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Rapid Growth Markets Forecast report Winter edition 2013 - E&Y

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    Rapid Growth Markets Forecast  Winter edition 2013 Rapid Growth Markets Forecast Winter edition 2013 Document Transcript

    • Growing BeyondRapid-growthmarketsErnst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • WelcomePublished in collaboration with2 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • A new year we predict that RGMs will underpin a recovery moving up the value chain by embracing new has dawned. in global growth from 3% in 2012 to 4.2% technologies and research and development. A year which in 2014. These are impressive — and much- Services, too, are becoming more important; will, hopefully, needed — numbers, but how can the recovery social security, health care and financial bear witness be sustained? services are just a few of the sectors that are to expanding The importance of rapidly growing middle- replete with opportunities. economies, classes as key to sustainable growth has Chinese policy-makers have played a key role increases in been well established. In addition, when in creating these conditions. Governments employment and examining the recent histories of countries in rapid-growth markets, much like theirAlexis Karklins- rising prosperity. which have enjoyed sustained rapid growth, counterparts in more mature economies, wantMarchay As we turn the four key lessons emerge. Political stability to apply what works internationally, learn fromCo-leader of the page on 2012,Ernst & Young Emerging and strong leadership is crucial, especially things that haven’t worked and then tailor the the world’sMarkets Center when augmented by a stable and prudent solutions to local circumstances. Addressing rapid-growth macroeconomic policy. High capital challenges such as urbanization and changing markets (RGMs) investment, particularly in infrastructure, is demographics, as well as strengthening will continue another key driver of growth; as is an open infrastructure, will contribute to stronger and to be pivotal to and balanced trade policy that can be adapted more sustainable growth. the hopes for sustainable global over time. Positive action in these four areas I hope you find the data and insights in thisrecovery. So what can we expect from will lead to competitive advantage and offers report useful. With the global economy2013? Is the fragility and turbulence countries the best route toward their shared remaining deeply scarred, the spotlight onset to continue or is economic revival ambition of rapid and sustainable growth. those countries that are generating growth isimminent? One country which has long enjoyed growth set to intensify even further. By offering timely of this nature is China. Largely immune to analyses of such economies, and providing ourWe have good news to report. This edition the worst of the economic headwinds arising view of how their progress affects the businessof Ernst & Young’s Rapid-Growth Markets from the global financial crisis, the Chinese landscape, we aim to help you navigate theForecast predicts that RGM growth will pick up economy — now the world’s second-largest — rapidly changing economic environment. Forfrom 4.7% in 2012 to 5.4% this year and 6.4% can look forward to even stronger growth more information on rapid-growth markets,in 2014. This data indicates that the lull in in 2013. We have increased our estimate of the business environment and local contacts,RGM expansion which occurred in 2012 was, growth in greater China, including mainland please visit www.ey.com/rapidgrowth.as hoped, a temporary phase rather than the China and Hong Kong, from 6.9% to 7.4% inbeginning of something more enduring. 2012, with 8.1% expected in 2013 and 8.8%Increasing trade among RGMs themselves, in 2014.together with monetary and fiscal measures These advances, which are underpinned byimplemented by Asian and Latin American factors such as lower interest rates and rapidpolicy-makers in 2012, has been key to this export growth, have important implicationsresurgence. Both regions are, as a result, for business. High infrastructure investmentparticularly well placed for expansion. In Asia, will prompt greater demand for steel, cementwe expect acceleration from 6.3% in 2012 and commodities, as well as increased regionalto 7.8% in 2014; and in Latin America, from development. And at the same time, China is2.6% in 2012 to 4.8% in 2014. Taken together,Contents 03 04 12 26 54 Highlights The nexus of Lessons learnt Forecast for Detailed tables success from past rapidly growing development countries paths Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 1
    • 2 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • HighlightsFour key lessons can be learnt from tightening of domestic policy and … and slightly lower oil prices willpast development paths weakness in key export markets such dampen activity in the Middle East as Europe. However, the new leadership• Rapid-growth markets (RGMs) striving has voiced its commitment to a shift • Growth in the three rapid-growth to continue upgrading their economies toward more sustainable and balanced markets of the Gulf Cooperation Council and increasing GDP per capita need growth. (GCC), Saudi Arabia, the United Arab to focus on four key growth catalysts: Emirates and Qatar, remains robust, political stability and strong leadership; • China’s recovery is expected to give although the pace began to slow in stable and prudent macroeconomic a boost to other Asian RGMs. There H2 2012. Growth is expected to slow policy; high capital investment; and are already clear signs that China’s a little further in 2013, as tensions in following an open, well-balanced and recent improvement is having a positive the Middle East moderate, allowing adaptive trade policy. impact on other RGMs and we expect oil prices to fall. But the region is the Asian RGMs to see their growth rate benefiting from expansionary fiscalThe rapid-growth markets are accelerate from 6.3% in 2012 to 7.8% in policy, a high absolute level of oil pricesexpected to lead a pickup in global 2014 as the recovery broadens. and rising oil output. Monetary policy ismomentum also accommodative. Enabling Latin America to benefit• In Q4 2012 encouraging signs started from higher demand for commodities China’s gradual move up the value to emerge that the more trade- chain will create opportunities for orientated RGMs, particularly those in • A strong pickup in the Latin American other RGMs Asia, were regaining momentum due RGMs is also anticipated. We expect to a combination of an improvement in the pace of growth to accelerate from • As China progresses up the value chain, intra-RGM trade and the impact of steps 2.6% in 2012 to 4.8% in 2014, driven it will create opportunities for lower taken earlier in 2012 to ease monetary by Brazil and Argentina and benefiting cost producers in Africa and Southeast and fiscal policy. from increased demand for commodities Asia, including Indonesia, Thailand and from emerging Asia. Mexico is expected Vietnam.• With both the Eurozone and Japan to benefit from its strong trade links ending 2012 in recession, the with the United States as import advanced economies are not expected demand improves in the US next year. to contribute to the pickup in global economic momentum in 2013. Only in But Eurozone uncertainty will the US are significant upside risks to continue to weigh on activity in growth visible. There, more progress emerging Europe … has been made in adjusting the balance sheets of banks and consumers and • However, weakness in the Eurozone will consequently monetary policy has been weigh on the European RGMs. Due to more effective. their strong trading and financial links with the relatively depressed Eurozone,• As expected, China’s economy appears the European RGMs are expected to lag to have landed softly. Evidence started behind their Latin American and Asian to emerge in Q4 2012 of the slowdown counterparts in 2013. Consequently, drawing to an end. We expect growth only a muted acceleration in the growth to pick up to 8.3% in 2013 and 9.0% in rate of emerging Europe is forecast for 2014. 2013, with a rise from 2.3% to 2.9% in 2013, before an acceleration to 4.2% in• China’s recent slowdown has been 2014. mainly cyclical, and due to an earlier Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 3
    • The nexus of successBack on track India’s expansion remains subdued, but today’s sub-trend growth should gain momentum during 2013 thanks to rising regional and USBusiness and political leaders alike may exhale a sigh of relief. The demand, and probably lower interest rates.slowdown of rapid-growth markets (RGMs) during 2012 seems certainto be merely a stumble from which they are now recovering. Signs of a In Latin America, Brazil is poised to accelerate after a disappointingpickup in the more trade-oriented RGMs, especially those in Asia and 2012 and Argentina has picked up a little. Meanwhile, Mexico isLatin America, emerged during the final quarter of last year. They are confirming its resilience as a regional export hub and is benefitingnow becoming the locomotives of a global recovery in which from a US recovery — which should help other Latin American tradingdeveloped economies will be the laggards. Those charged with partners too.shaping corporate strategy or public policy should look closely, and European RGMs, especially Poland and the Czech Republic, are heldask themselves: how must I realign my organization and its goals to back by Eurozone weakness. But overall, they should see modestbenefit from the improving outlook? growth acceleration from 2.3% in 2012 to 2.9% in 2013. Further east,Our new forecast is that RGM growth overall will accelerate from 4.7% Turkey is bouncing back, while Russia’s recovery is helped byin 2012 to 5.4% this year and 6.4% in 2014. This pickup will be consumer spending but dampened by weaker oil prices.underpinned by increased trade between RGMs and by the monetary We expect non-energy commodity prices to fall by 0.2% this year. And,and fiscal easing implemented in Asia and Latin America during 2012. as supply increases, oil prices are forecast to fall almost 6% to averageThe most powerful engine of growth in the next few years will be US$105.2 per barrel during 2013. This will help moderate RGMAsian RGMs. Among them, growth is expected to accelerate from inflation from 4.4% in 2012 to 4.1% in 2013.6.3% in 2012 to 7.8% in 2014. Simultaneously, growth in leading LatinAmerican RGMs will surge from a disappointing 2.6% in 2012 to 4.8% Nonetheless, the oil-exporting RGMs of the Gulf Cooperation Council —in 2014. Saudi Arabia, the United Arab Emirates and Qatar — will prove resilient, benefiting from increased trade with Asia and Latin America.Together, these markets will drive a resurgence in global growth — Stronger Asian demand for commodities should also assist Africanfrom 3% in 2012 to 4.2% in 2014. With feeble growth rates in the RGMs, notably Nigeria and Ghana.Eurozone, Japan and the UK likely to continue, the US is the onlydeveloped economy that could provide a fillip. But a boost from the US Riding the rebounddepends heavily on the nature of any long-term political deal to solveits deferred “fiscal cliff” challenge. Business leaders will need to tailor their expansion ambitions to the emerging opportunities. A sea-change is underway in the globalFaster growth sooner — or later business outlook. Uncertainties that clouded the global picture are fading as growth picks up, worries about the future of China and theJust as the pattern of global growth will be uneven, emerging regions Eurozone ease, and better US data accumulates. Meanwhile, investorwill expand at different paces. The slowdown in China, now the world’s interest is broadening beyond the BRICs (Brazil, Russia, India andsecond-largest economy, is ending. We have revised our estimate of China), triggering a wider spread of investment and growth.growth in greater China (embracing mainland China and Hong Kong)upwards from 6.9% to 7.4% for 2012, with 8.1% expected in 2013 and Three additional trends will capture attention. First is the mounting8.8% in 2014. As recovery broadens across Asia, we also anticipate attraction of consumer demand in emerging markets, where surgingfaster growth in Korea, Indonesia, Thailand and Malaysia. prosperity and expanding middle classes add to the breadth and scale4 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • of internal consumption. Second is the opportunity arising as Some existing industries that rely on low-cost labor are moving inland,investment — by the private and public sectors alike — reshapes away from coastal cities where wages have tripled in a decade. Thisemerging economies. And finally, there is the likely tendency of trend contributes to increased regional development.investment to flow to those economies where policy reform andstructural adjustment help accelerate growth. Such a trend creates Moving up-marketincentives for policy-makers to innovate in search of better Meanwhile, China is climbing the value chain. Seven strategicgovernance and more efficient service delivery, thereby triggering a industries are planned to generate 8% of GDP by 2015. These are:virtuous spiral. energy conservation and environmental protection; new-generation information technology; biotechnology; high-end equipmentChina, the driver manufacturing; new materials; new energy; and clean-energyEvidence that China is undergoing both a cyclical recovery and a vehicles.2successful structural transition is the cornerstone of our renewed Already, China is at the forefront of some technological development.optimism about the outlook for rapid-growth markets. Lower interest Incentivized Chinese companies sought more patents than their USrates, eased bank reserve requirements and lighter restrictions on peers in 2011. Competition with international rivals is beginning toproperty purchases all suggest that a hard landing has been avoided. occur at the forefront of technology, with a growing focus on researchMeanwhile, the sought-after rebalancing to substitute higher domestic and development — though talent shortages remain. As this trendconsumption for rapid export growth appears to be succeeding. develops, China-based companies will seek wider profit margins builtHistorically, investment has been the principal motor of Chinese on their ability to sell desirable, high-specification products rathergrowth. But in the first three quarters of 2012, consumption provided than simply offering the best value for money.55% of economic growth, according to the country’s National Bureau These factors will contribute to an economic transformation. Forof Statistics.1 example, we believe China’s share of the world pharmaceuticalsFueled by investment market will reach 15% in the next decade. And we expect its share of the global mechanical engineering market to rise to a third. WesternThe implications for business are far-reaching. As the December 2012 pharmaceutical firms, already wrestling with diminished new productopening of the 2,298km Beijing to Guangzhou high-speed rail line pipelines, generic competition and government pressure on pricing,confirms, China’s infrastructure investment remains high. The are seeking a bonanza among the newly-prosperous Chinese middlestimulus package unveiled in 2012 is equal to around 2% of GDP. It classes. But they will not have the field to themselves. Westerncenters upon road, rail, water and power infrastructure. Though the engineering leaders, meanwhile, will find themselves in an intensifyingprivate sector is being encouraged to assume a larger share of fixed race to innovate.investment, central and local government, together with state-ownedenterprises and banks, retain a key role. Better connections enableincreasing emphasis on regional development and affordable housing,for example. This underpins demand for steel, cement andcommodities, but also aids the spread of production, employment andconsumption to second-tier cities. 1 http://www.economist.com/blogs/freeexchange/2012/10/rebalancing-china 2 China unveils plan for new strategic industries, Chinadaily.com, 21 July 2012 — http://www.chinadaily.com.cn/business/2012-07/21/content_15605361.htm Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 5
