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    Etude marche emergent -Ernst1Young Oxford Etude marche emergent -Ernst1Young Oxford Document Transcript

    • Growing BeyondRapid-growthmarketsErnst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • WelcomePublished in collaboration with2 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Shifting, evolving, Firstly, it’s important to remember that the This is the fifth edition of our forecast and, contracting — the long-term fundamentals haven’t changed. one year on from its launch, we have reviewed global economy Cost competitiveness in certain markets and whether our selection of 25 RGMs is still has been less soaring domestic demand in RGMs continue valid. While we have opted to leave the group about rapid growth to offer businesses exciting new markets for unchanged for now, analysis of key economic, and more about goods and services. Consumer spending in social and demographic criteria shows that rapid change these countries is surging and will continue to beyond China and India, Indonesia, Turkey in 2012. Still, do so. Policy-makers in the RGMs have also and Vietnam stand out as particularly strong everything is reacted flexibly to the problems in the wider markets. Not only are all five poised forAlexis Karklins- relative and in a economic environment. Decisions made to growth of at least 5% per annum over the nextMarchay global context the enact a fiscal stimulus in several RGMs, as well 25 years but most of them also share commonCo-leader of the top 25 economies as the easing of monetary policy and credit features, such as large domestic markets andErnst & Young Emerging selected for ourMarkets Center conditions earlier this year, are now paying rising household incomes. A far greater share forecast have the dividends. of global GDP is likely to originate from these long-term potential countries in the future. to generate Another crucial factor is infrastructure. strong business Rapid urban expansion in many RGMs has As always, I hope you find the information opportunities. highlighted the urgent need for new transport, and insights in this report useful. Navigating housing, health care and energy networks. the global economy remains a challenge,But even these 25 rapid-growth markets Addressing these problems will demand a wherever you are located in the world. By(RGMs) have not escaped unharmed from huge construction program and a further offering timely analyses of rapidly growingthe uncertainty and fragility that have had boost to growth rates. economies and providing our view on howsuch an impact on developed economies. their development affects business, we aim toIn January, we predicted that the In this edition of the Rapid-Growth Markets contribute to business planning in this rapidlyexpansion of the RGMs would slow from Forecast, we also take a closer look at the changing economic environment.6.1% in 2011 to 5.3% this year, before banking and capital markets sector. This sectoraccelerating to 6.7% in 2013. Now, we has always been highly important in today’s For more information on rapid-growthare expecting the RGMs to grow by 4.5% interconnected world, but the structural markets, the business environment and localthis year and 5.5% next year — a trend changes it is experiencing, together with contacts, please visitcaused largely by the deterioration of the the shift in power between markets globally, www.ey.com/rapidgrowth.wider international outlook. The RGMs means that it warrants further analysis.are adapting to slower growth, but theirsis certainly no economic crash. Given theongoing financial turbulence beyond theirborders, how have they safeguarded theircontinued growth?Contents 03 04 10 34 62 Highlights Relative Infrastructure Forecast for Detailed tables attraction supporting rapidly growing continued countries growth Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 1
    • 2 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • HighlightsInternational backdrop has Further marked commodity and Several countries are beingdeteriorated currency rises would threaten the monitored for inclusion in the RGMs RGM growth outlook list• The global backdrop has deteriorated since the start of the year, impacting • We believe that the RGMs’ growth rates • One year on from launching the RGM on the outlook for RGMs’ exports and will accelerate over the next two years, report, we have reviewed whether their ability to attract foreign direct as the European Central Bank succeeds our 25 RGMs still match up to the investment “FDI.” We have revised in stabilizing the Eurozone economy, the economic, social and demographic down world growth in late 2012 and US recovery gathers pace, the RGMs criteria that we used in selecting them. H1 2013 by around 1 percentage point continue to gradually loosen monetary Because of the long-term nature of (pp). As a result, we now expect world policy, and infrastructure spending many of the criteria, we do not believe GDP growth of 2.2% in 2012 and 2.5% is used to boost growth. For example, things have changed sufficiently to in 2013. These downward revisions China’s growth rate is expected to warrant making any changes to the list. reflect a combination of tighter than accelerate from 2012’s 7.2% to 8.1% in Nevertheless, Bangladesh, Pakistan and anticipated monetary policy and a 2013 and 9.1% in 2014. the Philippines stand out as non-RGMs disappointing performance from the that now meet many, though not