After the BRICS and MINT, which emerging-market economies will be tagged as leaders with a jazzy acronym?
Sixteen years ago, Goldman Sachs chief economist Jim O’Neill coined the acronym “BRIC” to designate the most promising of the world’s developing countries—Brazil, Russia, India and China. These mammoth, rapidly growing economies would be the next to join the ranks of developed nations, the prediction held.
Since then, the BRICS (with an “S” for South Africa, which joined the elite group in 2010) have held annual summits and set up their own currency reserve and payments systems. Together, these five nations account for more than 40% of the world’s population and 20% of global GDP.
Yet their economic trajectories have diverged. India is still developing rapidly, but China’s growth is decelerating as its population ages and incomes rise. And all economies reliant on natural resources have faltered since the commodities supercycle ended.
By 2011, the BRICS were old news, and a new crop of fast-growing economies showed promise, this time getting the catchy acronym MINT, for Mexico, Indonesia, Nigeria and Turkey. But again, the prediction that these would be star-performing economies was at best half right; as the commodities exporters (Indonesia and Nigeria) suffered from lower global prices, while Turkey and Mexico faced political turmoil. New challengers, powered by human capital rather than natural resources, are now catching up.
In 2017, how can we determine which countries hold the potential to form a new BRIC or MINT, joining an elite club of economies with the strong productivity and healthy growth that hold long-term promise?
Good demographics and a track record of rapid economic growth help. This year, the world’s fastest-growing economies are Ethiopia, Uzbekistan and Nepal, according to the World Bank. But size also matters: These gains come from a very low base, and none of these economies has the scale to be a serious “new BRIC” candidate. Then there are qualitative criteria.
“Among the characteristics needed to join the elite group are stable macroeconomic policies,” says Kate Phylaktis, director of the Emerging Markets Group at Cass Business School, City University of London, adding “prudent fiscal policy, low inflation and a stable currency, political stability, good-quality institutions, good infrastructure (especially transport) and above all, education.”
For portfolio investors in emerging-market currencies, bonds and securities—the scale of which dwarfs FDI and private-equity inputs—the quality of a country’s financial institutions and the depth and liquidity of its markets are most important. As both Louis Lau, San Diego–based EM portfolio coordinator and director of the Investments Group at Brandes Investment Partners, and Jay Jacobs, vice president and director of research at Global X Management, a New York–based provider of emerging-market and frontier-market exchange-traded funds, point out, inclusion in the influential MSCI Emerging Markets Index is a prerequisite for most such investors.
Still, such market-capitalization-weighted indexes can be backward looking. They tend to overweight countries that have already gone through rapid growth and are now decelerating as they reach middle-income status, countries whose performance is becoming more closely correlated to developed economies. When the MSCI EM index was launched in 1988, the 10 countries included had just 1% of world market capitalization. At the time, Jacobs notes, the original BRIC nations plus South Korea and Taiwan had an average 8.2% GDP growth rate. By the end of 2016, these six countries had a 73% weighting in the MSCI index (which today includes 24 countries representing about 10% of world market capitalization) but their rolling five-year average growth rate had fallen close to 3%—and in the last year, to 1.5% due to downturns in Brazil and Russia.
Thus, in the race to identify the next “elite” emerging and frontier markets, there are many pitfalls. “Emerging markets are a very heterogeneous group, much more so than developed markets,” observes James Butterfill, head of research and investment strategy at London-based global investment house ETF Securities. Jacobs sees traditional measures like GDP growth as “passive,” arguing that other characteristics such as growing populations, natural resource wealth and relatively low market-capitalization-to-GDP ratios are better indicators of longer-term potential.
This year’s pickup in developed economies is only beginning to feed through to developing countries. And, as Butterfill explains, “This time, emerging markets are likely to be far more resilient than previously when the Fed raises interest rates, as over the past five years they have had to reduce their fiscal deficits and are now much more insulated against a stronger dollar.” Phylaktis notes their growth depends more on rising volumes of trade than on portfolio capital flows, pointing out that “African countries were not that affected by the global financial crisis, because of their low exposure to capital flows. However, a key factor to economic growth is the mobilization of domestic savings.”