    • Sector in focus: the role of governments in rapid-growth markets Sustainable economic growth is an ambition that unites policy- Identifying what works where makers across the world. Shifting demographics, urbanization and climate change, together with the ongoing financial crisis, have Governments in Russia, India and Brazil, for example, are all focused left a fast-evolving and challenging global environment for on preserving economic growth in times of significant slowdown, governments to navigate. creating jobs for millions of young people (India, for example, will have 500 million people under the age of 24 by 2020) and taking Even though it’s far from straightforward, sustainable growth can advantage of their natural resources. be achieved – as the examples below demonstrate. China, by contrast, has moved ahead. Its surging middle class The histories of countries which have enjoyed recent economic represents a huge new consumer base. And this trend, together with success demonstrate that political stability and strong leadership continuing urbanization, means it is well placed for ongoing and from government are key, especially when augmented by a stable significant growth. As a result, Chinese policy-makers are and prudent macroeconomic policy. concentrating on meeting the increasingly diverse needs of a very large population. These include rising demands for sophisticated High capital investment, particularly in infrastructure, is another health and social services. key driver of growth, as is an open and balanced trade policy that can be adapted over time. As shifts in capital from North to South Other emerging countries have alternative challenges to address. and from West to East grind relentlessly onward, positive action in These include constructing economic and social infrastructure, these four areas will lead to strong competitive advantage. creating markets, ensuring food security, strengthening education and managing the avoidance of crises. Still, emerging markets are not all alike. The role of government varies depending on the maturity of the market. It can act as In many of these countries, technology is set to drive growth and funder and provider of services where there is a tax base in place change. Examples such as mobile banking in Africa and the use of a or, alternatively, it might be the beneficiary of development funds Unique ID card in India are expected to become increasingly common and serve as the initiator or facilitator of private sector in the years ahead. And high-speed internet access is seen by many development. And in many instances, governments are the as a driver of entrepreneurship and the emergence of increasing creators of new market structures through regulation, legislation numbers of small businesses. and policy. In many instances, rapid-growth economies aim to adopt best Governments are in a position where they can set the conditions practice from mature markets, learn about what has worked and what for successful entrepreneurship by promoting education and has not worked, and then “leapfrog” to world class performance. culture; highlighting the important contribution of China is a prime example for this, with its government officials very entrepreneurship; facilitating easy establishment of new well informed about what works in other parts of the world. businesses; and offering grant programs for people who require funding for new businesses — ranging from micro credit to government grants programs. Policy-makers also play a major role in creating strong linkages with industry. After all, economic growth depends upon government and industry working together.6 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • The nexus of success Servicing and consuming Services will acquire greater importance in the Chinese economy. Public services — social security, health care and education — will expand, alongside financial services, tourism and retail. In some sectors, from running hospitals and business schools toGovernments in many African and South-East Asian countries insurance and lending, international firms are succeeding in exportingwork closely with International Development Partners such as the lessons and business models honed elsewhere.World Bank. As beneficiaries of development funds, they need to In consumer goods, meanwhile, a race is underway to build brandsbe clear about what is needed in their countries; ensure the and market share. And Chinese consumers are proving as fond of fizzyallocation of these funds in an accountable and transparent way; drinks, coffee, cakes and confectionary as their counterpartsfight against corruption; and demonstrate the achievement of elsewhere. The food and beverage sectors in particular offeroutcomes to the development partner. outstanding growth opportunities for companies with strong brands.Governments in emerging and mature markets alike are seeking With an eye to wider markets in decades to come, it is important tonew solutions to complex problems and striving to deliver public note that developing or acquiring brands and products that haveservices in the most efficient way possible. Ernst & Young works particular appeal to local tastes can give a competitive edge.closely with governments to meet these challenges. Visitwww.ey.com/government to learn more. Time to shift gear China’s recovery is just one element in an improving RGM economic outlook. After half a decade of heightened uncertainty in which companies have often hesitated to invest, we are edging into a moreUschi Schreiber predictable future — and that has massive implications. BusinessesGlobal Government & Public Sector Leader must start to extend their time horizons and focus much more on theuschi.schreiber@hk.ey.com future. As they plan with increasing confidence, they will be able to invest and hire. As the fog clears, volatility in financial markets should reduce, encouraging investors to return. Companies can at last shift gear. Those who have invested in RGMs can seize the chance to consolidate or improve their operations. They can accelerate their growth in leading markets and start to achieve long-awaited profits from existing investments. Investing more widely A second group of companies, that have yet to invest in RGMs, or who want to invest in new, often “‘second-tier” RGMs, can seek out opportunities more widely. Mid-sized European companies are recognizing the need to seek growth beyond Europe. They are beginning to ask where they should go, for example, in Latin America beyond Brazil; or whether they should be in Indonesia, Turkey, Taiwan, Thailand or further afield. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 7
    • As firms restructure BRIC operations, sometimes setting up in Many international companies are sitting on piles of cash. Looking“second-tier” RGMs, they are obliged to recast their supply chains, ahead, accelerating growth may prompt more acquisitions in RGMs,perhaps creating more regionalized structures. while expanding champions from these markets cast around for opportunities among accessible rivals in developed countries. ButSpreading the benefits outbound M&A originating in emerging markets is also a majorLow-cost Asian neighbors such as the Philippines, Vietnam and even component of transactions.Myanmar now compete energetically with inland China for labor- China looks abroadintensive industries displaced by rising wages in China’s coastal cities.These include textiles, footwear and electronic assembly. We expect Many Chinese manufacturers are investing in Vietnam, Bangladesh orIndonesia, Thailand and Vietnam to double their share of world Myanmar to escape double-digit annual wage growth in Chinesetextiles production to 10% over the next 25 years. coastal cities. High tech and capital goods enterprises are also buying brands, market share, operations and technology in the relativelyCompanies casting around for the next low-cost labor pool will open markets of Western Europe and the US. Others are setting upscrutinize secondary factors, including infrastructure, education and greenfield operations there.skills. Here, Asian countries are likely to remain better-placed thanmany of those in Africa, where labor may be cheap and plentiful, but The Chinese government has launched a “go global” strategy tosound education and transport infrastructure are often lacking. channel foreign exchange reserves into international investments. A study by Ernst & Young4 found that Chinese outbound foreign directThat said, African, Asian and Latin American suppliers of commodities investment has spread to 18,000 companies across 177 countries,should see the upside of accelerating economic growth in China. Such embracing assets totaling almost US$2t by the end of 2011. In thatbenefits are likely to range from increased purchases of cocoa to year, Chinese enterprises invested over US$10b in Europe (a threefoldenable rising chocolate consumption, to oil and other minerals, power, rise), making it their second top destination after Latin America. Themanufacturing and construction. Eurozone crisis has rendered some European assets more affordable.Buying opportunities Already, 350 of the 8,000 foreign businesses in the Netherlands — which is often seen as a gateway to Europe — are Chinese.Against this backdrop, more companies are using mergers andacquisitions to access, consolidate or extend their ability to benefit Today, many Chinese operations in Europe are relatively small andfrom growth in RGMs. But the traffic is not one way. Companies in devoted to services, sales and support, or logistics and distribution.RGMs clearly stepped up their drive to buy resources, technology and But they constitute a bridgehead from which to advance.expertise in 2012. Looking east, looking westM&A deals involving emerging markets totaled US$505.4b in 2012. China’s year-end uptick clearly foreshadows a growth recovery in twoThis is up 5% on 2011 and equal to 23.2% of global deals, according to of the other big RGM economies that slowed markedly in 2012: IndiaMergermarket.3 The rise was particularly strong in the fourth quarter, and Brazil. Each recognizes that improved infrastructure is essentialwhen deals involving BRIC countries rose 117%, year-on-year. to the next phase of growth, and seeks to accelerate it with privateOverall, China was involved in a quarter of deals involving BRIC capital. Yet the use of Public-Private Partnerships (PPP) in these bigcountries. The data shows that European companies are especially RGM champions offers contrasting choices for private infrastructureactive in buying businesses in emerging markets. This is evidence that investors.they are seeking opportunities beyond the stalled European economy.3 Mergermarket M&A Round-up for 2012, 2 January 2013. www.mergermarket. com4 China going global: the experiences of Chinese enterprises in the Netherlands. Ernst & Young.8 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • The nexus of successIndia underwent a massive boom in PPP in the past decade as burgeoning middle-class now supports a fast-growing flock of low-costcompanies built toll-roads, airports, power stations and other airlines.8 Meanwhile, the political opposition is contesting the outcomeinfrastructure. Since 2007, the private sector invested US$225b in of the country’s December 2012 elections not in the streets, but in itsIndian infrastructure.5 Many private sector partners used special Supreme Court.purpose vehicles to undertake design, build and operate (DBO)projects. But they often bumped up against delays and have found The combination of good governance and market liberalizationtheir investments slow to deliver profits, leaving these vehicles highly exemplified in Ghana is being replicated in many African statesleveraged. through the vehicle of regional economic integration, which helps to create a more attractive investment environment.A study by Ernst & Young found that translating investments intophysical infrastructure remains a challenge in India. It proposed Policy-makers everywhere need to examine what works, and whaturgent reforms to India’s PPP framework to get the country’s doesn’t, whilst simultaneously assessing their current priorities andinfrastructure program back on track.6 future challenges. Those who implement the right strategies will also attract the investments that are essential to enhancing prosperity.These troubled greenfield opportunities contrast with the brownfieldprivatizations being pursued in Brazil. In December, President Dilma As they sift investment options, shrewd business leaders will take aRousseff said her government would privatize airports at Rio de keen interest in market opening and trade policy, as well as politicalJaneiro and Belo Horizonte, along with 270 regional aerodromes, in a stability, and macroeconomic and demographic indicators.drive to attract US$9.2b of investment to these facilities.7 Today, it is clear that enduring economic growth stems from goodPart of the aim is to improve airport infrastructure before Brazil hosts governance and the simultaneous, symbiotic development of publicfootball’s FIFA World Cup in 2014 and the Olympics in 2016. Operating policy and private sector operators, cohabiting within a predictableand upgrading brownfield infrastructure of this sort may prove very framework.appealing to international infrastructure operators, offering more As RGMs, led by China, become the locomotives of global growth, thispredictable returns than greenfield alternatives. will be the nexus of RGM success.Propelling prosperity through smart policyAlongside high capital investment, especially in infrastructure, threefurther factors are required of states seeking to join the RGM league.These are political stability and strong leadership; stable and prudentmacroeconomic policy; and an open and well-balanced trade policy.The evidence from countries such as Korea, Ghana and Botswanademonstrates the importance of these factors in facilitating economictake-off. With GDP growth of 14.4% in 2011 and 7.1% expected for2012, Ghana is regarded as a beacon of economic and politicalstability in sub-Saharan Africa. As a member of the EconomicCommunity of West African States (ECOWAS), Ghana is among theAfrican countries active in regional economic integration. Its5 Infrastructure in India — RIPPP: The Economist, 15 December 2012.6 India Infrastructure Summit 2012 — Accelerating Implementation of Infrastructure Projects, Ernst & Young.7 Brazil plans to privatise Rio airport — Financial Times, 20 December 2012.8 Ghana’s modest middle takes to the skies — Financial Times, 28 December 2012. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 9
    • Box 1Regional integration in AfricaBreaking down business barriers in Africa To start a business in the EAC now requires an average of 10 procedures, and costs an average 55% of income per capita —A continent-wide drive to enhance economic integration is starting markedly better than in 2005.to erode some of the well-established difficulties of doing businessin Africa. The EAC already intends to create a tripartite 26-nation Free Trade Area with two regional integration zones under construction whoseLast year, leaders of the African Union endorsed a plan to create a membership overlaps that of the EAC. The Common Market forContinental Free Trade Area (CFTA) by 2017. They see this as a Eastern and Southern Africa (COMESA) includes 19 states totallingkey step in their strategy of boosting trade within Africa. Oxford more than 400 million people, whilst the Southern AfricanEconomics trade forecasts expect exports within sub-Saharan Development Community (SADC) counts South Africa, a leadingAfrica to double over the next ten years. economy, among its 15 more geographically-focused members.Expectations that economic growth in sub-Saharan Africa will In West Africa, meanwhile, the Economic Community of Westerncontinue to mirror the 5%-plus achieved in the past decade are African States (ECOWAS) brings together 16 countries, includingheightening investor interest. But the fragmentation of national francophone West African countries that share a common currency,markets behind high tariff and non-tariff barriers deters local and the CFA franc, with Anglophone Nigeria and Ghana.foreign direct investors alike. Building a common market like thatof the European Union would transform the picture. Governments participating in these organizations are seeking not only to break down barriers to trade, but to develop and implementDelivering on the African Union’s ambitious timetable for a common standards and rules, and to integrate infrastructure projects.pan-African market may prove difficult. Yet regional economic By promoting better governance, they help make it easier to dointegration is already beginning to enhance the attractions of business. They also create opportunities for investors, for example ininvesting in some regions of Africa. construction of infrastructure. Improving power supply and transport,Four emerging regional markets stand out. The East African for instance, also makes new kinds of business possible in newCommunity (EAC) launched a customs union in 2005 and its locations.common market in 2010, and is increasingly regarded as a beacon. Reducing tariffs in Africa is a thorny issue. But by bringing statesIt embraces Burundi, Kenya, Rwanda, Tanzania and Uganda, together, regional integration can facilitate international trade deals,offering a potential market of 142 million people with a combined with the European Union for example.GDP of US$86.1b, according to Oxford Economics. Completing a pan-African single market will take decades. ButA series of programs are underway within the EAC to promote businesses with African ambitions should be tracking the goals andentrepreneurship and facilitate trade. They include plans to timetables of regional integration in their target markets.develop better international port, road and rail connections. Anindependent study9 concluded that, in the past six years, the EACimplemented 11 trade facilitation reforms in areas such aselectronic submission of documents and joint border inspection.9 Doing Business in the East African Community 2012 — www.doingbusiness.org — 11 April 201210 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • The nexus of successLearn more about investing in the African marketForeign direct investment (FDI) into Africa has increasedsignificantly over the last decade and this trend is set to continue.As highlighted in Building bridges: 2012 Africa attractivenesssurvey, regional integration is critical to accelerating andsustainable growth. Creating larger markets with greater criticalmass will not only enhance the African investment proposition, it isalso the only way for Africa to compete effectively in the globaleconomy.Bridging the infrastructure gap will be a key enabler of regionalintegration, growth and development. It also remains a keychallenge and opportunity for investors.However, the decision on where to invest in this vast and diversecontinent can prove challenging.Our Africa by numbers: Assessing market attractiveness in Africareport outlines the risk profile of 17 of the most popular countriesfor investment in Africa and balances them against the rewardsthat are on offer.Download your copy at www.ey.com Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 11
