‘Frontier’ markets bring all-new opportunities and challenges
Marcus Goncalves
Emerging markets have been on a tear over the past decade. BRICS countries — Brazil, Russia, India, China and South Africa — powered the high growth rate in those economies, despite volatility. But that growth has slowed in recent years, coming to a screeching halt in 2013, mainly due to fears of an economic slowdown in China and that the Federal Reserve would taper its bond-buyback program, limiting investments in emerging markets.
But another breed of countries, often called “frontier” markets due to their small, unpopular and illiquid economies, are prone for fast growth. Although these countries have not yet joined the global investment community, they have already joined the global economic community. Many have improved their economic and trading policies, strengthened their institutions, and, in many cases, hoarded substantial foreign exchange reserves.
But progress has not been across the board, as monetary and fiscal policies, imbalances in foreign direct investment, and stock vulnerabilities vary widely. This situation is aggravated by the fact that the media tend to emphasize news of conflicts, violence, drought, flood and human suffering in frontier markets, shifting public opinion against them.
Take Bangladesh, a country the size of Iowa. It's a moderate, secular and democratic society, and the world's seventh most populous nation, with 160 million people. Bangladesh has a big potential market for foreign investors, with a growing garment sector that provides steady, export-led economic growth, and a rapidly developing market-based economy. It's on the cusp of attaining lower-middle income status, thanks to a consistent average annual growth rate of 6 percent since the 1990s.
Egypt is another overlooked economy. While it has lately been politically unstable as a result of the political unrest that spread through the Middle East, it's the third largest economy in Africa, and remains an important emerging market in that region since it controls and draws significant revenue from the Suez Canal. But for Egypt's economy to pick up, much will depend on how the political process evolves.
The Philippines has shown economic progress in the past few years, and posted the highest growth rates in Asia for most of 2013. It weathered the global economic crises very well, thanks to significant progress in recent years on fiscal consolidation and financial sector reforms, which contributed to a marked turnaround in investor sentiment, fostering significant foreign direct investment. But its economy still has a large agricultural sector, though that's beginning to change.
Other frontier markets include Turkey and Vietnam.
There are significant opportunities in frontier markets, especially considering their solid capital bases, young labor pool, and improving productivity, particularly in Africa, where the sub-Saharan region will, eventually, overtake China and India. It's plausible to assume that Africa's economy will grow more than 14 times by 2050, when it could exceed current economic output of both the U.S. and the Eurozone. But we must consider the frontier markets' deepening economic ties to China, which makes it vulnerable to a slowing Chinese economy. Also, frontier markets are not without risks, as local politics are complex, and there are still several pockets of corruption and instability. Further, liquidity is scarce, transaction costs can be steep, and currency risk is real. There's also the risk of nationalization of industries.
Emerging markets are not in “crisis”; in fact, their growth outpaces that of the U.S., Europe and Japan. But there are many other emerging markets — such as the “frontier” states — that deserve attention.
Marcus Goncalves, associate professor of management at Nichols College in Dudley, is chair of the school's International Business Program.
WBJ Web Partners
Most Recent
Most Recent
0 Comments