all, the major advanced economies, which are • To stop what has been a fairly mild criteria for inclusion and, as a result, now expected to grow by 1.5% in 2013, cyclical slowdown from becoming should be monitored closely. about a third slower than anticipated at something worse, the RGMs, with a few the start of this year. exceptions, have scope to ease fiscal policy. However, their scope to ease Beyond China and India, three monetary policy may be limited in the countries stand out as particularlyRGM slowdown is proving worse than coming months by higher food prices. rapidly growing markets: Indonesia,anticipated but not dramatically so Turkey and Vietnam • We are concerned that the US Federal• The RGMs will be partially shielded Reserve’s new round of quantitative • When we compare the RGMs to our from the deterioration in the global easing (QE) could create new inflation criteria, Indonesia, Turkey and Vietnam outlook by resilient domestic economies, pressures, curtailing the scope that stand out as high-potential economies boosted by fiscal stimulus and by easing RGMs have to use further rate cuts to alongside China and India. All five monetary policy and credit conditions boost their economies. In addition, QE countries are expected to grow by at earlier in the year. In the case of China, may strengthen the currencies of the least 5% p.a. over the next 25 years. Brazil, Indonesia, Thailand and Malaysia, RGMs against the US dollar, dampening All have large domestic markets, infrastructure spending is also expected their export growth. As yet, neither favorable demographic trends and to support the domestic economy, the commodity price moves nor the rising household incomes. And all are helping to offset the weak external currency moves are a major concern, expected to contribute a much greater environment. In January, we were but marked further rises would be a risk share of global GDP over the next 25 forecasting that RGM growth would slow to the RGM growth outlook. years. from 6.1% in 2011 to 5.3% this year, before accelerating to 6.7% in 2013. We are now expecting the RGMs to grow by 4.5% this year and 5.5% next year. So, while the slowdown has been worse than expected, the RGMs have policy tools to help support growth. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 3
    • Relative attractionThe relative attractiveness of rapid-growth markets (RGMs) In Latin America, Brazil has undergone a sharp slowdown, but is now showing signs of recovery. Mexico continues to benefit from itsfor business is undiminished. Their growth has slowed a emerging role as a regional manufacturing hub and especially fromlittle more than expected this year, hit mainly by weakness ongoing growth in the US, where many of its exports go.in demand from developed economies. But RGMs look set for But the Eurozone slowdown has put a brake on economies in Central and Eastern Europe that previously prospered as low-cost “offshore”a quick rebound, which will be spurred both by enhanced locations for selling goods and services into Western Europe. Hungaryinfrastructure spending programs and rising demand from and the Czech Republic feel the most pain; Poland, Turkey and the Baltic states remain on course for modest growth.their own consumers. As global rebalancing continues, Further east, Russia too is slowing at last. The rise in the price of oil thatbusiness must adapt nimbly to evolving and emerging benefited Russia and much of the Middle East and North Africa seemsopportunities. to have stalled, albeit at a high level. But the Middle Eastern and North African economies are still overshadowed by political instability andA disappointing performance in developed economies has led us to unrest as the Arab Spring fades into an Arab Autumn.revise downward our forecast for global growth in late 2012 and the Businesses surveying this overall slowdown in growth should notfirst half of 2013 by around 1 percentage point (pp). We now expect despair. Rather they should study underlying trends and rethink theworld GDP growth of 2.2% in 2012 and 2.5% in 2013. This is the long term. The simple world in which companies sourced products fromresult of disappointing growth in the Eurozone, the UK and Japan, low-cost emerging markets to satisfy the needs of Western consumerseven though the US remains on track. So we now see the advanced is changing. As RGMs prospered, domestic demand grew, andeconomies expanding by just 1.5% in 2013, more slowly than we businesses began to cater for local consumers too. Now, we areanticipated earlier in 2012. entering a third era: while consumers in developed markets oftenGrowth in RGMs has slowed too, though to a lesser extent. Overall, remain fundamental, their relative importance is declining. Business isRGM economies are likely to expand by 4.5% this year and the pace of therefore starting to develop regionally focused activities to cater forexpansion will accelerate to 5.5% in 2013. The relative strength of regional markets.growth in RGMs remains striking, even though we have pared our Bigger food bills bloat business costsforecasts slightly for this year and next. A surge in commodity prices made a significant contribution to theRegional variation recent slowdown in many RGMs. Droughts this year had a negativeThere are large variations in regional patterns. Weaker domestic impact on the production of corn, wheat and soybeans in the Americasdemand and exports have slowed Chinese growth a little, though we and