    • Lessons learnt from pastdevelopment pathsRGMs can approach the future having learnt lessons This process is expected to continue over the next couple of years,from the past enabling growth in the Asian RGMs to accelerate from 6.3% in 2012 to 7.8% in 2014, while growth in the Latin American RGMs is forecast toAs RGMs strive to continue upgrading their economies and increasing rise from 2.6% in 2012 to 4.8% in 2014. In contrast, the growth in theGDP per capita, there are a number of lessons to be learned from Middle Eastern RGMs is expected to slow a little as tensions in thecountries that have enjoyed sustained rapid growth in the past. Four region moderate, allowing oil prices to fall. The weakness of thekey growth catalysts emerge: political stability and strong leadership; Eurozone economy will limit the pace of recovery in the easternstable and prudent macroeconomic policy; high capital investment, European RGMs. Nevertheless, overall we expect RGM growth toparticularly directed at infrastructure, education and health care; and accelerate from 4.7% in 2012 to 5.4% in 2013 and then 6.4% in 2014.following an open and well-balanced trade policy and adapting it over In other words, 2012’s slowdown was just a soft patch from which thetime. RGMs are now recovering.For example, Korea’s path to high income status since 1980 shows Figure 1that trade liberalization is an important growth catalyst because it G7 and emerging markets: GDP growthincreases the level of competition industries face. This raises % yearefficiency, spurs innovation and increases productivity growth. All the 10 ForecastRGMs have reduced tariff barriers over the last 20 years, openingtheir economies to trade and the sharing of knowledge. But policies 8 Emerging marketstoward trade have varied widely across regions and analysis shows 6that it is important to plot a careful balance between export promotionand import substitution. 4Meanwhile, in sub-Saharan Africa, political stability and stronger 2leadership have enabled some countries to move onto a much firmer 0footing and enjoy sustained rapid growth. Efforts to achieve political -2stability and set a strong and stable macroeconomic policy havehelped attract foreign direct investment (FDI) to some countries in the -4region enabling them to enjoy sustained rapid growth. G7 -6RGMs to lead an improvement in global momentum in -82013 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015We expect the pace of global growth, on the basis of purchasing power Source: Oxford Economics.parity (PPP), to accelerate from 3.0% in 2012 to 3.5% in 2013 andthen 4.2% in 2014. The initial phase of this acceleration will be driven The pace of growth in advanced economies is notby the RGMs rather than the major advanced economies. In Q4 2012, expected to improve until 2014encouraging signs started to emerge that the more trade-orientated Unlike the RGMs, the developed economies are not expected toRGMs, particularly those in Asia and Latin America, were regaining contribute initially to the pickup in global economic momentum: inmomentum due to a combination of an improvement in intra-RGM 2013, growth of just 1.3% is forecast, unchanged from 2012. It willtrade and the impact of steps taken earlier in 2012 to ease monetary not be until 2014 that the advanced economies gain furtherand fiscal policy. momentum, with growth expected to nearly double to 2.5%, as Japan and the Eurozone pull slowly out of recession. Both Japan and the Eurozone ended 2012 in recession and recovery in 2013 is expected12 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • to be weak and heavily dependent on the anticipated upturn in world … supporting our forecast of acceleration in 2013 …trade to offset subdued domestic demand. Much the same is true ofthe UK. Monetary policy in developed countries faces an uphill Reflecting the more promising recent data, our 2012 GDP estimatestruggle if it is to offset the fiscal squeeze in Europe and force down for mainland China and Hong Kong has been revised up from 6.9% tothe value of the yen in Japan. 7.4%. We expect growth in China to accelerate to 8.3% in 2013, before reaching 9.0% in 2014. Some of that acceleration comes from anOnly in the US are significant upside risks to growth visible. More improvement in domestic demand as earlier stimuli feed through.progress has been made there in adjusting the balance sheets of However, most of the acceleration is due to a forecast increase inbanks and consumers than in the UK and Europe, and consequently Chinese export growth from 2.5% in 2012 to 8.7% in 2014, as themonetary policy has been more effective at stimulating growth. improvement in sales seen in recent months to the Association ofLending growth is stronger than in the UK and Eurozone and the Southeast Asian Nations (ASEAN) and the US continues. Ourhousing market is showing clear signs of recovery. This will help boost forecasts for bilateral trade over the next 10 years indicate that tradeconstruction output and consumer spending via wealth effects. Other between the emerging Asian economies will continue to increase, asfactors in the US economy’s favor include its high degree of demand rises for more sophisticated consumer products from theinternational competitiveness and the “shale gas revolution” that is expanding middle classes.making the US less dependent on others for energy. Figure 2With less upward pressure from commodity prices, China: manufacturing Purchasing Managers’ Index (PMI)inflation will remain controlled 50 = expansion/contraction line 60The relatively weak global growth outlook will mean global non-fuelcommodity prices fall by 0.2% in 2013. Moreover, oil prices areforecast to fall by nearly 6% during 2013 due to new supply and a 55declining risk premium, assuming that geopolitical tensions ease. As aresult, despite monetary policy remaining loose, 2013 is expected tosee RGM inflation drop a little from 4.4% in 2012 to 4.1% in 2013. 50A soft landing for China’s economy … 45In our October 2012 forecast, we predicted that China’s slowdowncould run its course before the end of the year. Evidence has now 40started to emerge that China’s slowdown is indeed coming to an end,with Q3 GDP up 7.4% year-on-year. This implies that the economyexpanded at a seasonally adjusted annualized rate of 9.1%, the 35strongest pace since Q3 2011. The most recent readings for industrial 2005 2006 2007 2008 2009 2010 2011 2012output, investment and retail sales have all picked up, suggesting that Source: China Federation of Logistics and Purchasing; Markit.the improvement continued in Q4 2012. But import values rose by just2.8% year-on-year in Q4, compared with a rise of 24.9% in 2011. Thisis a reminder that while the economy is no longer slowing, the pace ofthe recovery will be modest. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 13
    • Box 2China’s recent slowdown: cyclical or structural?China’s slowdown was driven by sharply lower export demand, Figure 4particularly from Europe but also from the US and the rest of Asia. China: bank lending and property pricesWe now have 11 months of trade data for 2012 which shows annual % annual growth, three-month moving averageexport growth slowed from 21.1% in the first 11 months of 2011 to 35just 7.3% in the same period of 2012. And the chart below shows that 30 Bank loansalthough the drop in demand was worst in the EU, demand alsoslowed notably in the US and the rest of Asia. 25Figure 3 20China: export growth 15 % annual growth 30 10 2011 2012 5 25 0 20 -5 Property prices 15 -10 10 2000 2002 2004 2006 2008 2010 2012 Source: Oxford Economics; Haver Analytics. 5 The authorities spent substantially less protecting the economy from 0 the global downturn in 2012 than they did in 2008-09. In 2012 the Government spent around 2% of GDP on stimulus to protect the -5 economy from the worst of the global downturn. The stimulus of-10 more than 10% of GDP in 2008-09 boosted imports so much that the World Rest of Asia EU US current account surplus narrowed and the reliance on investment, and particularly on state-led investment, represented a backwardSource: Oxford Economics; CEIC. step on the road to economic rebalancing. A key feature of the 12thThe slowdown in 2012 was also driven by the substantial tightening five-year plan (2011 to 2015) is for China to make substantialof monetary policy in 2010 and 2011. China’s central bank raised the progress in rebalancing the economy toward consumption-led growth,key prime lending rate from 5.31% in September 2010 to 6.56% by so the smaller state response to the 2011-12 downturn suggests theJuly 2011, before cutting it back to 6% between June and Government is keen to reduce the role of the state. This year’sAugust 2012 to boost domestic activity. The bank raised the ratio of stimulus, even at 2% of GDP was still quite sizable, however.reserves that banks are obliged to hold from 15.5% at the end of2009 to 21.5% by November 2011. It was cut to 20% in 2012. Asfigure 4 shows, the significant monetary tightening in 2010 and 2011had the desired effect of curbing growth of property prices and banklending, both of which had previously been surging. This has sharplyreduced the risk of a much harder landing for China.14 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsNew leadership in China, but similar policies? investment. In 2007, before the financial crisis, short-term projects attracted half of all lending; now their share has fallen to 40%. ThisChina’s new leader, Xi Jinping, who will take over in March, has just may suggest that more funding is finding its way to state-controlledbeen appointed both General Secretary of the Communist Party and firms than to private companies.head of the army. But whether the end of the Communist Party’s18th Congress marks the start of a smooth transition to a more Doubling real GDP by 2020 is targetedbalanced economy is less certain. The leadership changes do not necessarily suggest an early shift inA reduction of the Politburo Standing Committee from nine to seven the direction of economic policy.members may make it easier to achieve consensus. And the man whowill become prime minister in March, Li Keqiang, may be in favor of We will have to wait until the next five-year plan to see how thereform: earlier this year he signed off a controversial World Bank authorities decide to rebalance the economy and to reform keyreport recommending measures to curb the power of state-owned sectors. In his farewell address, the outgoing president stated thatcompanies and to encourage private investment. But of the three China would aim to double real GDP (and income) between 2010 andcandidates for appointment to the committee that were known as 2020. Starting with growth of 7.5% in 2012, the economy would needkeen reformers, two of them didn’t make it onto the committee and to expand by 6.9% a year for the rest of the decade to achieve this,the third was given a non-economic role heading anti-corruption. The significantly below growth rates over the previous 10 years.party secretary of Tianjin province, who is known to favor state Population aging will also constrain growth.control of economic activity, was appointed to the committee. But what will 7% growth mean for the labor market?Concerns that the recovery has so far been quite state But it is interesting to look at what this implies for the labor market,led given that a key policy consideration is the need to keep unemployment low. The answer depends in part on what happens toMuch of the improvement so far appears to be state led, raising doubt productivity. Productivity growth could slow as the economy isabout the authorities’ commitment to reforms that would promote rebalanced away from investment toward consumption and services.the rebalancing of the economy. A statement from National Bureau One of the drivers of whole-economy productivity growth has beenof Statistics of China that accompanied the release of November the transfer of workers from agriculture to industry, which is a more2012’s manufacturing PMI indicated that, while the pace of growth productive activity.expanded for a third successive month for large (and thereforepredominantly state-controlled) firms, smaller firms saw a But China is a very heterogeneous economy, with its regions varyingretrenchment, with the smallest companies experiencing the steepest substantially in terms of incomes, structure and development. Whiledeclines. The HSBC PMI for services also dropped back in November on average whole-economy productivity growth may slow, many(though it remained above 50), suggesting that private activity is still regions are still moving from producing largely primary goods tosubdued. New services business rose at its slowest pace in three producing secondary goods — so these regions will still see largemonths. productivity gains.Annual bank lending growth also slowed in November for the secondsuccessive month. With little further detail available, it is hard to tellwhether this merely reflects a slowdown in property-related lending(as the heat has been taken out of house price rises this year) orwhether poor access to credit is holding back private sector Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 15
    • Box 2China’s recent slowdown: cyclical or structural? (continued)Figure 5 Figure 6China: employment by sector China: productivity by sector Millions Millions RmB 1990 prices830 450 4,500780 Primary Total 4,000 (right-hand side) (left-hand side) 400730 3,500680 350 3,000630 300 2,500580 Secondary Tertiary 2,000 Total 250530 (right-hand side) 1,500480 200 1,000 Tertiary430 Secondary (right-hand side) 150 Primary380 500330 100 0 1990 1994 1998 2002 2006 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: CEIC. Source: Oxford Economics; CEIC.If part of the rebalancing effort over the next 10 years attracts The policy of rebalancing growth toward the consumer meansworkers from agriculture and industry to the services sector (initially switching some spending from investment to consumption. Asin the coastal regions and the cities), this productivity bonanza will investment is one of the key drivers of productivity, lower investmentfade because, as figure 6 shows, the tertiary sector is about half as rates will result in slower productivity growth.productive as the secondary sector. Productivity may also be held If China can continue to boost its productivity at current rates, itback by the slow pace of implementing economic reforms to aid would have to more than double GDP between 2010 and 2020 inentrepreneurship and innovation. So growth rates of around 7% may order to maintain low unemployment. But there are good reasons tobe enough to maintain a stable labor market. think this may not be realistic. Slower productivity growth, resulting from the impact of rebalancing and the slow pace of economic reform to aid entrepreneurship and innovation, suggests that medium-term growth is also likely to slow toward 7% a year.16 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsIndia’s full potential is yet to be realized infrastructure are addressed. The Government has taken some steps in the right direction in the past year, but its recent track record is notGrowth in India remains subdued. GDP growth slowed from 5.5% on promising. To encourage more FDI, this strategy must be continuedthe year in Q2 2012 to 5.3% on the year in Q3 — the weakest pace in and expanded further to enable knowledge sharing and to upgrade thethree and a half years. Industrial production was up just 0.5% on the technical capacity of the economy.year in Q3, while the composite Purchasing Managers’ Index (PMI) hasbeen somewhat volatile in recent months. Household spending is still China’s soft landing is expected to give a boost to otherbeing held back by high inflation and the investment climate remains Asian RGMs …challenging. Although the reforms recently announced by the IndianGovernment will go some way to improving the economic There are already clear signs that China’s recovery after a successfulenvironment, it remains to be seen whether they will be fully soft landing is having a positive impact on the other developingimplemented by the states. markets. We expect the Asian RGMs to see their growth rate accelerate from 6.3% in 2012 to 7.8% in 2014 as the recoveryWe expect the economy to grow by just 5.4% in 2012, the slowest broadens and trade across Asia improves.pace since 2002, and a downward revision from the 5.6% we predictedin our October forecast. Looking ahead, some of the headwinds that … and Korea is already showing positive signs …held back growth in 2012 are expected to ease in H2 2013. Inflationhas already begun to stabilize, and the recent increase in diesel prices Korean GDP increased by just 0.1% on the quarter in Q3, as activityand impact of the Indian Rupee’s depreciation in H1 2012 will drop was held back by uncertainty about the state of the global economy,away in 2013. External demand is also forecast to pick up, driven by prompting firms to cut investment and run down stocks. But the moreaccelerating growth in the US and China. As a result, we expect encouraging news from China seems to be having a positive impact ongrowth to accelerate from 5.4% in 2012 to 6.0% in 2013. With growth the Korean economy, suggesting that the low point has now beenstill below trend and inflationary pressures set to fall, we expect the passed. Export growth has moved back into positive territory,policy interest rate to be cut over the course of the next two years. industrial output rose in both September and October, and the manufacturing PMI picked up in October and November. We expect anBut promising FDI reforms should help the Indian improvement in the pace of economic growth over the next two years,economy upgrade from 3.3% in 2013 to 5% in 2014, driven mainly by exports and business investment. Consumer spending growth is expected toChina has made greater progress than India since 1980, when the two remain fairly modest, with households held back by overhangingcountries had similar levels of per capita GDP. Analyzing the reasons debts.for China’s success and India’s relative failure can help to identifywhich countries are likely to grow fastest in the next few years and … building on 20 years of successful developmenttherefore offer the best investment opportunities. While China has Over the past 20 years Korea has grown rapidly. GDP per capita hasgrown rapidly since 1980, the Indian economy stagnated in the 1980s increased from just 20% of US levels in 1982 to 65% last year, and nowand the early 1990s as its inward-looking growth model prevented it amounts to US$33,079. This was achieved through a sustainedfrom taking full advantage of world trade. Events reached crisis-point increase in labor productivity, driven by a commitment to upgradein 1991 when India, on the brink of economic collapse, was bailed out technical capacity and to improve education and infrastructure.by the International Monetary Fund (IMF). Spending on research and development (R&D) shot up from theMore economic liberalization imposed by the IMF in the 1990s helped equivalent of 0.5% of GDP in the mid-1960s to over 2% by 1995.the Indian economy to chalk up five consecutive years of GDP growth, Chiefly fuelled by the private sector, R&D spending has continued towhich exceeded 7% between 2003 and 2007, and toward the end of grow. It reached 3.4% of GDP in 2008 and is now ahead of spending inthat period the economy was expanding by over 9% a year. Moreover, the Organization for Economic Co-operation and Development (OECD)investment rose markedly as a proportion of GDP from 23.2% in 2002 nations.to 30% last year. This suggests that India could now sustain a highergrowth rate, at least if the constraints imposed by its inadequate Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 17
