BRICS FDI net inflows bounce back

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. 

 In 2010, FDI net inflows recovered somewhat from the previous crises hit year, but remained only half of 2007’s FDI level. The subsequent 2 periods, saw more stability, but a general decrease from the previous year. The USA’s FDI net inflows seemed to be slipping over the period ($271 billion in 2010; $257 billion in 2011; and $205 billion in 2012).  This reduction in FDI projects value could be attributed to its higher unemployment rate, and general lack of confidence in the country’s future GDP growth prospects in the current economic climate.

 

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.   

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[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.

[3] IMF. World Economic Outlook Update. “Growing Pains”. July 09, 2013. Retrieved August 01, 2013.

‘Golden era ending for emerging markets’

An interesting read from Reuters. suggesting a more sombre outlook for the near future of Emerging Markets.

Reuters – A decade of improvement in emerging market credit ratings is coming to an end as higher borrowing costs and commodity price falls threaten to lay bare many countries’ failure to reform during the good times.

Between 2007 and 2012 emerging economies earned almost 200 rating upgrades from the three main agencies, nearly half of them promotions to the top ‘investment grade’ category.

Given the weight investors still assign to credit ratings, that was a huge driver for much of the $8 trillion or so that has flowed to emerging stock and bond markets since 2004.

But this week has brought confirmation of two things, both with profound implications for the developing world. First, US money-printing won’t last for ever and may end in 2014. Second, China’s economy is indeed cooling, and fast.

These factors made recent years good ones for emerging markets. Rock-bottom US interest rates and a resurgent China stoked commodity demand, bringing an exports bonanza, fast economic growth and a chance to borrow at record low yields.

Signs of a reversal sparked a worldwide sell-off in emerging markets this week, with over $6bn fleeing the sector.

That the golden years might be ending was made clear recently when Brazil, one of the main beneficiaries of China’s rise and the easy money tide, saw its outlook cut to negative by Standard & Poor’s, putting it in line for a downgrade.

Moody’s has since warned it might also cut Brazil’s rating outlook because of weak growth, rising debt and lack of reform.

Those worries apply to a number of developing countries, says Sébastien Barbé, head of emerging markets strategy at Credit Agricole, who does not expect any significant rises in average emerging market ratings soon.

“We have turned the page,” Barbé said. “In the past decade two factors were driving ratings. One was positive – better management, political stability and the rise of the middle class. The other was artificial, coming from excessive spending in developed countries and excessive savings in Asia.”

These imbalances added on average 1.5 percentage points a year to emerging markets’ growth, he estimates.

“Now that period has ended and it won’t come back. EM must change its business model, China has to invest less and consume more, Brazil has to consume less and save more … All this is going to be very hard to do,” Barbé added.

Data reflects the change in ratings momentum. Fitch, for example, upped six emerging sovereigns last year, versus 18 and 13 upgrades respectively in 2011 and 2010. Negative outlooks are now twice as common as positive, a sea change from late 2011.

The picture is similar for S&P, which upgraded 10 emerging ratings in 2012 versus 19 in 2011. So far this year it has raised four emerging market sovereigns while cutting seven.

The Fed and China have crystalised existing worries over slower growth and weaker balance sheets, which as Brazil and Turkey show, can lead to a rise in political risk.

Of the giant BRICS economies, India is in danger of losing its investment grade rating. South Africa also faces a downgrade while China saw its local debt rating cut this year.

Marie Cavanaugh, S&P’s managing director for sovereign ratings, said successful reforms in many Latin American and Asian countries had put them on a stronger footing. Some, such as Mexico, are actually now embracing long-delayed reform.

But the backdrop is changing, Cavanaugh warned: “Many emerging markets are dealing with shifts in cross-border capital flows and the challenges of economic rebalancing.”

Reforms

Big changes have occurred in emerging markets since the turn of the century that should mean they are more robust than in the crisis years of the late 1990s. These include the free float of many currencies, healthy public debt ratios, and trillions of dollars in central bank vaults.

J.P. Morgan notes that almost two-thirds of countries included its flagship emerging bond index, the EMBI Global, are now rated investment-grade, compared with just 2% when the index was launched in 1993.

Yet, after an initial reform spurt, relatively few countries have used the good times to improve infrastructure, labour markets and tax collection, or reduce reliance on commmodities.

David Hauner, head of EEMEA fixed income strategy at BofA-Merrill Lynch Global Research, says the 30 commodity exporters he tracks enjoyed a quadrupling of terms of trade since 2012.

But widely used indices measuring corruption or ease of business show only a third have adopted any meaningful reform.

“Commodity prices explain a good part of the improvement in these countries’ current account and fiscal balances,” he said.

As the tide of easy money ebbs, the high-spending growth model will become unfeasible for many. Hauner uses Russia as an example, noting the budget deficit excluding oil now equates to 10% of economic output – double its 2007 level.

The average EM current account balance stands at under 1%, a third of pre-crisis levels, Morgan Stanley says.

“You have to ask: are interest rates in line with financing needs?” Hauner said. “If they are lower, their policies are not sustainable: they are a gift of (US money printing).”

via 'Golden era ending for emerging markets'.

Share of the World’s GDP since 1820

This chart shows the resurgence of China and India’s economies, compared to the more developed nations of the USA and Europe. It highlights the significance of Investment oppurtunities in these fast growing emerging markets.