Central Europe. In India, a late monsoon damaged rice crops.expect it to recover to 8.1% next year. Other big regional exporters, Rising food commodity prices can be a particular concern in RGMs,notably Thailand, Malaysia and Indonesia, will sustain growth where a larger proportion of family income is often spent on food. Thiscomfortably over 4%. has multiple consequences for businesses operating in these markets.India has seen slightly slower growth, hampered by the central bank’s Rising food prices rapidly push though into inflation, creating upwardbattle with inflation, capacity constraints and a poor monsoon, but it pressure on food prices and demands for higher wages. They alsoshould accelerate in 2013. increase the cost of inputs for food processors, eroding profit margins.4 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Food manufacturers, therefore, face difficult negotiations with The combination of weak trade and excess shipping capacity seems towholesale and retail customers who will be reluctant to accept price be acting as a cushion on transport costs for many businesses. This isincreases from suppliers that end consumers will resist. There is, painful for shipping and freight companies, but cheap rates are unlikelytherefore, a risk of reduced profitability throughout the food supply to last indefinitely. We expect international trade to grow by 4.6% inchain unless commodity prices fall or costs can be passed on. 2013 followed by 7.2% in 2014. In the future, rising long-distance shipping rates and surging labor costs in China may contribute to aExpensive energy adds to the pressure global near-shoring trend.High energy prices are also a challenge. A rise of 40% in oil prices Relaunching RGM growth through infrastructure investmentduring 2011 increased costs for many businesses. We expect the oilprice to average around US$111 per barrel (pb) in 2012, remaining flat Exports are being displaced by domestic demand as the engine ofrelative to 2011, but still at a historically high level. This adds to growth in many of the RGMs we survey. As concerns about overheatingpressure on profit margins in energy-intensive businesses and those recede, governments in some RGMs are taking steps to rekindlethat use oil or gas as a feedstock, such as the chemical industry. expansion. Alongside more relaxed monetary and fiscal policies, largeBusinesses will respond by raising prices where possible, but also with infrastructure investment programs are looming in China, India, Brazil,renewed efforts to enhance energy efficiency, investing in energy- Indonesia and Colombia, as we detail elsewhere in this report. In somesaving equipment where it is cost effective in the medium term. countries, these programs may help increase trade, and make it easier to find new markets for exports to replace slack demand in developedCompetition and excess capacity contain long-distance shipping economies. Spending on roads and railways, ports and airports, canprices facilitate trade and reduce the costs of doing business for companies inIn the longer term, high energy costs push up the cost of transport and both domestic and overseas markets.render long supply chains less attractive. But today, a sharp slowdown Colombia’s ability to benefit from the global commodity boom wasin global trade arising from weak demand in developed economies restricted by poor infrastructure, for example. Now a four-lane highwayseems to have assuaged upward pressure on freight rates, helping RGM is being built to the country’s main port, which will improve access toexporters and their customers overseas. The annual pace of world trade markets overseas, including to other RGMs. Indonesian exporters, too,growth has halved from 6.4% in October 2011, to less than 3.0% a year are likely to see big benefits from improvements in infrastructure.later. Designing, building and sometimes financing such projects offersThe slowdown is evident in the falling cost of shipping goods from China interesting opportunities, mainly for domestic contractors. Internationalto Europe. Freight rates normally peak in the last months of the year as suppliers of technology equipment such as air traffic control systemsretailers stock up ahead of the annual year-end shopping spree. and railway signaling may be able to compete for contracts, but areHowever, in September there were reports that the cost of shipping a likely to be best-placed for success when committed to localcontainer from Shanghai to Europe had fallen by more than a third manufacture.since May. Volumes of containers were reported to be down 13.2% inJuly, compared with July 2011.11 “Asia-Europe Box rates slide further,” Lloyd’s List, 14 September 2012, http://www.lloydslist.com/ll/sector/containers/article407393.ece, accessed 10 October 2012. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 5