    • Figure 7 Figure 8Research and development spending Total patent applications Thousands 2009 600 Egypt 1995 Colombia Or closest available year Mexico 500 Malaysia Europe Poland Japan 400 Turkey India 300 South Africa Brazil China and Russia 200 Hong Kong KoreaCzech Republic North America China 100 OECD India Korea % of GDP 0 0 1 2 3 4 1980 1984 1988 1992 1996 2000 2004 2008 2011Source: World Bank. Source: World Intellectual Property Organization.Korean companies were initially encouraged to import technologies Human capital is critical to rapid growth. Last year, China had nearlyand expertise so they could master new industries. Later, as they 500,000 postgraduate students, more than five times as many as adeveloped indigenous expertise, they pursued a more sophisticated decade ago, illustrating the commitment to education in China. Andimport-substitution strategy, replacing imported inputs with most return to use their skills in China — over 70%, according to adomestically produced ones. The targeted industries received recent government report. From the 1960s onwards, India has alsopreferential government treatment, tax incentives and greater access invested heavily in education and it continues to spend much moreto capital. Critically, the success of each industry was judged on its heavily per person on university education than other emergingcompetitiveness in the global market and its ability to build market nations. Large numbers of technical graduates meant India was ideallyshare. placed to benefit from the ICT revolution. India’s software and medical tourism sectors have grown rapidly, giving India a strong foothold in aChina is also upgrading but must balance many vastly number of high-tech industries. But China and India still have a longdiffering regions way to go in developing research and technical capabilities. Though student numbers are rising fast, the proportion of the populationChina is well on the way to upgrading its economy to achieve higher entering higher education is low compared with the OECD.income levels. As in Korea, the authorities have made good use of FDIin order to expand the country’s technical capacity, particularly fromJapan. As the chart below shows, in 2011 the World IntellectualProperty Organization reported that, for the first time, companiesregistered in mainland China and Hong Kong applied for more patentson new products or services than companies in North America. And97.5% of the applications from greater China came from the mainland.18 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsChina’s heterogeneity is enormous and this provides an A strong pickup in the Latin American RGMs isunprecedented challenge for the Government. While the coastal areas anticipatedare losing competitive advantage in low-wage assembly, many ruralareas are still building capabilities in these industries. Decentralization We expect the pace of growth in the Latin American RGMs tois crucial to managing this dilemma. Cities and provinces must be accelerate from 2.6% in 2012 to 3.8% in 2013 and 4.8% in 2014. Thisgiven the ability to make their own decisions, supported by the center, growth will be chiefly driven by Brazil and Argentina. Mexico is alsoenabling different cities and regions to compete against each other for expected to benefit from its strong trade links with the US, as importinvestment. Certain areas, for example nationwide infrastructure, demand in the US is forecast to pick up in 2013.such as railways, benefit from being handled at a central level, but Figure 9region-specific decisions are better handled at a state level. Indonesia Brazil: industrial production and real saleshas been particularly successful at decentralizing policy. Indonesia’s 2006 = 100capital is growing at a similar rate to the rest of the country. This is in 130contrast to nearby Malaysia and Thailand, whose capital cities tend to Manufacturing real salesgrow faster than the rest of the country. 120Our 2012 growth estimates for Malaysia and Thailandhave been revised up 110Expansionary fiscal policies in Thailand, Malaysia and Indonesia havecontinued to boost investment and support consumer spending,enabling these economies to maintain strong growth. Since our 100October 2012 forecast, we have increased our 2012 growth estimatesfor Malaysia and Thailand by at least 0.5 percentage points. Industrial production 90However, with investment expected to moderate in 2013 as factoriesfinish flood-related repairs and equipment replacement, Thailand’s 80GDP growth is forecast to slow to 5.3% in 2013, before improving 2005 2006 2007 2008 2009 2010 2011 2012exports enable GDP growth to reaccelerate to 5.4% in 2014. We alsoexpect Malaysia’s exports to pick up in H2 2013. But investment is Source: Oxford Economics; CEIC.also expected to moderate after the high levels seen in 2012, leadingGDP growth to slow to 4.3% in 2013. The growth rates of Brazil and Argentina lagged behind those of the other Latin American RGMs in 2012, with expected growth rates ofAided by robust domestic demand, Indonesian growth is expected to 1.0% and 1.7% respectively. However, we believe they will catch uphave remained above 6.0% in 2012, despite seven months of falling during 2013 as world growth improves.exports. Improving trade with China and the rest of emerging Asia isforecast to boost exports sharply, enabling GDP growth to remain at We have cut our forecast for Brazilian growth in 2013 to 3.9%, fromor above 6% in 2013 and 2014. 4.5% previously. Nevertheless, exports should slowly improve as China’s economy begins to pick up again during 2013, increasing demand for commodities. Brazil’s competitiveness, however, is still hampered by an overvalued exchange rate. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 19
    • In contrast to Brazil, Argentina had a better end to 2012 than quarter in Q3, with private spending, investment, exports and importsexpected, so we have revised up our 2012 growth forecast from 1.4% all falling. Leading indicators are not particularly promising either.to 1.7%. There were signs that the economy improved in H2 2012, Confidence declined across all main sectors in October, while thewith retail sales, car output and the seasonally adjusted indicator of manufacturing PMI, although improving modestly, remained close toeconomic activity all up. Our forecast assumes a better outlook for historically weak levels. Until the Eurozone difficulties are resolved,world growth and in particular that the very early signs of the outlook for Poland and most of the rest of emerging Europe isimprovement in Brazil will continue. There is scope to raise our unlikely to improve.expectations further if the recent positive signs are maintained over Eurozone weakness is also expected to weigh on the Czech Republicthe next few months. over the next two years. We forecast GDP will fall by 0.5% in 2013,Unlike Brazil and Argentina, Mexico took 2012’s global slowdown in its after an estimated 1.1% decline in 2012. The recovery of the exportstride, with GDP growth last year expected to have been in line with sector and the improvement of credit conditions will depend on growth2011’s at 3.9%. Mexico benefits from its proximity to the US, a in the Eurozone, which is expected to remain weak over the next fewcompetitive exchange rate and relatively cheap labor. This is expected years. As a result, we expect a gradual recovery of the Czech economyto have enabled Mexico to increase its exports, many of which are in the medium term, with growth expected to average 2.6% p.a.consumer goods sold in the US, by around 5.6% in 2012. As world between 2014 and 2016 — around half of the pre-Eurozone-crisistrade improves and the US accelerates out of a soft patch related to average.the fiscal cliff, we expect exports to grow even faster in 2013, by The flash estimate for Q3 GDP in Russia suggested real GDP growth ofabout 6.7%. 2.9% on the year, an improvement on Q2, but still below trend. WeIn Chile meanwhile, we expect GDP growth for 2012 to have slowed believe that consumer spending is still driving growth, although retailonly very slightly, moderating from 5.9% in 2011 to 5.7%, despite sales data suggests a slightly diminished contribution compared withexport growth slowing to less than 2% in 2012. Exports were hit hard recent quarters. Looking ahead, we expect the recovery to be gradual,by weak demand from China and the Eurozone, but resilient domestic with growth picking up momentum slowly during the course of 2013demand, particularly investment, enabled GDP growth to hold up. due to the falling oil price. While consumer spending will remain theAlthough GDP growth is expected to slow to closer to 4.5% in 2013 main driver, there should also be a pickup in investment and anand 2014 as the impact of earlier monetary stimulus fades and acceleration in stock accumulation as business confidence improves.interest rates begin to rise in Q3 2013, growth will become betterbalanced. Improving global backdrop to give Turkey a boost In part due to its geographic location at the crossroads betweenEurozone weakness expected to weigh on emerging Europe and Asia, Turkey is expected to do better in 2013 than theEurope other emerging European RGMs. Growth is forecast to accelerate fromDue to strong trading and financial links with the relatively depressed 2.6% in 2012 to 4.3% in 2013, as growth broadens out and gainsEurozone, the emerging European RGMs are expected to lag behind momentum through the year. The significant easing in monetarytheir Latin American and Asian counterparts in 2013. Consequently, conditions since mid-2012 will continue to feed through to lowerwe forecast only a muted acceleration in the growth rate of emerging lending rates for households and companies. In addition, lowerEurope, from 2.3% in 2012 to 2.9% in 2013. inflation (down from 10.6% in January to 6.2% in December) and a gradual improvement in the global outlook should help liftWe have become more pessimistic about the outlook for Poland, consumption and investment. Looking further ahead, provided thatcutting our 2012 growth estimate from 2.5% to 2.2% and our 2013 the still-large external deficits remain comfortably financed andforecast from 2.5% to 1.6%. Concerns about the outlook for the domestic inflation is kept under control, growth should exceed 5% p.a.economy led the central bank to cut the reference rate by 0.25 in the medium term.percentage points in November, December and January. We expectthe interest rate to be cut to 3.5% by H2 2013, implying a cumulativerate cut of 1.25 percentage points. GDP picked up by only 0.4% on the20 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsDespite a lower oil price, growth in the Middle Eastern external assets which would cushion the economy from oil-priceRGMs is expected to remain robust shocks.) A further challenge for the medium term is the need to generate jobs for a young and rapidly growing population, with risingGrowth in the three rapid-growth markets of the GCC, Saudi Arabia, expectations to match.the United Arab Emirates and Qatar, remains robust, although thepace began to slow in H2 2012 and is expected to continue in 2013 Qatar’s growth rate is expected to slow from 6.0% in 2012 to 5.5% inwith oil prices remaining lower than earlier this year. But the region is 2013 on lower oil and gas output, in part due to the moratorium onbenefiting from expansionary fiscal policy, facilitated by healthy public further liquefied natural gas (LNG) expansion. In the medium term,finances, the high absolute level of oil prices and rising oil production. the economy is expected to grow in excess of 6%, driven by robustMonetary policy is also accommodative. External factors are government spending and strong commodities exports, particularly tofavorable, too, because their trade is orientated toward faster- Asia. Saudi Arabia’s growth is also expected to slow, from 6.8% ingrowing Asian markets rather than the Eurozone. Even so, these 2012 to 4.1% in 2013, largely due to weaker oil prices.RGMs have not been immune to the Eurozone crisis or to weak US In contrast, we expect the UAE to see growth picking up from 3.3% ingrowth: capital inflows have fallen, and longer-term bank lending is 2012 to 3.7% in 2013 as the key crisis-hit property and financialdown. sectors continue to recover and global headwinds moderate.Figure 10 Africa to maintain strong growth in 2013 despite lowerMiddle East and the GCC: real GDP % year oil prices 15 Forecast We expect both Ghana and Nigeria to grow by more than 6% in 2013, GCC helped by stronger demand for commodities from emerging Asia. The 12 authorities in Egypt have reached preliminary agreement with the IMF on a US$4.8b loan. The deal is likely to unlock other sources of 9 Middle East international finance and to bolster confidence. Egypt is gradually ex Libya becoming more stable and we expect growth of more than 4% in 2014, 6 unless there are further setbacks. Africa can learn lessons from Botswana 3 Botswana was one of the poorest countries in Africa when it gained 0 independence in 1966. But political stability and good management of Middle East the country’s sizable diamond endowment has underpinned steady growth since. The Government of Botswana has maintained a sound -3 1990 1993 1996 1999 2002 2005 2008 2011 2014 fiscal policy and foreign reserves are high. In 1985, Botswana had a per capita income of US$3,094. By 2011, this had increased to moreSource: Oxford Economics. than US$16,000. The small size of the country has probably helped to ensure social cohesion.The RGMs in the GCC face some longer-term problems. Non-oil fiscaldeficits are rising because of a surge in government spending,particularly on wages, other social benefits and subsidies followingthe Arab Spring. This leaves these countries vulnerable to a fall inglobal oil prices and energy demand. Our model suggests that evenwith an oil price of US$105.2pb in 2013, Saudi Arabia’s budgetsurplus will plummet to less than 4% of GDP, from almost 10%estimated in 2012. (But Saudi Arabia, like the UAE, has substantial Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 21
