2018: Emerging markets take control of their destiny

Tuesday, 30 January 2018

 

 

Watch David Wijeratne, Partner and Growth Markets Centre Leader, PwC, discuss the areas of growth in emerging markets in 2018

As we enter 2018, there is a general feeling of optimism about the world economy with both developed and emerging economies contributing to global growth. This sentiment is fueled by the benefits of structural reforms in key emerging markets (Mexico & India), strengthening commodity prices, growing and stable demand from developed markets (in particular Europe and Japan), Chinese fiscal stimulus and China’s Belt & Road Initiative.

However, this growth will be tempered by interest rate hikes in developed markets, led by the US, and inflationary pressures and leadership elections in certain key emerging economies. Protectionism and trade tensions, particularly with the US and China, and geopolitical tensions with North Korea, Iran and Qatar, will further affect global growth.

In parallel to this is the issue of productivity, which is a key area of improvement for all emerging economies. Nevertheless, it looks like the collective GDP for emerging markets is poised to rise modestly by 4.9%, thereby stimulating investor interest.

 Argentina

As we look around the world, Argentina appears well set to lead Latin American growth, following President Mauricio Macri’s success in the congressional elections in October 2017. His tax reforms aim to lower the cost of doing business and together with the relaxation of certain regulations, this will attract investment to a broad range of sectors.

Brazil

Having experienced a torrid few years, 2018 looks more positive for Brazil, with economic growth returning on the back of rebounding private consumption and strengthening exports, supported by business friendly policies, including Energy, Mining and Telecom reforms. Nevertheless, uncertainty still remains, due to the fact that an anti-reformist stance may return following the October presidential elections.

Mexico

Mexico is already seeing the benefits from its own reforms, especially in telecommunications and energy, which have been boosted by the recent rising global commodity prices. However, despite having a strong domestic consumer market, there are concerns over the North America Free Trade Agreement (NAFTA) renegotiations, which will likely prompt Mexico to rebalance its imports and exports based on its existing, non-US, trade agreements [i].

Central & Eastern Europe

Europe was a surprising area of moderate growth in 2017, with the Eastern bloc leading this through low unemployment rates and rising wages, which strengthened domestic consumption. And whilst growth looks likely to peak across the Eurozone in 2018, Poland, the Czech Republic and Hungary look set to continue Central Eastern Europe’s growth, through the benefits of the outsourcing trend of Western European companies and also increasing exports of cars and electronics. However, labour shortages will leave growth more dependent on productivity gains which are harder to come by.

Turkey

Further East, following a strong growth in 2017, the Turkish economy looks like it is heading towards slowing down, with inflation hitting a 13 year high at the end of 2017. This is compounded by rising short-term external debt and a widening current account deficit, due to a reduction in inbound capital, exacerbated by Turkey’s geopolitical stance against the West.

Russia

In Russia, recovering commodity prices will help, but only result in a slow level of growth, with real GDP growth set to remain well below historical highs. The March presidential elections look certain to maintain the status quo, and therefore concerns remain with regards the government’s influence on key sectors, its reliance on energy exports and the need to upskill the labour force.

Nigeria

On the African continent, Nigeria is experiencing a gradual recovery driven by the oil sector, which led the economy out of recession in 2017, and will likely drive economic growth in 2018, supported stronger global oil prices and power reforms which will unlock opportunities across sectors.

South Africa

Further south, uncertainty clouds South Africa, following President Zuma’s cabinet reshuffle, political fragmentation and previous policy inconsistency. This is fueled by distrust from the business community. All this will likely undermine the impact of reforms across the Labour, Power and state owned enterprises.

Saudi Arabia

In the Middle East¸ the rapid consolidation of power by the Crown Prince Mohammed bin Salman in Saudi Arabia has shifted the country’s consultative policy making model towards a more directive approach. This will likely propel his ambitious economic reforms and diversification program to reduce the Kingdom’s reliance on oil, signaling opportunities for companies, as government services such as airports and utilities get privatised. Most notable of these is the IPO of the state owned oil firm Saudi Aramco, however speculation surrounds as to whether this will occur in 2018.

India

On the subcontinent, India’s growth looks set to accelerate, as the negative impacts from demonetisation and the implementation of the new Goods and Services Tax begin to dissipate. Supplementing these two key reforms, there have been a series of initiatives taken to ease doing business and facilitate FDI from key investors such as Japan and South Korea. Next on the Modi agenda will be to gain a majority in the Rajya Sabha (Upper House), following the April  elections, which will facilitate his pursuit of more controversial, but needed reforms such as land acquisition.

China

Following President Xi Jinping’s consolidation of power, at last year’s 19th Party Congress, China will continue its globalisation agenda notably through the Belt & Road initiative, the pace of which will depend on how it addresses the concerns from neighbouring regions. Globalisation will be balanced against domestic needs, specifically managing provincial debt, cooling the housing market, addressing industrial surplus and containing inflation. On balance these measures look to support real GDP growth of 6 .5% in 2018. China will no doubt pursue these priorities with one eye on any US policies aimed at reducing its trade deficit with China.

Southeast Asia

And finally, Southeast Asia looks to maintain its strong economic growth story in 2018, benefiting from a global trade boom, whilst preparing itself for any effects from interest rate hikes in key investor markets such as the US and a series of elections in Malaysia, Thailand, and Indonesia. Overall, the basis of this growth looks to broaden beyond manufacturing and electronics, providing opportunities for investment from other sectors. Cambodia, Laos, Myanmar and Vietnam, will continue to represent the fastest growing economies, registering strong 6 - 8% GDP growth, thanks mainly to growing consumer demand, increasing FDI and enhanced intra-regional trade, whilst policy reforms and rising government infrastructure spending will drive growth in the larger economies of Indonesia, Malaysia and the Philippines. Many of these markets have strengthened their position by building foreign exchange reserves to protect themselves against capital flow volatility.

 

Conclusion

As we can see, it is not easy to generalize the fortunes of Emerging Markets in 2018, in particular due to the differing stages of their reforms, varying monetary policies and deficit levels across the growth economies of South America, Eastern Europe, Africa, the Middle East, the Subcontinent and Asia Pacific. These characteristics have created a situation that whilst Emerging Markets’ fortunes will never be completely decoupled from events in Developed Markets, 2018 does appear to be a year in which growth in emerging economies lies more within their control than ever before.  


Sources

[i] PwC Growth Markets Centre, “Going over the wall – The time has come for Mexico to establish its long term prosperity and redefine its role in global trade”, March 2017

Other sources include: Reuters, Financial Times, The Economist, Eurasia Group and Business Monitor International


 

David Wijeratne | PwC Growth Markets Centre - Partner and Growth Markets Leader
Website | [email protected]

Gagan Oberoi | PwC Growth Markets Centre 
Website | [email protected]
Neu Boon Ling| PwC Growth Markets Centre 
Website | [email protected]

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