable consumer goods. Services, whose development is supported by strong domestic consumption, account for 62% of GDP, which is higher than China (43%), Russia (59%), or Mexico (60%). Turkey’s demographic vitality, with a quarter of its 76 million inhabitants under the age of 14, is a considerable asset for the country, whose middle class now represents nearly 60% of the population. Private investment and consumption, the drivers of Turkish growth, are largely financed by the Turkish banking sector, which has been stabilized since the 2002 reforms.
However, corporate debt exceeds 100% of GDP and will therefore be a variable to watch. In addition, the structurally high current account deficit, at around 7% of GDP, increases the country’s vulnerability to foreign financing. The volatility of foreign investment in Turkey, which is mainly short-term, was the cause of the lira’s depreciation in 2013. This current account deficit is due to the country’s energy dependence on Russian and Iranian gas and low household savings, with households either consuming or hoarding due to the size of the informal sector, estimated at a quarter of the economy. The outcome of the political crisis currently affecting the country will determine its economic prospects and, ultimately, its emergence in the coming years.
Colombia: a quiet emergence between natural resources, democracy, and the middle class
Rarely highlighted in comparison to the four countries discussed above, the Colombian economy, whose GDP is comparable to that of South Africa, nevertheless has considerable growth potential. This is all the more true given the progress made in recent months in the peace negotiations between the guerrillas and the Colombian authorities. One of the few countries to border two oceans, Colombia enjoys a privileged geographical position, which is particularly conducive to trade.
The country has significant agricultural resources (coffee, flowers, bananas), mineral resources (coal, gold, copper, iron, etc.) and, above all, oil resources (40% of its exports). Although smaller than other newly emerging countries, its population is relatively large (47 million inhabitants) and, above all, more than 70% of it belongs to the middle class. As in the other countries mentioned, consumption is dynamic and supports the development of the private sector, whose investments are largely financed by the banking system. Furthermore, FDI flows, known as « sustainable » investments, are particularly significant in Colombia, with two-thirds concentrated in the mining sector (oil), but also in sectors as diverse as automotive, cosmetics, textiles, and agribusiness. In this regard, the relative easing of tensions with the guerrillas should allow for a rebound in mining investment and oil production, which are particularly sensitive to the security situation in Colombia. Colombian oil fields, being located on land, are much more exposed to attacks than offshore fields.
However, the lack of infrastructure, both in terms of roads and ports, is likely to hamper the country’s emergence. With this in mind, in 2012 and 2013 the Colombian government launched several large-scale projects, with financial support from the Inter-American Development Bank (IBRD), to improve and develop its road and maritime network. In addition, the informal economy is very significant, estimated at 45% of GDP, which is much higher than in Turkey. However, the incentives for income declaration put in place by the authorities should quickly produce positive effects in this regard. The outcome of the peace negotiations between the guerrillas and the government and the evolution of the security situation are the major challenges for Colombia’s emergence.
Conclusion
Indonesia, Nigeria, Mexico, Turkey, and Colombia have considerable assets that should enable them to continue their emergence and take over from the BRICS countries in driving global growth. With their tremendous demographic potential, the development of their middle class, the dynamism of their private sector, and their exceptional natural resources, these countries have everything they need to become the giants of tomorrow.
However, a country’s emergence inevitably brings with it tensions, particularly political and social ones, which can destabilize an economy in the long term. In addition, economic diversification and moving upmarket will be necessary to make them less vulnerable to both commodity prices and the depletion of their resources, and to enable them to create more added value. Like most developing countries, these new emerging economies suffer from a lack of infrastructure and persistent governance problems, particularly high levels of corruption. Nevertheless, significant efforts have been made by the authorities to remedy this, as in Colombia and Mexico. The definitive emergence of these giants in the making therefore seems imminent.
Bibliography:
Kathryn Koch, » After the BRICS, here come the « Next Eleven , » June 2012
Laurence Daziano, » Emerging countries: after the BRICS, the rise of the BENIVMs , » February 2013
Céline Jeancourt-Galignani , » Colombia, a new El Dorado for investors, particularly French ones , » May 2011
Laurent Kretz, » Sub-Saharan Africa in 2013: what developments? »
Julien Moussavi and Samuel Delepierre, » After the BRICS, which other countries show promise? », BSI Economics, February 2014 .