More-stable growth this time is often coupled with low valuations. While most investors apply historic inflation to evaluate EM bond yields so that they trade at a significant discount to developed markets, Butterfill notes that in many EM countries, “both core and headline inflation have been falling fast, and in some cases are now lower than in developed markets.” Rather than looking at purchasing managers’ or stock market indexes, which are only starting to recover, he sees the OECD’s composite leading indicators as a better guide to future growth.
Many countries in Central Europe, as well as China, South Korea and Taiwan, are still classified as “developing” but have actually reached middle-income status, with aging populations and slower long-term growth prospects. That said, China is set to contribute more to global GDP growth through 2020 than anyone else; although, as Phylaktis points out, it could be vulnerable to a financial crisis caused by excessive domestic borrowing.
China’s trajectory will have serious impacts on other developing economies’ prospects. “The big question is what happens to cut petroleum consumption,” says Lau. “With its push toward developing electric vehicles, China could be a big winner; but it is a cause of long-term concern for the oil-based economies among the BRICS and in the Middle East.”
Similarly, rising wages in China are encouraging an uptake in automation, which, combined with advances in artificial intelligence and robotics in developed countries, could disrupt global supply chains and lead to a “reshoring” of previously labor-intensive manufacturing.
That could diminish the “demographic dividend” claimed by India and many African countries with fast-growing and youthful populations. But India’s elite educational system equips it well to compete in an IT-driven world. For the short term, Butterfill notes that India is planning a big increase in infrastructure spending. Phylaktis also sees India outperforming, while acknowledging that “there are still problems in pushing through reforms.”
China and India are already economic powerhouses. “Of the other BRICS, commodity-driven countries like Russia and Brazil did not diversify their economies fast enough while oil prices rode high,” observes Lau. Poor governance contributed to South Africa’s fall from grace, though the global push toward electric vehicles may, according to Butterfill, “cause a constriction of supply of industrial metals, which could lead to a stronger rand.”
“Mexico’s solid track record places it in the next group of elite developing countries,” says Phylaktis. And although it is tightly connected to the US economy, Lau points out that if NAFTA is scrapped, WTO tariffs of 4% would kick in and the currency could depreciate to maintain competiveness. “Domestic consumption is still growing,” he adds, “and if investment from the US slows, the slack may be taken up by European and maybe later Chinese companies investing in Mexico.”
Of the other MINTs: Indonesia is in a stable recovery, but the importance of commodities like coal and palm oil means it will not return to previous growth levels soon; Nigeria’s economy remains overdependent on oil, though Phylaktis sees its “fast-growing population and labor force feeding faster economic growth over the medium term”; and while “Turkey has a lot of potential,” Lau says, “its political and economic management is questionable and casts a shadow over the economy.”
Prominent among the candidates for a “new BRIC” is Vietnam, though as Phylaktis points out, much of its growth comes through its close links with China, which could be tested by geopolitical tensions in the South China Sea. That also applies to the Philippines, which Lau notes has performed well, with “good future-growth prospects.”
Saudi Arabia is “attractive in the short term,” says Butterfill, “but a lot depends on the Saudi Aramco deal; and there are issues about transparency, debt levels and political certainty.” Further out, keeping its growing young population employed could stretch the nation’s budget if oil revenues don’t recover.
Argentina’s history of serial bankruptcies weighs against it, though its diversified economy, human capital and natural resources point to a brighter future. While it doesn’t quite make the MSCI EM index this year, Jacobs sees it “at the inflection point between frontier and emerging markets, its export-oriented economy now being assisted by the government’s return to fiscal responsibility and loosening up capital controls.”
Chile’s economy is smaller and was hard hit by falls in commodities markets, but Phylaktis notes it has pushed through a raft of reforms and with its educated workforce could soon join the elite group.
Pakistan, now one of the world’s fastest-growing economies, entered the MSCI benchmark last June. With its rapidly growing population and low asset valuations, Jacobs sees great potential—especially with a boost due to “huge infrastructure investment from China.”
So who will be the next EM thrusters? Jim O’Neill has admitted he called half of the original BRICs wrong. But to embrace the vogue for acronyms, how about the VAMPPS for the next wave of turbocharged economies? Vietnam, Argentina, Mexico, Pakistan, the Philippines and Saudi Arabia constitute a likely group, to be sure, but there are no guarantees.