    • Ghana is already making good progress ConclusionGhana has a population more than 10-times larger than Botswana and The RGMs are expected to lead an improvement in global momentumit is more ethnically diverse. Nevertheless, it has tripled its income per over the coming two years. Encouraging signs have started to emergecapita since 1992, when political reforms ended more than 30 years that the more trade-orientated RGMs, particularly those in Asia, areof uncertainty following independence. This stability has encouraged regaining momentum due to a combination of an improvement inforeign investors: FDI rose from under US$0.1b a decade ago to more intra-RGM trade and the impact of steps taken earlier in 2012 to easethan US$3b last year. Economic reforms since the 1990s have monetary and fiscal policy. As expected, China’s economy appears toenabled Ghana to meet the Millennium Development Goal of halving have landed softly and this should boost other Asian RGMs. Weits 2000 levels of poverty and hunger. It is the first African country to forecast that the Asian RGMs will see their growth rate acceleratedo so and well ahead of the 2015 target date. High capital investment from 6.3% in 2012 to 7.8% in 2014. A strong pickup in the Latinin health, education and infrastructure is also important. Ghana is now American RGMs is also anticipated. We expect the pace of growth inself-sufficient in staple foodstuffs and child malnutrition has fallen the Latin American RGMs to accelerate from 2.6% in 2012 to 4.8% insharply. 2014, as commodity exports to other RGMs grow and Mexico benefits from stronger US growth in 2013.Figure 11Corruptions perceptions score Due to their strong trading and financial links with the relatively depressed Eurozone, the RGMs of emerging Europe are expected to Zambia 2012 Russia 2002 lag behind their Latin American and Asian counterparts in 2013. India 1–10 where 10 is least corrupt Consequently, only a muted acceleration in the growth rate of Argentina Thailand emerging Europe, from 2.3% in 2012 to 2.9% in 2013, is forecast. Turkey Growth in the Middle Eastern RGMs is expected to slow a little in 2013 Egypt China from 2012’s robust pace, due to slightly lower oil prices. But the Mexico region is benefiting from expansionary fiscal policy, facilitated by ColombiaCzech Republic healthy public finances, the high absolute level of oil prices and rising Ghana oil production. Brazil Poland In plotting a course for the future RGMs policy makers should focus on Korea South Africa four key factors that have driven the development paths of the past: Uruguay political stability and strong political leadership; stable and prudent Botswana Chile macroeconomic policy; high capital investment; and following an open Hong Kong and well balanced trade policy and adapting it over time as the global 0 2 4 6 8 marketplace changes.Source: Transparency International.22 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsBox 3China’s rebalancing toward higher-value sectors willlead the RGMs to another decade of buoyant growthChina’s 12th five-year plan (2011 to 2015) aims to shift economic Figure 12growth toward consumption and away from low value-added China: economic structure: share of GDPmanufacturing exports. If the plan is successful in achieving greater 100% Forecastfocus on R&D and high-end manufacturing and services, what will this Extraction 90% Consumer goodsmean for other economies in the region? Some commentators havesuggested that they would be hit by falling demand for manufactured 80% Agriculturecomponents for products currently assembled in China, but it is more 70%likely that assembly would shift to lower-cost parts of the region (or Intermediate goods 60%indeed of China), and that they will benefit from China’s gradualmovement into the higher-value industries. Growing consumer 50% Investment goodsdemand in China should underpin strong growth in the rest of the 40%region. 30%China’s economic structure is shifting Services 20%China has come a long way in 20 years. In 1991, GDP per capita (in 10%PPP terms) was less than US$1,000 a year; last year it was 0%US$9,024, roughly where Korea was in 1991 or Japan in 1980. With 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034higher incomes and levels of development, China is now able toencourage higher-value industries. Figure 12 illustrates the changing Source: Oxford Economics.structure of its economy. As the importance of agriculture hasdeclined, consumer and intermediate goods have taken its place. And Our industry forecasts suggest that China’s share of the worldover the next 25 years we expect investment goods and services to pharmaceuticals market will grow from less than 10% now to more thanbecome increasingly important, including financial services. Social 15% over the next 10 years and that its share of global mechanicalsecurity, education, health care, tourism and wholesale and retail engineering will rise to almost a third. And by 2022, a third of alltrade will also expand. electrical goods in the world will be produced in China. Moving away from agriculture into increasingly high-tech industries will enable China to upgrade its technical capacity and raise per capita GDP. Creating opportunities for lower cost producers As China makes these transitions, it will create opportunities for other RGMs, notably in Africa and Southeast Asia. The labor-intensive textile industry, for example, is dominated by countries with low labor costs. Wages have risen notably in China over the past 10 years (though not so much in some inland regions), so wages in the Philippines, Vietnam and Indonesia are now substantially lower than in China. Countries in Africa also have a good opportunity to build market share in the lower cost labor-intensive industries. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 23
    • Box 3China’s rebalancing toward higher-value sectors willlead the RGMs to another decade of buoyant growth (continued)Figure 13 But in another 10 years, Indonesia, Vietnam and the Philippines areAverage annual earnings, 2011 likely to have a per capita income of around US$10,000, and will need to expand into higher-value industries themselves. Vietnam already US$ has a strong foothold in the telecoms market. According to the World 4,000 Bank, within the last few years mobile phones and accessories have risen to become the largest export item from Vietnam after garments, accounting for 10.5% of total exports. By 2013, the World 3,000 Bank expects mobile phones to have overtaken clothing as Vietnam’s largest source of export revenue. Figure 15 2,000 Vietnam: exports of telecoms excluding TVs US$m 1,600 1,000 1,400 1,200 0 1,000 Thailand China Philippines Vietnam IndonesiaSource: Oxford Economics. 800 600We expect Indonesia, Thailand and Vietnam to increase theircombined share of the world textile market from around 5% currently 400to more than 10% over the next 25 years. 200Figure 14World share in textiles: Indonesia, Thailand and Vietnam 0 % 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200914 Forecast Source: Oxford Economics.1210 8 6 4 2 0 1990 1996 2002 2008 2014 2020 2026 2032 2038 2044Source: Oxford Economics.24 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Lessons learnt from past development pathsClear opportunities for the Asian tigers Figure 17 The destination of emerging Asian trade flows*The four original Asian tigers, Korea, Singapore, Taiwan and HongKong, all have a key role to play in this as mainland China needs to Share of exports (%) 56 Within emerging Asiaimport the high-tech capital goods to build local technological skills Outside emerging Asiaand climb the value chain. Korea now has an 11.5% market share in 54global electronics. As the chart below shows, in 25 years, Korea’sshare in global electronics will still be around 10%. Although it has 52already reached advanced-country status in terms of its per capitaGDP, Korea is still expected to grow rapidly in the longer term, as it 50should remain competitive in terms of costs and it has many world- 48class consumer brands. 46Figure 16Global market share: electronics 44 %100 42 Forecast 90 40 2010 2020 80 * Emerging Asia refers to mainland China, Hong Kong, Taiwan, Korea, 70 China Singapore, Indonesia, Thailand, Malaysia and Vietnam. 60 Source: Oxford Economics. 50 US 40 Some commentators have suggested that China will struggle to move up the value chain because of cultural and structural impediments to 30 EU innovation. A key element of the rebalancing strategy is to encourage 20 Korea more private investment, but the Government must also provide the right environment for skills and technology to be shared. Its success 10 Japan will determine how fast it is able to develop higher-value industries, 0 and how this will affect the trade and development of the rest of the 2005 2009 2013 2017 2021 2025 2029 2033 RGMs.Source: Oxford Economics; Haver Analytics.Our forecasts for bilateral trade over the next 10 years indicate thattrade between the emerging Asian economies will continue toincrease as demand rises for more sophisticated consumer productsfrom the expanding middle classes across emerging Asia. Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 25
    • Forecast for rapidly growingcountriesArgentinaBrazilChileMainland China and Hong Kong special administrative region (SAR)ColombiaCzech RepublicEgyptGhanaIndiaIndonesiaKazakhstanKoreaMalaysiaMexicoNigeriaPolandQatarRussiaSaudi ArabiaSouth AfricaThailandTurkeyUkraineUnited Arab EmiratesVietnam26 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • 25 rapid-growth markets Please visit our dedicated rapid-growth markets website for access to additional information on the Ernst & Young Rapid-Growth Markets Forecast and content related to the 25 individual markets, such as thought leadership pieces and insights, and also to learn more about Ernst & Young’s competencies in rapid-growth markets. The site contains the full version of our report as well as a series of additional perspectives and, soon, the webcast and further news items. Access our Ernst & Young Rapid-Growth Markets Forecast anywhere with our upcoming app. Personalize the app to focus on subject, industry and geographic areas that most interest you; quickly contact the people behind the pieces to learn more; and easily share the content with friends or colleagues. To find out more, please visit www.ey.com/rapidgrowth Russia Poland Czech Republic Ukraine Kazakhstan Turkey China Korea Saudi Qatar Mexico Egypt Arabia UAE India Vietnam Thailand Ghana Nigeria Malaysia Colombia Indonesia Brazil South Africa Chile Argentina Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 27
    • ArgentinaGDP growth shows signs of picking up The official measure of consumer prices showed a slightly smaller monthly increase of 0.8% in October, although annual inflationThere were signs that the economy improved in H2 2012, with retail rose to 10.2%.sales, car output and the seasonally adjusted indicator of economicactivity all up. This suggests some resilience after a sharp slowdown in We have raised our 2012 GDP growth expectation to 1.7%, from theQ2. And seasonally-adjusted industrial production, which remained 1.4% envisioned in our October 2012 forecast, to reflect these signs ofsluggish in Q3, picked up strongly in October to regain levels last seen slowly improving activity. But slow growth in neighboring Brazilat the end of 2011. continues to be a major drag on activity, as are the trade and currency controls. However, we still expect growth to pick up to 3% over theBoth exports and imports rose in Q3 after two quarters of decline. course of 2013 and to average around 4% in the medium term.The current account has benefited from tough trade and currency Our forecast assumes a better outlook for world growth, and incontrols introduced in 2012 to contain the flight of capital out of particular that the very early signs of improvement in Brazil continue.the country.Figure 18 Figure 19GDP and industrial production World: commodity prices % increase per year 2007 = 100 (rebased) 25 200 Industrial Forecast production 20 180 Oil 15 160 10 140 5 120 0 Commodity Research 100 Bureau foodstuffs -5 GDP 80 -10 60 -15 -20 40 Commodity Research Bureau raw industrial materials -25 20 1990 1994 1998 2002 2006 2010 2014 2000 2002 2004 2006 2008 2010 2012Source: Oxford Economics. Source: Commodity Research Bureau; Haver Analytics. Table 1 Argentina Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 8.9 1.7 3.1 4.5 4.2 3.8 Official CPI inflation (% per year)* 9.8 10.0 9.9 7.6 5.6 4.6 Current account balance (% of GDP) -0.1 0.3 -0.2 -0.1 -0.2 -0.2 External debt total (% of GDP) 31.1 30.6 31.4 29.3 28.4 27.6 Short-term interest rate (%) 10.7 12.0 13.3 11.3 9.0 8.4 Exchange rate per US$ (year average) 4.1 4.6 5.0 5.2 5.4 5.5 Government balance (% of GDP) -1.6 -1.2 -1.5 -1.2 -0.9 -0.6 Population (millions) 40.8 41.2 41.5 41.9 42.2 42.6 Nominal GDP (US$b) 444.7 468.1 479.4 520.7 555.1 585.1 GDP per capita (US$ current prices) 10,897.6 11,371.6 11,546.4 12,436.4 13,148.2 13,746.2* Private estimates put the true rate of inflation closer to 25%.28 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • BrazilBrazil’s two-speed economy We remain confident that a cyclical recovery in economic activity is unfolding in Brazil. But we have scaled back our expectationsA dichotomy appears to be emerging between the strength of regarding the strength of the upturn following a disappointing GDPconsumer spending and subdued investment and production activity. report for Q3 2012 (0.6% growth on the quarter). We now expect GDPThe investment cycle has recently become more closely linked to growth of no more than 1% in 2012, a sharp fall from the 1.4% growthshifts in the terms of trade. This is because demand for commodities projected in our October 2012 forecast. We have also cut ourhas become an increasingly important driver of production capacity expectations for 2013 to 3.9% from 4.5%.related to the export of these materials. But commodity prices areexpected to be fairly soft next year and the overvalued exchange But there are reasons for optimism. The authorities have announcedrate will continue to compress margins in the industrial sector. an ambitious infrastructure program that is set to begin in 2013.These factors may blunt the positive impact on production of lower A shift in the focus of policy to addressing the country’s structuralinterest rates. bottlenecks is welcome. If implemented successfully, these policies could provide a boost to activity in late 2013 and raise the country’s longer-term growth potential.Figure 20 Figure 21Contributions to GDP Prices and earnings % increase per year % increase per year12 Forecast 45 Forecast 40 10 35 8 GDP Producer 30 prices Domestic 6 Consumer prices demand 25 4 20 15 2 10 0 5 -2 0 Net exports -4 -5 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics.Table 2Brazil Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 2.7 1.0 3.9 4.9 4.8 4.3 CPI inflation (% per year) 6.6 5.4 5.9 5.1 4.5 4.5 Current account balance (% of GDP) -2.1 -2.0 -1.7 -1.7 -1.7 -1.7 External debt total (% of GDP) 11.8 13.4 13.0 13.0 13.0 13.0 Short-term interest rate (%) 11.7 8.5 7.2 8.3 7.9 7.9 Exchange rate per US$ (year average) 1.7 2.0 2.0 2.0 2.2 2.3 Government balance (% of GDP) -2.6 -2.3 -1.4 -1.4 -1.5 -1.6 Population (millions) 196.9 198.6 200.3 201.9 203.5 205.0 Nominal GDP (US$b) 2,476.4 2,262.1 2,478.3 2,662.6 2,711.7 2,806.9 GDP per capita (US$ current prices) 12,577.6 11,390.3 12,374.1 13,187.2 13,326.2 13,691.5 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 29
    • ChileDomestic activity drives growth More recent data suggests some moderation in activity in Q4 2012 compared with earlier in the year. However, a pickup in export volumesThe latest national accounts data reveals that Chile’s economy and resilient domestic demand are still expected to underpin quarterlyexpanded by a quarterly 1.4% in Q3 2012, driven by robust growth of around 0.8% in Q4. In the short term, we expect growth ofconsumption and investment growth. Combined with data revisions to around 4.5% in the year as a whole. This will be underpinned by a moreH1, we now expect GDP to increase by 5.7% in 2012. balanced combination of exports and domestic demand.Export volumes sharply contracted by 5.9% in the same period, With healthy GDP growth expected over the next year and CPIreflecting weak demand from China and the Eurozone. However, we remaining within the central bank’s target range, we do not expect anyexpect improving foreign demand to foster export growth in 2013. change in the main policy rate in the near-term. However, we expectThis should help to maintain a trade balance surplus, although the the central bank to remain vigilant against inflation and begin to raisecurrent account as a whole is expected to remain in deficit until 2014. rates from Q3 2013. Medium-term growth should exceed 4%.Figure 22 Figure 23Exchange and interest rates Monthly indicator of economic activity Peso/US$ % 2008 = 100 (IMACEC, seasonally adjusted)300 16 130350 14 120400 Peso/US$ (left-hand side) 12450 110 10500 100550 8 90600 6650 Nominal 80 interbank rate 4700 (right-hand side) 2 70750800 0 60 1995 1997 1999 2001 2003 2005 2007 2009 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Banco Central de Chile; Haver Analytics. Source: Haver Analytics. Table 3 Chile Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 5.9 5.7 4.5 4.5 4.1 3.9 CPI inflation (% per year) 3.3 3.0 2.7 3.1 3.0 3.0 Current account balance (% of GDP) -1.3 -2.8 -2.3 -0.3 1.1 1.3 External debt total (% of GDP) 36.0 36.0 34.9 34.1 33.1 32.1 Short-term interest rate (%) 4.9 5.0 5.1 5.9 6.0 6.0 Exchange rate per US$ (year average) 483.7 486.5 488.2 503.2 506.9 507.8 Government balance (% of GDP) 1.5 0.9 1.1 0.9 0.7 0.5 Population (millions) 17.3 17.4 17.6 17.7 17.9 18.0 Nominal GDP (US$b) 248.7 265.6 290.5 311.4 334.8 358.1 GDP per capita (US$ current prices) 14,381.9 15,225.7 16,513.3 17,554.0 18,720.4 19,866.630 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Mainland China and Hong Kong special administrative region (SAR)Leadership change agreed and activity picking up Xi Jinping, the newly appointed Communist party general secretary, will take office in March. In his farewell address, outgoing President HuThe Chinese economy expanded by 7.4% year-on-year in Q3, implying Jintao stated that China would aim to double real GDP between 2010a pickup in quarterly growth. So with industrial output, investment and and 2020, implying annual growth of 6.9% for the rest of the decade.retail sales all improving in recent months, China’s recent slowdownhas reached a trough. But the moderate annual growth in import Growth of around 7% p.a. may become the new norm. A gradualvalues is a reminder that while the economy is no longer slowing, the rebalancing of the economy toward the consumer could slowpace of recovery is likely to be modest. productivity growth while maintaining low unemployment.Having picked up for three successive months to October, exportsstuttered in November. But the overall trend of improvement reflectsstronger global demand. Most of the additional sales went to the USand ASEAN countries, but European demand remained weak. Inflationremains low because food prices have fallen. This offers scope forfresh initiatives to support the recovery if required.Figure 24 Figure 25Mainland China: inflation Hong Kong: stock market % increase per year 24 32,000 20 28,000 16 Food prices 24,000 12 Hang Seng index 8 20,000 4 16,000 0 12,000 -4 Manufacturing Consumer producer prices prices -8 8,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1999 2001 2003 2005 2007 2009 2011Source: China Bureau of Statistics; Haver Analytics. Source: Hang Seng Index Services Limited; Haver Analytics.Table 4Mainland China Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (%year) 9.3 7.7 8.3 9.0 8.5 8.0 CPI inflation (% per year) 5.4 2.6 2.5 3.4 3.6 3.2 Current account balance (% of GDP) 2.7 2.9 3.0 2.6 2.4 2.2 External debt total (% of GDP) 8.3 8.3 8.1 7.9 7.7 7.5 Short-term interest rate (%) 5.3 4.6 4.4 4.2 4.3 4.8 Exchange rate per US$ (year average) 6.5 6.3 6.2 6.0 5.8 5.7 Government balance (% of GDP) 0.1 -1.9 -1.8 -1.1 -1.2 -1.2 Population (millions) 1,363.7 1,372.3 1,380.8 1,389.1 1,397.0 1,404.6 Nominal GDP (US$b) 7,335.6 8,198.9 9,369.6 10,767.8 12,238.8 13,857.0 GDP per capita (US$ current prices) 5,379.2 5,974.7 6,785.6 7,751.9 8,761.0 9,865.3 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 31
