Emerging Markets Face Challenges in 2013
Although emerging markets will show significantly higher growth in 2013 than most established markets, they still face increasing challenges, Yves Zlotowski, Coface chief economist said at the Coface Country Risk Conference in Paris last week.
The slow pace of reform in emerging markets, infrastructure deficiencies and governments’ inability to respond to middle class expectations has shown to be problematic. Unrest could potentially spread into some key emerging markets, he said.
“A fully expanding middle class is more demanding in terms of law, anti-corruption measures, freedom and transparency. Political institutions in emerging countries are being challenged to adapt to this new situation.”
“In South Africa, the potential for GDP growth could be negatively affected by the growing level of youth unemployment, lack of opportunities, social tensions and unrest in the labour market,” said Mr Zlotowski.
Society is changing and institutions need to adapt accordingly, but many governments are not addressing changing social needs.
This situation is being exacerbated where the middle class are voicing their opposition to corruption and poor governance.
But Coface sees significant growth potential in certain emerging markets. These are mainly outside of the Euro-area and include India, Philippines, Indonesia, Thailand, Malaysia and Korea.
On the other hand, Russia, Turkey, Romania, Ukraine, Croatia and Hungary are struggling to produce GDP growth above 4%.
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Coface estimates that Sub-Saharan Africa’s growth for 2012 was 4,4% and 5,2% for 2013. China’s estimated growth for 2012 is 7,7% rising to 8,5% for 2013. India’s estimated growth for 2012 is 5,5% increasing to 6,0%. Russia’s figures are estimated at 3,5% falling to 3,0% in 2013.
Mr Zlotowski said one of the factors contributing to growth in emerging markets is export trade openness, which is what Asian countries have attributed their success to.
When comparing the banking systems, he said there is a vast disparity in the exposure of banks when comparing central Europe, at around 70%, to emerging Asia, at around 11%. In the BRICS countries there has been a positive inflow of foreign direct investment (FDI) since 2005.
China currently has the highest emerging market ratio of bank funding to the domestic credit market. It has a credit to private sector/GDP ratio of 129%. South Africa is at an acceptable 69%. However, countries with a better bank lending ratio include Brazil 58%, India 51% and Russia at 46%.
Countries with a ratio too low include Argentina at 16% and Algeria at 15%, meaning that there is virtually no domestic credit lending by banks. One of the concerns of the Chinese market is the high level of credit in the economy.
Governance remains a major challenge for emerging markets. A report by the World Bank indicates that South Africa has the one of the highest ratings in government effectiveness in combatting corruption. Less effective emerging countries include China, India, Mexico and Russia.
