Written by: Gareth Gray
In 2007/2008, a financial crises rocked the worlds economies. Its effects are still lingering amongst many nations, with some tragic consequences and repurcussions. Most attribute the Financial crises to the US housing bubble of 2006. [1],[2] Trillions of Dollars were wiped off balance sheets, Housing foreclosures spiralled, major financial institutions were closed or bailed out, and some EU member countries – namely Greece – even needed rescuing from the EU.
This article looks at six developed countries heavily effected by the 2008 financial crises, and compares their GDP growth rates and FDI net inflows to the BRICS countries. The six developed countries chosen can be seen in the table below. The table shows GDP growth rates for each country per year between 2007 and 2012. The BRICS countries, comprising Brazil, Russia, India, China and South Africa are also tabled. The average growth rate for the two groups were calculated and presented in the table.
In 2007, the average GDP growth rate of the six developed countries was 2.75%, while the five BRICS countries grew at 8.84%. This difference in growth rates is depicted in figure 1.
One can see in figure 1 that a slight lag exists between the Developed and BRICS countries, in terms of the reversal of GDP growth rates. The BRICS countries seem to react to the Developed countries up or downswings. What does seem to remain, in respect of this short 6 year period is that the gap in growth rate between the BRICS and Developed countries. It remains close to a 6% margin in favour of the BRICS countries. It is an interesting observation. That through a major financial recession and subsequent road to recovery, the Emerging countries Growth rates seem to fall and rise somewhat in-sync with their more developed Western partners. This highlights just how interconnected nations have become.
Prior to the crises, FDI inflows were flowing in vast quantities into the six developed countries in the sample ($799 billion, 2007). Figure 2 shows the inflows into the developed countries over the 5 year period under review. When the Crises hit (in 2008), FDI net inflows started to decline. Italy saw a negative net flow of FDI out of its economy (-$24.91 billion). The biggest influence was seen in 2009, when each of the six developed countries recorded dramatically different FDI net inflows compared to the previous period. USA’s FDI net inflows decreased by more than half in 2009 (from $332 billion to $139 billion). In contrast to the previous year, and to the others in the sample, Italy saw a turnaround of its FDI net inflows. It bounced back to its pre-crises level of $40 billion in FDI net inflows for 2009. This might be attributed to a large FDI transaction that may have been in a very advanced stage when the crises hit.
Turning attention to the BRICS emerging markets in Figure 3, in 2007, FDI net inflows to these 5 countries was a healthy $287 billion. When the financial crises started to take effect in most of the developed nations during 2008, the emerging markets seemed to be unaffected at least initially. The BRICS 5 all had healthy GDP growth rates in 2008. They also saw an increase in FDI net inflows to their economies to the amount of roughly $63 billion. By the time 2009 came along, the recessionary effects of the 2008 financial crises had spilled over into the BRICS countries. Russia’s GDP shrunk by 7% in 2009. India and China’s GDP growth bucked the negative sentiment (growing by 8.48 and 9.2% respectively). While FDI net inflows in 2009 were lower than the previous period, the drop in flows of $110 billion was much less severe than the massive $484 billion reduction of FDI net inflows to the Developed countries. This resulted in FDI net inflows to the BRICS countries in 2009 marginally surpassing that of the 6 Developed countries in the sample ($240 billion compared to $233 billion).
2010 saw an improvement in FDI net inflows to the BRICS countries (most noteably in China, an increase of $112 billion above the previous period’s inflows). In 2010, China also surpassed Japan to become the second-largest economy behind the USA.
In the final period of the review (2012), FDI net inflows to the BRICS countries amounted to $410 billion. This is more than the $373 in the six Developed countries. With China leading the way, the four remaining BRICS countries all posted healthy FDI net inflows. Regarding the Developing countries, while the USA, Spain, France, and UK all recorded healthy FDI net inflows, Italy and Greece were lagging.
Looking ahead, The IMF projects a difficult couple of years ahead for the Developed countries, especially in Europe.[3] The EU looks set to remain in recession for the 2013 period, with France, Italy and Spain being the main drags on the region. The USA will see positive growth, albeit marginal in 2013. The growth prospects in BRICS look stable for 2013 and 2014. The IMF predicts China’s GDP growth rate to remain around 2012’s rate at 7.8% for the 2013 period. India’s growth looks set to rise from its 2012 level to 5.6%, and a healthy 6.3% in 2014.
In terms of FDI net inflows prospects going forward, the developed countries look set to continue feeling the pressure on FDI inflows in 2013 and perhaps into 2014. Until the EU recession ends, and confidence is restored in these countries, FDI projects might be kept on hold into these areas. On the other hand, The BRICS countries positive growth prospects look set to maintain this healthy appetite for FDI net inflows. Where there is economic growth, there is opportunity. Multinationals look set to capitalise on these opportunities in Emerging Markets for the foreseeable future.
[1] “Episode 06292007”. Bill Moyers Journal. June 29, 2007. PBS
[2] Lahart, Justin (December 24, 2007). “Egg Cracks Differ in Housing, Finance Shells”. The Wall Street Journal. Retrieved July 31, 2013.
Emerging Market FDI 