    • ColombiaBoost from government spending Inflation is well under control. The 2.4% recorded in December was toward the bottom of the central bank’s 2% to 4% target range.Colombia’s economy is still fairly robust, although activity slowed over Therefore, the authorities have room to cut the key policy interest ratethe course of 2012, with GDP growth falling to 4.9% in H1 after if required.reaching almost 6% in 2011. Industrial production picked up in Q32012 following a sluggish first half, although retail sales grew much With higher government spending offsetting weaker global growth, wemore slowly in 2012 than in the previous two years. expect GDP to have been around 4.0% in 2012, and we think that growth will pick up slightly in 2013. The boost to the economy fromMost of Colombia’s recent economic growth has come from investment in infrastructure, together with world demand forgovernment spending — especially on housing and construction Colombia’s mining and oil output, should achieve annual growth overprojects — and public expenditure will also underpin the economy in the medium term of around 4%.2013. Spending on infrastructure in particular has been rising fast.Increased metals production and firm oil prices should continue tounderpin economic activity as the world economy slowly improves.Figure 26 Figure 27Real GDP growth Inflation % increase per year % increase per year 8 Forecast 45 Forecast Latin America 40 6 and Caribbean 35 4 Western hemisphere 30 2 25 0 20 Colombia 15-2 10-4 Colombia 5-6 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015Source: Oxford Economics; World Bank. Source: Oxford Economics; Haver Analytics.Table 5Colombia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 5.9 4.0 4.2 4.4 4.1 4.0 CPI inflation (% per year) 3.4 3.3 3.5 3.4 3.3 3.3 Current account balance (% of GDP) -3.0 -4.1 -4.0 -3.8 -3.6 -3.6 External debt total (% of GDP) 22.2 23.4 25.5 28.0 30.7 32.9 Short-term interest rate (%) 4.0 5.0 6.0 6.9 6.9 6.9 Exchange rate per US$ (year average) 1,848.1 1,796.2 1,850.2 1,952.8 2,089.6 2,195.0 Government balance (% of GDP) -2.1 -2.1 -1.7 -1.6 -1.6 -1.5 Population (millions) 46.9 47.5 48.1 48.8 49.4 49.9 Nominal GDP (US$b) 333.2 368.3 385.6 394.4 396.3 405.3 GDP per capita (US$ current prices) 7,102.2 7,749.2 8,010.0 8,088.9 8,028.0 8,117.832 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Czech RepublicShort-term outlook deteriorates, with recovery The economy remains insulated from the debt problems in theexpected in 2014 Eurozone. Public debt was low in 2012, at just above 40% of GDP, and the spread of 10-year government bond yields with German Bunds fellGDP dropped 0.3% on the quarter in Q3 2012, following a 0.4% decline below 100 basis points in August. However, the recovery of the keyin Q2 2012. As a result, in Q3 2012 GDP was down 1.3% on the same export sector and the improvement of credit conditions will depend onquarter in 2011 — and 2.3% on its peak in Q3 2008. The short-term growth in the Eurozone, which is expected to remain weak in the nextoutlook deteriorated, as exports growth fell to just 0.6% year-on-year few years.in November, from 8.2% in August. Moreover, unemployment rosesignificantly in late 2012, as industrial production remained on a As a result, we expect a gradual recovery of the Czech economy in thedownward trend. As a result, business and consumer confidence medium term, with annual growth expected to average 2.5% inworsened markedly and investment is now expected to decline for the 2014-16 — around half of the pre-crisis average.third successive year in 2013. We expect GDP to drop 0.5% in 2013,after an estimated 1.1% decline in 2012.Figure 28 Figure 29Consumption and investment Unemployment % increase per year % 25 Forecast 11 Forecast 20 Investment 10 9 15 8 10 7 5 6 0 5 -5 4 -10 Consumption 3 -15 2 -20 1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics. Table 6 Czech Republic Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 1.9 -1.1 -0.5 1.9 2.7 3.0 CPI inflation (% per year) 1.9 3.3 3.2 1.9 2.0 2.0 Current account balance (% of GDP) -2.8 -2.2 -2.3 -3.2 -3.4 -3.3 External debt total (% of GDP) 45.7 50.0 51.3 53.2 54.4 54.3 Short-term interest rate (%) 1.2 1.0 0.5 0.7 0.9 1.0 Exchange rate per US$ (year average) 17.7 19.6 20.1 21.2 22.0 22.0 Government balance (% of GDP) -3.7 -2.6 -3.0 -2.8 -2.4 -2.0 Population (millions) 10.5 10.5 10.5 10.5 10.5 10.5 Nominal GDP (US$b) 217.2 195.9 191.9 188.7 191.2 201.4 GDP per capita (US$ current prices) 20,691.1 18,635.3 18,245.6 17,935.7 18,166.0 19,142.6 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 33
    • EgyptIMF deal should boost confidence but growth prospects Growth prospects remain weak. We forecast GDP to be little changedremain weak from last year at 2.1% in 2012-13. Prospects are constrained by political uncertainty, the Eurozone crisis, the poor near-term outlookPreliminary agreement on a US$4.8b IMF loan and the for tourism and FDI inflows, and unfavorable base effects.implementation of a national economic plan has been reached. Thedeal is likely to unlock other sources of international finance, bolster And there are substantial downside risks to our growth forecasts.confidence and the Egyptian pound, accelerate much-needed These include renewed political instability, implementation of populisteconomic reforms and act as an anchor for prudent policies. policies and fiscal slippage. In addition, there are geopolitical risks, deteriorating global economic conditions (specifically hitting SuezFiscal austerity is likely to see substantial cuts in fuel subsidies and a Canal traffic) and the ongoing crisis in the Eurozone — Egypt’s majorhike in the sales tax. Such measures are designed to help cut the trading partner.budget deficit to around 10% of GDP in 2012-13 from an estimated11% of GDP in 2011-12.Figure 30 Figure 31Real GDP growth Government budget balance % increase per year US$b % of GDP 8 Forecast 0 0 Egypt 7 -4 -3 6 -8 US$b -6 5 (left-hand side) -12 4 -9 -16 % of GDP 3 (right-hand side) -12 -20 2 Forecast Middle East and -15 1 North Africa -24 0 -28 -18 1991 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015Source: Oxford Economics; World Bank. Source: Oxford Economics.Table 7Egypt Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 1.8 2.2 2.1 4.0 5.9 5.9 CPI inflation (% per year) 10.1 7.1 7.5 6.7 6.2 5.5 Current account balance (% of GDP) -3.3 -2.0 -1.3 -1.0 -0.7 -0.5 External debt total (% of GDP) 15.5 15.5 15.8 15.6 14.9 14.4 Short-term interest rate (%) 14.0 12.2 10.5 9.5 8.0 7.5 Exchange rate per US$ (year average) 5.9 6.1 6.3 6.5 6.7 6.9 Government balance (% of GDP) -9.8 -11.2 -10.1 -8.9 -7.8 -7.1 Population (millions) 82.5 83.9 85.4 86.8 88.2 89.5 Nominal GDP (US$b) 231.1 247.6 260.2 279.2 305.4 332.4 GDP per capita (US$ current prices) 2,799.9 2,949.6 3,048.8 3,217.2 3,463.4 3,713.734 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • GhanaRising oil revenues fuel GDP growth high state spending ahead of December 2012 elections, surging imports and a 17% slide in the Ghana Cedi in 2012. The Bank of GhanaGhana started producing oil in commercial quantities in 2011. This raised interest rates by 250p in H1 2012, and an early cut in rateslifted GDP growth to over 14% in 2011, with the year-on-year rate appears unlikely.peaking at above 20% in Q2 2011. The pace slowed modestly to about16% in Q1 2012, but as the big boost to activity in 2011 started to Although exports surged by 60%, a 46% jump in imports and rising netdrop out of the calculations, the year-on-year growth rate fell to just outflows of services and income meant that the current account2.5% in Q2 2012. However, we still expect growth of about 7% for deficit widened to US$3.5b in 2011, over 9% of GDP. The deficit then2012 overall, before a further, but more modest, slowdown in 2013 climbed to US$4b in Q1-Q3 2012 but, despite continued high importand some 5.5% annually thereafter. growth, it is forecast to start falling from 2013 onwards as oil revenues build.Inflation has been driven by the impact of high world oil prices andcuts in fuel subsidies. It rose from about 8.5% in mid-2011 to a littleover 9% in November 2012. It could rise further amid concerns aboutFigure 32 Figure 33Inflation Real GDP growth % increase per year % increase per year60 Forecast 16 Forecast 1450 12 Ghana40 10 830 Ghana 620 4 Sub-Saharan 2 Africa10 Africa 0 0 -2 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.Table 8Ghana Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 14.4 7.1 6.9 5.9 5.5 5.0 CPI inflation (% per year) 8.7 9.2 8.5 7.0 6.0 5.2 Current account balance (% of GDP) -8.9 -14.6 -8.7 -4.4 -2.4 -2.5 External debt total (% of GDP) 25.9 35.7 38.6 38.1 36.3 35.2 Short-term interest rate (%) — — — — — — Exchange rate per US$ (year average) 1.5 1.8 1.9 2.0 2.0 2.1 Government balance (% of GDP) -3.1 -7.0 -5.6 -4.7 -3.9 -3.7 Population (millions) 25.0 25.6 26.1 26.7 27.3 27.9 Nominal GDP (US$b) 39.2 38.4 41.4 45.4 50.0 54.5 GDP per capita (US$ current prices) 1,569.3 1,503.2 1,584.7 1,697.1 1,829.7 1,953.8 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 35
    • IndiaEconomy slows but growth expected to pick up in 2013 Looking ahead, some of these headwinds are expected to ease in H2 2013. Inflation is set to fall back, as the recent increase in diesel pricesThe pace of expansion slowed further in Q3 2012, with growth falling and the impact of the Indian Rupee’s depreciation in H1 2012 dropback to 5.3% year-on-year from 5.5% in Q2. Both external and away. External demand is also forecast to pick up, driven bydomestic demand were held back by economic headwinds. Exports accelerating growth in the US and China. As a result, we expecthave continued to struggle against the uncertain global environment, growth to accelerate from 5.4% in 2012 to 6.0% in 2013. We anticipatewhile domestic demand is being weighed down by high inflation and growth accelerating to around 7.5% over the medium term. But India’sthe difficult business environment. economy has the potential to register annual growth of over 8% in theThe government has revised its deficit target for 2012-13 to 5.3% long term if significant reforms — such as the recently announced(from 5.1%). But disappointing revenue growth, coupled with rising changes in the retail, airline and finance sectors — are implemented.spending, means that this new target is also likely to be missed.However, the government is confident that it can reduce the deficit to3% by 2016-17.Figure 34 Figure 35HSBC manufacturing Purchasing Managers’ Index (PMI) Interest rate and wholesale price index inflation 50 = expansion/contraction break-even point % 65 10 Repo rate 8 60 6 55 4 2 50 0 45 Wholesale price index non-food -2 40 -4 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Markit. Source: Oxford Economics.Table 9India Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.5 5.4 6.0 7.5 7.9 7.8 WPI inflation (%) 9.5 7.6 5.3 4.4 4.3 4.2 Current account balance (% of GDP) -3.4 -4.7 -3.8 -4.0 -4.0 -4.0 External debt total (% of GDP) 17.3 19.5 17.9 16.0 14.8 13.8 Short-term interest rate (%) 7.8 8.1 7.6 7.1 7.0 7.0 Exchange rate per US$ (year average) 46.7 53.5 54.0 52.3 52.1 52.5 Government balance (% of GDP) -6.8 -5.9 -5.5 -4.3 -3.6 -3.1 Population (millions) 1,232.8 1,249.0 1,265.0 1,280.7 1,296.1 1,311.2 Nominal GDP (US$b) 1,840.5 1,816.3 2,061.9 2,388.5 2,691.8 2,993.1 GDP per capita (US$ current prices) 1,492.9 1,454.2 1,630.0 1,865.1 2,076.8 2,282.636 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • IndonesiaDomestic activity proves robust as consumers Interest rates are on hold now, but inflationary pressures mean thatmaintain confidence the central bank is likely to begin raising rates from H2 2013. With planned minimum wage increases in the provinces coming intoGDP growth in Q3 was steady at 6.2% year-on-year, as strong domestic effect, and electricity tariffs scheduled to rise by an average of 4.3%demand offset subdued exports. The strength in domestic demand was in each quarter this year, pressure will be put on prices.broad based. Annual growth of fixed investment rose at a double-digitpace for the fourth consecutive quarter in Q3, while that of private In 25 years’ time, Indonesia is expected to be the ninth largest economyspending picked up to 5.7%, the fastest pace since Q1 2009. Consumer in the world. Looking a little less far ahead, we expect its strongconfidence remains high, which bodes well for spending in 2013. domestic fundamentals to support medium-term growth of almost 6%.Exports fell for seven consecutive months from April to October, andas a result we expect the current account deficit to exceed 2% of GDPthis year — the largest deficit since 1997. Concerns over the future ofthe Eurozone remain, but activity in China and the rest of emergingAsia has shown signs of picking up in H2 2012. Therefore, we expecttrade flows to improve gradually in 2013.Figure 36 Figure 37Inflation Bank lending growth % increase per year % increase per year 35 Forecast 45 Producer prices 30 40 25 35 Consumer prices 20 30 15 25 10 20 5 15 0 10 -5 5-10 0 2000 2002 2004 2006 2008 2010 2012 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Oxford Economics. Source: Bank Indonesia; Haver Analytics.Table 10Indonesia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 6.5 6.1 6.2 6.0 5.4 5.5 CPI inflation (% per year) 5.4 4.3 4.8 4.9 4.9 4.8 Current account balance (% of GDP) 0.2 -2.2 -2.2 -2.3 -1.9 -1.9 External debt total (% of GDP) 26.1 27.2 25.5 22.4 20.7 19.2 Short-term interest rate (%) 6.5 4.7 5.4 7.1 7.5 7.5 Exchange rate per US$ (year average) 8,789.4 9,403.2 9,550.9 9,275.8 9,402.9 9,584.3 Government balance (% of GDP) -1.1 -2.2 -2.3 -2.2 -2.0 -1.7 Population (millions) 235.3 237.7 240.0 242.3 244.5 246.6 Nominal GDP (US$b) 845.4 878.9 963.4 1,102.1 1,201.6 1,303.0 GDP per capita (US$ current prices) 3,593.1 3,698.0 4,013.9 4,549.2 4,915.3 5,284.3 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 37
