Emerging Markets: Stronger for Longer?


Asia’s emerging markets remain on edge over the U.S. Federal Reserve’s actions, damaging investor confidence from India to Indonesia. However, a new survey by the World Bank suggests that foreign direct investment (FDI) flows won’t be drying up anytime soon.

In its World Investment and Political Risk 2013 report released Thursday, the World Bank’s Multilateral Investment Guarantee Agency (MIGA) said macroeconomic instability and political risk ranked “neck and neck” as the top concerns for investors over the short and medium terms.

Somewhat counterintuitively, however, the MIGA-EIU Political Risk Survey 2013 found nearly half of those polled expected to increase their investments in developing countries over the year ahead, with 70 percent intending to increase their planned investments over the next three years.

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The BRICs dominated the ranks of current investments, with the survey of 459 mainly Western-based firms finding China the most popular at 41 percent, followed by India at 40 percent, Brazil at 29 percent, Indonesia with 21 percent and Russia and Malaysia at 20 percent.

However, the survey found that FDI flows to developing economies would see only a marginal 2 percent increase in 2013 to an estimated $617 billion – below the 2011 peak of $628 billion – and with the next increase not occurring until 2015.

“While there has been explosive FDI growth since the turn of the century – FDI was 337 percent higher in 2011 than in 2000 – the rebound of 2009-10 looks more distant. FDI now appears stable and at high levels, but with persistent economic concerns and stuttering growth, it does not look likely to return to the growth rates of the mid-2000s anytime soon,” the report said.

For the first time in the report’s five-year history, investors ranked “macroeconomic instability” as the key constraint against investing in developing economies over the medium term. Yet despite elevated perceptions of political and economic risk, the majority of respondents “have no plans to withdraw or cancel investments in developing markets,” it said.

East Asia on Top

The report noted that the East Asia and Pacific region was expected to continue outpacing the rest of the world in economic growth, with World Bank staff estimates predicting an average growth rate exceeding 7 percent a year through to 2016.

Nevertheless, a slowdown in the larger developing economies of Brazil, China and India has moderated the outlook, with countries having large domestic imbalances and current account deficits “particularly vulnerable.” Improved performance by high-income economies including Japan “may have some paradoxically negative consequences for developing ones” as investors shift funds back to major markets.

The East Asia and Pacific region is set to remain the largest recipient of FDI flows in the developing world, rising 2 percent in 2013 to an estimated $320 billion. China is forecast to remain the top destination despite seeing a 9 percent decline in 2012, although its economic slowdown could dampen prospects for 2014.

Nevertheless, improved prospects for high-income economies like Japan are set to see FDI flows rebounding to $345 billion in 2015, helped by better growth outlooks in Southeast Asian nations such as Laos and Myanmar.

As well as attracting investment, Brazil, China and India are forecast to continue extending their global reach with outflows of $68 billion in 2012, with other emerging outward investors including Indonesia and Malaysia.

Emerging Funds Drop

Yet despite the report’s cautious optimism, a separate survey by researcher EPFR Global has found that more than $20 billion has been withdrawn from emerging market funds over the past year amid nervousness over the Fed’s delayed start to tapering its $85 billion bond buying program.

According to EPFR, redemptions from such funds exceeded $20 billion in late November, while developed market funds received nearly $350 billion as investors searched for safe havens.

In a note to clients, Citigroup chief economist Willem Buiter said he expected emerging markets to continue growing in the year ahead, assuming no new political shocks from China, Europe or the United States, but the performance gap would shrink.

“Emerging market growth will continue to outpace advanced economy growth in 2014, as in every year since 1999. However, the growth gap in 2014 is likely to be the smallest since 2002 and [Citi] continue[s] to revise emerging market growth forecasts lower on balance,” he was quoted saying by the Australian Financial Review.

With the Fed not expected to start tapering until the first quarter of 2014, Asia’s emerging economies can look forward to a brighter new year – and possibly even better times to come from 2015.

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