    • KazakhstanInfrastructure spending and commodities demand The 2012 current account surplus was narrowed by less favorablesupport strong recovery movements in the price of main exports . A further deterioration, to about 3.0% of GDP, is expected in 2013. This primarily reflects theGDP growth slowed to 5.2% in January-September from 5.6% in H1, projected 8.6% decline in the oil price, which will result in an expectedimplying Q3 growth of just 4.4%. The slowdown reflects a combination rise in merchandise exports of only 1.7%.of factors, including a worsening global environment, weaker metalprices and lower oil production. Kazakhstan will benefit from higher commodity prices in 2014 and 2015 and this, combined with strong infrastructure spending,Growth is forecast to accelerate to 6% in 2013. As well as continued should support a strong recovery. We expect a medium-termhigh government spending, the economy will benefit from slightly growth rate of 7%.stronger growth in key export markets, a better grain harvest andhigher commodity prices. Metal prices are forecast to rise 3% in 2013after a 17% fall this year. In addition, oil production will get a boostnext year from the giant Kashagan oil field coming on stream.Figure 38 Figure 39Real GDP growth Inflation % increase per year % increase per year 15 Forecast 50 Forecast Kazakhstan 45 10 40 Europe and Central Asia 35 5 Europe and Central Asia 30 0 25 20 Kazakhstan -5 15 10-10 5-15 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank. Table 11 Kazakhstan Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.5 4.9 6.0 7.5 7.1 6.7 CPI inflation (% per year) 8.3 5.1 6.6 6.2 6.0 6.0 Current account balance (% of GDP) 7.4 5.6 3.0 1.8 2.1 2.0 External debt total (% of GDP) 67.9 65.0 59.3 51.5 44.5 38.8 Short-term interest rate (%) 1.9 2.4 3.7 4.7 5.7 6.5 Exchange rate per US$ (year average) 146.6 149.4 154.0 160.7 165.5 170.5 Government balance (% of GDP) -3.3 -3.5 -3.0 -3.0 -3.2 -3.4 Population (millions) 16.2 16.4 16.5 16.7 16.9 17.0 Nominal GDP (US$b) 183.1 200.1 215.0 235.2 259.2 284.7 GDP per capita (US$ current prices) 11,304.3 12,223.6 12,995.1 14,072.5 15,352.6 16,701.338 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • KoreaExport manufacturing shows signs of improvement Chinese economy and their likely impact on regional trade. But while the low point of the cycle may now have passed, the upturn is likely toIn Q3 2012, GDP rose by just 0.1% on the quarter, implying annual be gradual. Once the global economy is in better health, businessgrowth of only 1.5%. Although consumer spending grew at a steady investment should pick up.pace and export volumes held up surprisingly well, overall GDP washeld back by a sharp fall in machinery investment. Output was Meanwhile, consumer spending will remain fairly modest, withundermined by firms’ persistent worries about the global outlook — households held back by the overhang of high debts. However, theand a significant reduction in stock building. base rate reductions in H2 2012, and the likely modest easing of fiscal policy in H1 2013, should provide support. We are slightly moreHowever, the data for Q4 2012 shows some improvement. The cautious about the pace of the upturn in 2013 than we were in ourmanufacturing PMI rose in the last three months of 2012, while the October 2012 forecast, and now expect annual growth of 3.3%.level of exports (in US$ terms) has picked up since July. Moreover,these trends should be bolstered by the recent, positive signs in theFigure 40 Figure 41Contributions to GDP GDP and industrial production % increase per year % increase per year 15 Forecast 30 Industrial Forecast production 25 GDP 10 20 5 15 10 0 5 Net exports -5 0 -10 -5 GDP -10 -15 Domestic demand -15 -20 -20 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics.Table 12South Korea Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 3.6 2.1 3.3 5.0 4.8 4.4 CPI inflation (% per year) 4.0 2.2 2.3 2.7 2.6 2.6 Current account balance (% of GDP) 2.4 3.5 2.3 1.5 1.0 0.8 External debt total (% of GDP) 35.3 36.9 33.8 31.7 29.8 28.0 Short-term interest rate (%) 3.4 3.3 2.7 4.2 4.9 4.9 Exchange rate per US$ (year average) 1,108.2 1,126.8 1,081.8 1,086.5 1,090.8 1,094.0 Government balance (% of GDP) 1.5 0.4 -0.5 -0.1 0.1 0.1 Population (millions) 48.7 48.8 48.9 49.1 49.2 49.3 Nominal GDP (US$b) 1,116.7 1,131.0 1,239.7 1,322.3 1,408.0 1,495.9 GDP per capita (US$ current prices) 22,943.3 23,168.7 25,328.3 26,951.5 28,637.5 30,371.3 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 39
    • MalaysiaStrong domestic demand offsets dismal external Due to the weak external environment and low inflation, loose monetaryperformance conditions are set to continue and the policy rate is forecast to remain on hold until Q3 2013.GDP surprised on the upside in Q3 with growth of 5.2% on the yearfollowing a revised 5.6% in Q2. We expect growth to continue at a In the face of a weak external sector, Malaysia has strong financialhealthy pace into Q4 and envisage full-year growth of 5.1% in 2012, up resilience. International reserves finance 9.3 months of retainedfrom 4.5% expected in our October 2012 forecast. imports and more than 4 times the short-term external debt.Investment has been very robust, growing at over 20% in Q3 supported Looking ahead, we forecast exports to pick up in 2013. But investmentby strong government support for infrastructure projects. Private will moderate after the high levels seen in 2012, leading GDP growth toconsumption also maintained strong growth in Q3, at 8.5%, and with slow to 4.3% in 2013. But strong commodities demand, combined withfavorable labor market conditions we expect strong earnings growth to robust investment, will drive medium-term growth of around 4.5%.continue. The external sector has been very weak, with export volumesdeclining in Q3. This has had a knock-on impact on imports.Figure 42 Figure 43Exports and imports Industrial production % increase per year % increase per year 50 30 40 Exports 30 20 (US$) 20 10 10 0 0 -10-20 -10-30 Imports (US$) Three-month moving average Three-month moving average-40 -20 1995 1997 1999 2001 2003 2005 2007 2009 2011 1995 1997 1999 2001 2003 2005 2007 2009 2011Source: Department of Statistics. Source: Department of Statistics.Table 13Malaysia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 5.1 5.1 4.3 4.7 4.3 4.4 CPI inflation (% per year) 3.2 1.7 2.6 2.9 3.0 3.0 Current account balance (% of GDP) 11.0 4.7 2.8 3.2 3.7 4.0 External debt total (% of GDP) 31.8 34.8 35.9 36.8 37.5 37.8 Short-term interest rate (%) 2.9 3.0 3.2 4.0 4.1 4.1 Exchange rate per US$ (year average) 3.1 3.1 3.0 3.0 3.0 3.0 Government balance (% of GDP) -4.7 -5.0 -5.1 -4.5 -4.3 -4.0 Population (millions) 28.4 28.8 29.3 29.7 30.1 30.5 Nominal GDP (US$b) 288.1 304.1 329.7 355.9 383.0 413.0 GDP per capita (US$ current prices) 10,143.8 10,545.4 11,265.9 11,992.2 12,729.0 13,539.740 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • MexicoPositive outlook for 2013 abroad were 7% lower in October than the previous year, reflecting the modest pace of economic growth in the US and the fact that netThe economy performed well in 2012, driven mainly by strong migration from Mexico is now down to zero. We therefore forecastmanufacturing output. Mexico benefits from its proximity to the US, a growth to slow a little to 3.7% in 2013. In the medium term, growthcompetitive exchange rate and relatively cheap labor. This has enabled should pick up toward 5% as the US economy regains momentum.it to increase its exports — many of which are consumer goods sold inthe US — by around 5.6% in 2012. And we expect exports to grow even Our medium-term outlook is also bolstered by the prospect offaster in 2013, by about 6.5%. economic reform. Structural improvements to the labor and energy markets, and to taxation, could help raise the country’s growthWe have increased our GDP growth expectation for 2012 to 3.9%, potential by encouraging more investment and diversification.from 3.5% in our October 2012 forecast. This is mainly in responseto an upward revision in the national accounts to growth in H1.But domestic demand expanded at a slower pace in H2, and we expectthis to continue into early 2013. Remittances from Mexicans workingFigure 44 Figure 45Merchandise trade: US vs. Mexican growth Consumption and investment % increase per year % increase per year 50 Forecast 30 Forecast Investment 40 20 30 Mexican goods’ exports 10 20 0 10 -10 Consumption 0 -20 -10 US goods’ imports-20 -30-30 -40 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015Source: Oxford Economics. Source: Oxford Economics. Table 14 Mexico Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 3.9 3.9 3.7 4.9 4.5 4.3 CPI inflation (% per year) 3.4 4.2 3.9 3.6 3.3 3.2 Current account balance (% of GDP) -0.8 -0.4 -0.6 -0.7 -0.4 -0.3 External debt total (% of GDP) 17.6 17.7 16.5 15.5 14.7 13.9 Short-term interest rate (%) 4.4 4.4 4.5 4.8 4.9 4.7 Exchange rate per US$ (year average) 12.4 13.2 12.9 13.0 13.1 13.2 Government balance (% of GDP) -2.3 -2.5 -2.9 -3.3 -3.4 -3.5 Population (millions) 115.0 116.3 117.6 118.9 120.2 121.4 Nominal GDP (US$b) 1,160.3 1,180.5 1,287.1 1,382.1 1,479.2 1,581.3 GDP per capita (US$ current prices) 10,093.9 10,150.0 10,940.9 11,619.6 12,304.8 13,020.5 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 41
    • NigeriaGDP growth robust despite slower oil activity High oil prices — which boost exports — have underpinned the current account, which posted a surplus of some US$9b in 2011. However,GDP growth picked up slightly to 6.5% in Q3 2012 from a revised 6.4% this was down slightly from 2010, due to rising imports and heavyin H1. However, it was down from over 7% in 2011. The non-oil sector income and services outflows. With world oil prices high and importremains buoyant, rising 7.6% on the year in Q3 2012. But the oil sector growth slowing, the external surplus rose modestly in 2012. But it iscontinues to restrain overall economic activity, even though oil output expected to fall back again in 2013 on lower oil prices. Reserves haverose on the quarter. risen to almost US$46b, and the external position should remain solid,Despite signs of slower growth, inflation remains high, rising to 12.3% helping to support annual GDP growth of 5-6% over the medium term.in November 2012. Core inflation is still above 12%. Amid concern We forecast GDP growth of about 6.5% for 2012, with a similar rateabout food prices in the wake of recent flooding and the uncertain expected in 2013.global picture, the central bank again kept interest rates on hold at itsNovember 2012 policy meeting. Inflation is forecast to average 10.5%in 2013.Figure 46 Figure 47Inflation Real GDP growth % increase per year % increase per year80 Forecast 12 Forecast70 10 Nigeria60 8 Sub-Saharan Africa50 640 430 2 Africa Nigeria20 010 -2 0 -4 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.Table 15Nigeria Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.3 6.5 6.5 6.1 5.5 5.1 CPI inflation (% per year) 10.8 12.2 10.5 9.0 8.0 8.0 Current account balance (% of GDP) 3.8 3.9 1.6 1.5 1.6 1.7 External debt total (% of GDP) 3.8 3.6 3.3 3.1 3.0 2.9 Short-term interest rate (%) 10.6 14.2 11.5 9.5 8.0 7.0 Exchange rate per US$ (year average) 154.7 158.5 160.8 163.1 166.2 170.5 Government balance (% of GDP) -3.1 -3.1 -3.9 -3.1 -2.2 -1.3 Population (millions) 162.7 167.0 171.2 175.5 179.8 184.6 Nominal GDP (US$b) 226.8 264.6 306.8 350.0 391.3 432.9 GDP per capita (US$ current prices) 1394.2 1,584.4 1,791.6 1,994.1 2,176.6 2,344.842 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • PolandSharp slowdown prompts rate cuts Risks to the current forecast remain skewed to the downside, given the absence of a definitive resolution to the sovereign debt crisisSeasonally and working-day adjusted real GDP rose by 0.4% on the in the Eurozone.quarter in Q3 2012, slightly above our forecast. However, a downwardrevision to Q2 growth implied that the economy had expanded by Monetary Policy Council members have reacted to the weakness of0.6% over the previous six months, in line with our initial view. The recent data by initiating an easing cycle. We expect rates to fall to 3.5%expenditure breakdown made grim reading, with both investment and by H2 2013 — implying a cumulative 125bp rate cut — with risksprivate consumption contracting. skewed to additional easing.Since our October forecast, we have downgraded our expectation for Looking ahead to the medium-term, prospects remain solid,2013 real GDP growth from 2.5% to 1.6%. The move reflects further and we have marginally upgraded our forecast for real GDP growthdowngrades to the Eurozone forecast and the recent weakness of the in 2015–16, based on greater potential for cyclical recovery.Polish labor market, which will subdue consumer spending next year.Figure 48 Figure 49Contributions to GDP Government budget balance and debt % increase per year % of GDP % of GDP 12 Forecast 2 Forecast 80 Government balance Domestic demand (left-hand side) 10 0 GDP 70 8 -2 6 60 4 -4 2 -6 50 0 -8 -2 Government debt 40 (right-hand side) -10 -4 Net exports -6 -12 30 1993 1996 1999 2002 2005 2008 2011 2014 1992 1995 1998 2001 2004 2007 2010 2013Source: Oxford Economics. Source: Oxford Economics.Table 16Poland Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 4.3 2.2 1.6 3.1 3.8 4.2 CPI inflation (% per year) 4.2 3.8 2.4 2.6 2.5 2.5 Current account balance (% of GDP) -4.9 -3.6 -3.3 -3.2 -3.1 -3.3 External debt total (% of GDP) 66.9 71.0 77.0 78.7 79.6 79.1 Short-term interest rate (%) 4.3 4.7 3.9 3.7 4.2 4.2 Exchange rate per US$ (year average) 3.0 3.3 3.2 3.2 3.3 3.3 Government balance (% of GDP) -5.0 -3.4 -3.6 -3.1 -2.6 -2.2 Population (millions) 38.2 38.2 38.2 38.2 38.2 38.2 Nominal GDP (US$b) 514.7 492.1 517.5 549.9 580.8 620.6 GDP per capita (US$ current prices) 13,472.6 12,879.3 13,545.2 14,393.8 15,206.5 16,253.1 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 43
    • QatarBright medium-term outlook We expect inflation to rise from current levels to average 3.5% in 2013. Rentals will continue to rise as the housing over-supplyQatar has endured slowing growth, a continuing reliance on oil and diminishes (and the country gears up to host the 2022 FIFA Worldgas, and a worryingly sharp rise in bank dependence on external Cup) — and given that the measurement of rentals is skewed towardfinancing. However, rating agency S&P has reaffirmed the country’s new contracts. Higher inflation will also be driven by substantial paysovereign credit rating of AA with a stable outlook. Qatar’s strong rises (typically of 60%) and pension increases, other fiscal expansion,external and fiscal finances, its very high GDP per capita and relatively surging project activity, a rising population and low interest rates.low political risk fully justify this rating. In the medium term, we expect the economy to grow in excess of 6%,Economic data for H1 2012 shows that the pace of GDP growth slowed driven by robust government spending and strong commoditiesto 6.5%. The data also showed lower oil output and an increasing exports, particularly to Asia.reliance on government spending and the non-oil sector, following thecompletion of most of the planned expansion in the Liquefied NaturalGas sector. Growth is expected to slow to 5.5% in 2013 on lower oiland gas output.Figure 50 Figure 51Real GDP growth Inflation % increase per year % increase per year30 Forecast 18 Forecast 1525 Middle East and 12 North Africa20 Qatar Middle East and 915 North Africa 610 3 Qatar 5 0 0 -3 -5 -6 1991 1994 1997 2000 2003 2006 2009 2012 2015 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank. Table 17 Qatar Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 13.0 6.0 5.5 5.9 6.1 6.0 CPI inflation (% per year) 1.9 1.9 3.5 4.0 4.0 4.0 Current account balance (% of GDP) 30.0 23.4 18.6 16.3 15.1 13.8 External debt total (% of GDP) 50.4 44.4 41.3 37.2 33.6 30.5 Short-term interest rate (%) − − − − − − Exchange rate per US$ (year average) 3.6 3.6 3.6 3.6 3.6 3.6 Government balance (% of GDP) 8.6 5.3 5.8 6.7 6.4 7.3 Population (millions) 1.8 1.9 1.9 2.0 2.0 2.1 Nominal GDP (US$b) 173.5 191.2 205.6 223.4 242.7 261.9 GDP per capita (US$ current prices) 95,666.0 102,308.5 106,879.4 112,945.4 119,392.1 126,772.244 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • RussiaOutlook unchanged with soft landing underway political risks associated with elections. Clearly, however, the easing of global uncertainty is far from guaranteed.The first estimate indicates that growth quickened to 0.6% on thequarter in Q3 2012, although this remained below trend. An Compared with our October 2012 forecast, our real GDP growthexpenditure breakdown is not available, but we expect consumer expectation for 2013 remains little changed at 3.6%. Essentially, dataspending to have remained the key driver of growth, albeit to a slightly released over the past quarter has largely accorded with our baselinelesser extent than in the previous year. view. PMI survey data for Q4 2012 indicates a modest increase in growth, a trend we expect to continue in 2013. This reflects a gradualRisks to the forecast are skewed to the downside. With real wage growth improvement in the external outlook. However, in the medium term weset to slow in 2013, we expect consumption growth to suffer expect growth to be limited by the slow pace of institutional reform, andcommensurately. We think that this can be compensated for by a pickup to average around 4% out to 2016.in investment, with plans having previously been delayed by acombination of heightened global macroeconomic uncertainty andFigure 52 Figure 53Contributions to GDP Inflation % increase per year % increase per year 15 Forecast 60 Domestic demand 50 10 Wages Producer prices 40 5 30 0 20 Net exports 10 -5 Consumer prices 0-10 -10 GDP-15 -20 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Oxford Economics. Source: Federal State Statistics Service; Haver Analytics.Table 18Russia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 4.3 3.6 3.6 4.1 4.0 3.9 CPI inflation (% change year-on-year) 8.4 5.1 6.5 5.7 5.7 5.4 Current account balance (% of GDP) 5.4 4.0 2.2 1.4 0.9 0.2 External debt total (% of GDP) 28.7 30.6 32.6 34.0 35.4 36.3 Short-term interest rate (%) 5.5 7.2 8.1 8.1 7.4 7.3 Exchange rate per US$ (year average) 29.4 31.1 31.2 31.8 32.5 33.1 Government balance (% of GDP) 2.1 -0.6 -0.7 -0.9 -0.8 -0.8 Population (millions) 142.8 142.7 142.5 142.4 142.2 142.0 Nominal GDP (US$b) 1,856.1 1,954.7 2,124.4 2,306.7 2,470.5 2,656.8 GDP per capita (US$ current prices) 12,998.5 13,701.5 14,904.6 16,200.6 17,372.8 18,709.1 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 45
    • Saudi ArabiaSet for steady medium-term growth in oil and 6.8% in 2012) is largely due to weaker oil prices. However, we expectnon-oil sectors oil prices to resume their upward trend by mid-2013. Production should also hold up, as the Kingdom is currently producing belowWith global food and beverage prices forecast to fall back in 2013 and capacity and is expected to make up for some of the slack in Iranianrental inflation appearing to be contained by more new housing stock production.coming on the market, inflationary pressures are unlikely to take off inthe foreseeable future. Furthermore, a moderately appreciating US$ Alongside a healthy oil sector, non-oil growth will also remain robust,(to which the Saudi Arabian Riyal is pegged) will also dampen any supported by loose fiscal and monetary policy. We expect governmentinflationary pressures in the shorter term. expenditure to grow by over 8% on average in the next four years, and the central bank rate to remain below 3% until 2015. Overall, weOur forecast for Saudi Arabia remains little changed from October expect growth rates of around 4% on average in the three years to2012, with growth of 4.1% expected in 2013. The slowdown in growth 2016.in 2013 (we expect the Saudi economy to have expanded by aroundFigure 54 Figure 55Real GDP growth Current account balance % increase per year US$b % of GDP 10 Forecast 210 90 Forecast 180 75 8 150 US$b Middle East and (left-hand side) 60 North Africa 6 120 45 90 4 30 60 15 2 30 % of GDP (right-hand side) 0 0 0 -30 -15 Saudi Arabia -2 -60 -30 1990 1993 1996 1999 2002 2005 2008 2011 2014 1991 1994 1997 2000 2003 2006 2009 2012 2015Source: Oxford Economics; World Bank. Source: Oxford Economics.Table 19Saudi Arabia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 8.5 6.8 4.1 4.3 4.2 3.8 CPI inflation (% per year) 5.0 4.5 4.4 4.0 3.8 3.8 Current account balance (% of GDP) 26.6 26.5 17.8 13.8 11.0 9.1 External debt total (% of GDP) 14.6 13.7 13.3 12.1 11.0 10.1 Short-term interest rate (%) 0.7 0.9 0.7 0.8 1.0 1.5 Exchange rate per US$ (year average) 3.8 3.8 3.8 3.8 3.8 3.8 Government balance (% of GDP) 13.8 9.1 3.5 2.9 2.7 2.5 Population (millions) 28.1 28.7 29.3 29.9 30.5 31.1 Nominal GDP (US$b) 597.1 649.1 679.6 736.6 796.2 849.0 GDP per capita (US$ current prices) 21,274.4 22,628.3 23,194.0 24,617.5 26,071.0 27,266.846 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • South AfricaDomestic demand key to growth Growth in 2012 was supported by robust domestic demand, with rapid growth in retail sales and credit. This domestic spending has beenGrowth slowed in Q3 to 0.3% on the quarter after Q2’s robust 0.8% underpinned by resilient earnings growth and prompt monetarypace. Weak external demand held back growth in manufacturing, while easing by the central bank. Rating agency Fitch downgraded thelabor unrest led to a sharp fall in mining output. Manufacturing is still sovereign rating in January 2013 and this may weigh on investmentstruggling from low foreign demand and the lingering impact of strikes prospects.felt in mining. Agricultural strikes provide further risk. However, this combination of weak external and strong domesticThe external deficit has also left South Africa reliant on inflows of demand caused the current account deficit to widen in 2012. Despite aportfolio finance, increasing vulnerability to investor sentiment. This forecast pickup in exports, continuing strong import growth meanslies behind the sharp depreciation in late 2012 and the subsequent the deficit will only narrow slowly. This will act as a medium-term dragspike in inflation, which is likely to last thru early 2013. By eroding real on growth. We forecast 3% for 2013 and around 4.5% for 2014-16 —incomes and preventing further monetary easing, this poses a which is somewhat below potential.potential threat to domestic demand.Figure 56 Figure 57Retail and car sales GDP and industrial production % increase per year % year % increase per year 160 15 12 Forecast Retail sales 140 (right-hand side) 12 8 GDP 120 9 4 100 6 0 80 3 60 Car sales -4 Industrial production (left-hand side) 0 40 -8 -3 20 -12 -6 0 -9 -16 -20 Three-month moving average -40 -12 -20 2000 2002 2004 2006 2008 2010 2012 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Statistics South Africa; Haver Analytics. Source: Oxford Economics. Table 20 South Africa Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 3.5 2.5 3.0 4.2 4.4 4.7 CPI inflation (% per year) 5.0 5.6 5.6 5.3 4.9 4.8 Current account balance (% of GDP) -3.4 -6.0 -5.7 -4.7 -4.2 -3.7 External debt total (% of GDP) 11.7 13.0 12.9 12.4 12.0 11.8 Short-term interest rate (%) 5.6 5.4 5.1 5.4 6.3 7.2 Exchange rate per US$ (year average) 7.3 8.2 8.5 8.4 8.5 8.6 Government balance (% of GDP) -4.2 -5.5 -4.9 -3.9 -3.5 -3.2 Population (millions) 50.5 50.8 51.0 51.2 51.5 51.7 Nominal GDP (US$b) 403.1 387.4 414.2 455.5 494.6 533.7 GDP per capita (US$ current prices) 7,982.7 7,631.1 8,121.4 8,891.1 9,611.2 10,323.7 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 47
    • ThailandExternal weakness remains but strong downturn in demand from the ASEAN and Chinese economies.investment drives growth Improvements are expected as the Chinese economy shows positive signs of improvement, prompting a pickup in regional trade.Annual GDP growth was 3% in Q3 2012. This was stronger than hadbeen expected as robust investment and private consumption After the improvement in Q3 2012, we now anticipate GDP growth ofcontinued to drive the economy. Investment was particularly buoyant, 6.0%, compared with the 5.4% forecast in October 2012. However,reflecting considerable spending on new machinery and utilities investment is expected to moderate in 2013 as factories finish repairsinfrastructure as well as improved flood defenses and rebuilding. and stop replacing equipment. We expect GDP growth to slow to 5.3% in 2013, then accelerate to 5.4% in 2014 as exports improve.The weak external sector continues to hold back growth as exportsdeclined by 2.8% on the year in Q3 2012. This has stemmed fromweak demand from the EU but is further exacerbated by the sharpFigure 58 Figure 59Exports and imports Private investment indicator % increase per year 2,000 = 100 (seasonally adjusted) 75 240 60 220 45 Imports 200 30 180 15 Exports 160 0 140 -15 120 -30 100 Three-month moving average (US$) -45 80 1995 1997 1999 2001 2003 2005 2007 2009 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Customs Department; Haver Analytics. Source: Bank of Thailand; Haver Analytics.Table 21Thailand Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 0.1 6.0 5.3 5.4 5.5 5.0 CPI inflation (% per year) 3.8 3.0 3.0 2.3 2.3 2.5 Current account balance (% of GDP) 1.7 0.7 1.4 1.3 1.1 0.9 External debt total (% of GDP) 21.9 21.4 23.5 25.3 26.7 28.5 Short-term interest rate (%) 3.1 3.1 3.1 4.0 5.0 5.6 Exchange rate per US$ (year average) 30.5 31.1 30.6 31.7 32.4 33.3 Government balance (% of GDP) -1.6 -3.9 -3.2 -2.4 -2.0 -1.7 Population (millions) 68.6 68.9 69.3 69.6 70.0 70.3 Nominal GDP (US$b) 346.1 366.5 403.1 419.3 443.0 464.2 GDP per capita (US$ current prices) 5,046.3 5,315.8 5,816.4 6,020.8 6,330.7 6,603.348 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • TurkeyGrowth patchy, but inflation down and markets rallying Growth is expected to broaden out and gain momentum through 2013. The significant easing in monetary conditions since mid-2012The latest information has been quite mixed, although overall it points will continue to feed through to lower lending rates for households andto a modestly expanding economy. Industrial output surged in companies. In addition, lower inflation (down to 6.2% in December)September but then fell back in October, while unemployment has and a gradual improvement in the global outlook should help liftstarted to rise and the deepening Eurozone recession may exert a consumption and investment. Overall, GDP growth should move backlarger drag on exports. However, there are signs that consumer above 4% in 2013 after an expected 2.6% in 2012. Looking furtherspending is picking up, helped by solid lending growth. Overall, GDP ahead, provided that the global background remains reasonable androse 0.2% on the quarter in Q3 2012 after a 1.7% rise in Q2. domestic inflation is kept under control, annual growth should exceedIn November, Fitch became the first of the leading rating agencies to 5% in the medium term.raise Turkey’s sovereign status to investment-grade. This reinforcedthe optimism shown by 2012’s sharp equity market rally and the dropin government bond yields.Figure 60 Figure 61Monthly trade balance Interest rates US$m (seasonally adjusted) % 0 24 Average bank -1,000 22 lending rate -2,000 20 -3,000 18 -4,000 16 -5,000 14 Policy rate -6,000 (instrument changed in May 2010) 12 -7,000 10 -8,000 8 -9,000-10,000 6-11,000 4 1997 1999 2001 2003 2005 2007 2009 2011 2006 2007 2008 2009 2010 2011 2012Source: Turkish Statistical Institute; Haver Analytics. Source: Oxford Economics; Central Bank of Turkey; Haver Analytics.Table 22Turkey Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 8.5 2.6 4.3 5.6 5.3 5.3 CPI inflation (% per year) 6.5 8.9 5.9 5.4 5.0 4.6 Current account balance (% of GDP) -9.9 -6.5 -6.8 -7.2 -7.1 -6.8 External debt total (% of GDP) 39.8 40.8 38.7 38.0 37.3 35.6 Short-term interest rate (%) 8.4 7.8 6.2 8.4 9.5 9.5 Exchange rate per US$ (year average) 1.7 1.8 1.8 1.9 2.0 2.0 Government balance (% of GDP) -1.4 -2.2 -1.6 -0.9 -1.0 -1.1 Population (millions) 73.7 74.6 75.5 76.3 77.1 77.9 Nominal GDP (US$b) 777.3 795.0 867.0 912.4 960.2 1,040.6 GDP per capita (US$ current prices) 10,540.4 10,655.0 11,489.4 11,959.6 12,453.7 13,360.3 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 49
    • UkraineModest recovery set to presage stronger exports the IMF may have to re-open before investor confidence returns, but pre-election fiscal slippage will need to be reversed before standbyWeak exports led to a faster industrial output decline and a 1.3% GDP funds can resume.contraction in Q3 2012. Receding hopes for Q4 have seen ourfull-year 2012 growth forecast cut to just 0.6%. Pressure for faster Even if larger currency depreciation is avoided, inflation is set tocurrency depreciation, which is being resisted to keep down the costs return as fuel and food prices rise, ending a year of consumer priceof heavy debt repayments before March 2013, has ruled out any stability. The falling real exchange rate has boosted trademonetary relaxation to boost domestic investment — and inward competitiveness, but weakness in the Eurozone means anemic GDPinvestment slowed sharply ahead of last October’s elections. growth until mid-2013, with solid recovery postponed to 2014-15.Although a post-election eurobond has allayed immediate financingconcerns, the rundown of reserves to support the currency will behard to sustain ahead of the export pickup hoped for during 2013.Hard currency is already being rationed as demand rises. Talks withFigure 62 Figure 63Government budget balance Inflation US$b % of GDP % increase per year 2 Forecast 2 45 Forecast 0 0 40 35 -2 -2 30 Ukraine -4 -4 25 -6 -6 % of GDP (right-hand side) 20 -8 -8 US$b 15 (left-hand side) -10 -10 10 -12 -12 5 Europe and Central Asia -14 -14 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015Source: Oxford Economics. Source: Oxford Economics; World Bank.Table 23Ukraine Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 5.2 0.6 2.4 4.6 4.1 3.9 CPI inflation (% per year) 8.0 1.0 7.0 6.0 5.5 5.5 Current account balance (% of GDP) -6.2 -7.1 -7.1 -7.1 -6.6 -6.0 External debt total (% of GDP) 76.1 82.0 83.9 82.8 81.5 79.7 Short-term interest rate (%) 7.8 7.3 7.0 7.1 7.1 7.0 Exchange rate per US$ (year average) 8.0 8.1 8.5 8.7 8.7 8.8 Government balance (% of GDP) -4.0 -4.1 -3.3 -2.7 -2.5 -2.1 Population (millions) 45.2 45.0 44.7 44.5 44.2 44.0 Nominal GDP (US$b) 165.2 164.6 172.5 187.7 204.2 222.0 GDP per capita (US$ current prices) 3,655.6 3,661.2 3,857.6 4,222.2 4,616.6 5,047.150 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • United Arab EmiratesOil and non-oil growth both set to pick up next year would be increased investment, especially if institutional reforms are significant enough to allow the UAE to secure the prized emergingEconomic indicators continue to point to the resilience of the UAE’s market status in the Morgan Stanley Capital International (MSCI)economy, which we estimate to have grown by 3.3% in 2012. As a result grading system. This would aid the UAE’s diversification efforts.of tentative hiring growth in key sectors, we forecast employment However, so far the timeline for the passage of reforms and theirgrowing more sluggishly than output over the next three years, and do precise content remains uncertain.not expect a return to pre-crisis unemployment rates of under 3.5%until 2015. We expect growth to pick up to 3.7% in 2013, as the key crisis-hit property and financial sectors continue to recover and globalA key development to monitor over the next year will be the outcome of headwinds moderate. Looser fiscal policy will also help, but the extentmuch-awaited revisions to the UAE’s Company Law, which currently of the pickup in growth will be limited by a weaker oil price. In thecaps foreign ownership outside of designated “free zones” at 49%. The medium term to 2016, we expect the UAE to grow by almost 4.0% onkey benefit from opening up the possibilities for foreign ownership average.Figure 64 Figure 65Real GDP growth Government budget balance % increase per year US$b % of GDP21 Forecast 60 Forecast 3018 50 Middle East and 40 2015 North Africa 30 US$b12 United Arab Emirates (left-hand side) 20 10 9 % of GDP 10 (right-hand side) 6 0 0 3 -10 0 -20 -10 -3 -30 -6 -40 -20 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics. Table 24 United Arab Emirates Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 4.2 3.3 3.7 3.9 4.1 3.8 CPI inflation (% per year) 0.9 0.7 2.0 2.7 3.0 3.0 Current account balance (% of GDP) 9.1 10.5 6.3 4.7 4.2 3.7 External debt total (% of GDP) 35.4 29.8 26.2 22.0 19.5 17.3 Short-term interest rate (%) 1.8 1.8 1.8 1.8 1.9 2.4 Exchange rate per US$ (year average) 3.7 3.7 3.7 3.7 3.7 3.7 Government balance (% of GDP) 6.2 8.5 5.9 5.7 6.2 6.2 Population (millions) 4.8 4.9 5.0 5.1 5.2 5.3 Nominal GDP (US$b) 338.7 369.2 382.3 408.6 435.8 462.9 GDP per capita (US$ current prices) 70,399.1 75,168.9 76,376.6 80,126.6 83,927.7 87,552.7 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 51
    • VietnamActivity still subdued but set to pick up in 2013 and remains a downside risk to expansion. GDP growth will remain quite2014 modest next year, with the government targeting growth of 5.5%.Lower inflation has allowed interest rate cuts and some recovery of The weakness of recovery toward the official 7.5% medium-termhousehold expenditure. However, GDP growth slowed from 6.0% in growth target has been exacerbated by banking reforms. Although the2011 to 5.0% last year, as weak export markets curbed industrial reforms will strengthen the system in the long term, they are currentlyinvestment and bad debts stalled credit growth. Banks’ a restraint on lending growth.recapitalization needs could be difficult to meet without external A near-7% growth trend can be regained by 2014, as export marketsassistance, despite the expansion of official reserves as economic recover, if banks are successfully stabilized and planned FDI ruleslowdown has improved the trade balance. changes enacted. Import substitution will continue to contain theInward investment stayed stable in 2012 and the external surplus trade deficit, despite consumption picking up as inflation subsides. Butimproved as exports recovered ahead of imports. But slow US growth competition from other low-cost locations is a downside growth risk.Figure 66 Figure 67Real GDP growth Inflation % increase per year % increase per year14 Forecast 70 Forecast12 60 Vietnam 5010 Vietnam 40 8 30 6 20 4 10 2 0 0 -10 1991 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank.Table 25Vietnam Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 6.0 5.0 5.5 6.9 7.1 6.6 CPI inflation (% per year) 18.7 9.3 7.8 6.4 4.8 4.5 Current account balance (% of GDP) 0.2 4.4 0.1 -1.2 -1.0 -0.4 External debt total (% of GDP) 27.7 21.0 18.8 18.0 17.2 16.0 Short-term interest rate (%) 15.0 8.3 7.0 6.0 6.0 6.0 Exchange rate per US$ (year average) 20,509.8 20,859.4 21,402.3 21,995.1 22,497.6 22,900.3 Government balance (% of GDP) -2.8 -3.5 -3.4 -3.1 -2.8 -2.6 Population (millions) 88.8 89.7 90.6 91.5 92.4 93.2 Nominal GDP (US$b) 123.6 139.5 154.6 171.1 187.7 205.3 GDP per capita (US$ current prices) 1,392.4 1,555.2 1,705.8 1,869.3 2,030.3 2,202.652 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 53
    • Detailed tables54 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
    • Cross-country tablesReal GDP growth 2011 2012 2013 2014 2015 2016Americas 4.2 2.6 3.8 4.8 4.5 4.2Argentina 8.9 1.7 3.1 4.5 4.2 3.8Brazil 2.7 1.0 3.9 4.9 4.8 4.3Chile 5.9 5.7 4.5 4.5 4.1 3.9Colombia 5.9 4.0 4.2 4.4 4.1 4.0Mexico 3.9 3.9 3.7 4.9 4.5 4.3EMEIA 6.2 4.0 4.2 5.3 5.5 5.4Czech Republic 1.9 -1.1 -0.5 1.9 2.7 3.0Egypt 1.8 2.2 2.1 4.0 5.9 5.9Ghana 14.4 7.1 6.9 5.9 5.5 5.0India 7.5 5.4 6.0 7.5 7.9 7.8Kazakhstan 7.5 4.9 6.0 7.5 7.1 6.7Nigeria 7.3 6.5 6.5 6.1 5.5 5.1Poland 4.3 2.2 1.6 3.1 3.8 4.2Qatar 13.0 6.0 5.5 5.9 6.1 6.0Russia 4.3 3.6 3.6 4.1 4.0 3.9Saudi Arabia 8.5 6.8 4.1 4.3 4.2 3.8South Africa 3.5 2.5 3.0 4.2 4.4 4.7Turkey 8.5 2.6 4.3 5.6 5.3 5.3Ukraine 5.2 0.6 2.4 4.6 4.1 3.9United Arab Emirates 4.2 3.3 3.7 3.9 4.1 3.8Asia 7.5 6.3 7.0 7.8 7.4 7.1China and Hong Kong 9.1 7.4 8.1 8.8 8.3 7.9Indonesia 6.5 6.1 6.2 6.0 5.4 5.5Korea 3.6 2.1 3.3 5.0 4.8 4.4Malaysia 5.1 5.1 4.3 4.7 4.3 4.4Thailand 0.1 6.0 5.3 5.4 5.5 5.0Vietnam 6.0 5.0 5.5 6.9 7.1 6.6Total 6.4 4.7 5.4 6.4 6.2 6.0 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013 55
    • Cross-country tablesCPI inflation 2011 2012 2013 2014 2015 2016Americas 5.4 5.1 5.2 4.6 4.0 3.9Argentina 9.8 10.0 9.9 7.6 5.6 4.6Brazil 6.6 5.4 5.9 5.1 4.5 4.5Chile 3.3 3.0 2.7 3.1 3.0 3.0Colombia 3.4 3.3 3.5 3.4 3.3 3.3Mexico 3.4 4.2 3.9 3.6 3.3 3.2EMEIA 7.1 6.0 5.4 4.8 4.6 4.5Czech Republic 1.9 3.3 3.2 1.9 2.0 2.0Egypt 10.1 7.1 7.5 6.7 6.2 5.5Ghana 8.7 9.2 8.5 7.0 6.0 5.2India (WPI inflation (%)) 9.5 7.6 5.3 4.4 4.3 4.2Kazakhstan 8.3 5.1 6.6 6.2 6.0 6.0Nigeria 10.8 12.2 10.5 9.0 8.0 8.0Poland 4.2 3.8 2.4 2.6 2.5 2.5Qatar 1.9 1.9 3.5 4.0 4.0 4.0Russia (% change year-on-year) 8.4 5.1 6.5 5.7 5.7 5.4Saudi Arabia 5.0 4.5 4.4 4.0 3.8 3.8South Africa 5.0 5.6 5.6 5.3 4.9 4.8Turkey 6.5 8.9 5.9 5.4 5.0 4.6Ukraine 8.0 1.0 7.0 6.0 5.5 5.5United Arab Emirates 0.9 0.7 2.0 2.7 3.0 3.0Asia 5.2 2.8 2.8 3.4 3.4 3.1China and Hong Kong 5.4 2.7 2.6 3.4 3.5 3.1Indonesia 5.4 4.3 4.8 4.9 4.9 4.8Korea 4.0 2.2 2.3 2.7 2.6 2.6Malaysia 3.2 1.7 2.6 2.9 3.0 3.0Thailand 3.8 3.0 3.0 2.3 2.3 2.5Vietnam 18.7 9.3 7.8 6.4 4.8 4.5Total 5.9 4.4 4.1 4.1 3.9 3.756 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013
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