    • Opening markets to competition and foreign investment The lesson from developments in India and China is that business must keep close tabs on market opening in RGMs, and seize opportunitiesStructural reforms are also back on the agenda in some RGMs. In India, presented as their governments seek to accelerate growth.the government of Prime Minister Manmohan Singh has relaunchedreforms to promote economic growth. An overhaul of rules governing Spotting the growth sectorsforeign direct investment (FDI) was unveiled in mid-September. Led by China, RGM economies are starting to increase their capacity toPreviously blocked, foreign supermarkets will at last be allowed to meet rising demand from domestic consumers, upgrade theircompete in India’s notoriously fragmented and inefficient retail sector. infrastructure, and achieve greener growth. This complexInternational firms can now own a stake of up to 51% in multi-brand modernization will have divergent impacts on the fortunes of individualretailers. Several international retailers have welcomed this step. sectors.Under revised rules, foreign companies will also be able to buy stakes of The drive up the value chain that accompanies growth in RGMup to 49% in Indian airlines, own up to 74% of Indian broadcasters, and economies will be reinforced. In China, a “cleaner growth” agenda willinvest in electricity trading.2 strengthen the demand for cutting-edge technology in nuclear powerHowever, would-be investors will need to respect precise conditions. and electric cars, for example, and for the software that is integral toUnder the revised retail sector FDI rules, foreign retailers will have to the development of more sophisticated products and services. Energy-invest at least US$100m, source at least 30% from India, and will be intensive industries, such as aluminum production, may be relegated torestricted in the locations where they can open.3 a lesser role.Privatization efforts have also been revived. In simultaneous moves, Meanwhile, the services sector will become larger and increasinglyIndia’s Ministry of Finance approved the sale of significant stakes in four advanced. Expansion in health care services will be reinforced bycompanies in the minerals sector.4 strengthening social safety nets. Development of these sectors will be led by domestic companies keen to develop state-of-the-artChina also appears to be taking an accommodating attitude to FDI in technologies and business models. International rivals may be able tosectors where foreign expertise can accelerate growth. In energy, for participate, particularly if willing to be junior partners or to share theirexample, China is believed to have the world’s largest shale gas expertise.reserves, and is licensing national firms to exploit them. But extractingshale gas by hydraulic fracturing requires sophisticated technology. Seeking technology through mergers and acquisitionsSeveral foreign companies that have gained in-depth experience ofshale gas extraction in the US’s unconventional-gas boom have An increasing focus on meeting fast-growing domestic demand ispartnered with oilfield services groups in Mainland China or Hong Kong expected to sharpen the appetite of emerging multinationals fromin deals that promise to benefit both companies and China’s energy RGMs to acquire technology through mergers and acquisitions (M&A).ambitions. We foresee acceleration in M&A activity in Europe by cash-rich national and regional champions, from Asia and elsewhere, keen to acquire knowledge and technologies that will improve their ability to compete with Western rivals. This trend has already been seen in sectors including steel, computing,2 “India opens retail to global supermarkets,” BBC News, 14 September 2012, http://www.bbc.co.uk/news/world-asia-india-19596091, accessed automotive and cleantech. Now we expect it to extend to sectors where 10 October 2012. domestic demand in RGMs is likely to grow especially quickly, such as3 “India Allows Foreign Investment in Retail, Aviation and Broadcasting,” pharmaceuticals. The Chinese Government is keen to promote outward International Business Times, 15 September 2012, http://www.ibtimes.co.uk/ investment by Chinese companies. While seeking to acquire Western articles/384632/20120915/india-fdi-retail-aviation-broadcasting.htm, accessed technologies through M&A, some RGM champions will seek to extend 10 October 2012. their footprint in other fast-growth regions, deploying their low-cost4 “Divestment okayed in four PSUs – Hindustan Copper, Nalco, MMTC and Oil business models and existing technologies in similar markets elsewhere. India,” The Economic Times, 15 September 2012, http://articles.economictimes. indiatimes.com/2012-09-15/news/33845811_1_disinvestment-ccea-nalco-share, accessed 10 October 2012.6 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Relative attractionFollowing fortunes in the rapid-growth leagueBut the bigger challenge for business is to respond effectively to theshifting fortunes of RGMs. Each of the 25 RGMs in our study is Sector in focus: banking and capitaleconomically significant, displays strong growth potential and most ofthem have attractive demographics. But relatively few companies can marketsrealistically aspire to a strong presence in every country — though some For an industry grappling with multiple challenges, theRGMsbranded-goods companies do achieve remarkable global presence. Most offer a more positive outlook for banking. This edition of thebusinesses keen to benefit from the attractive growth rates of RGMs will forecast focuses on Indonesia, Turkey and Vietnam. Althoughseek to focus limited sales, marketing or investment resources in they are at different stages of development, all three offer realcountries that offer the best prospects for their particular activities. opportunities for both domestic and international banks. TheMany policy-makers in RGMs are highly competent and achieve story is not wholly optimistic, but the scales are tipped in favoradmirable levels of growth and stability. But in immature economies of growth and investment.with lingering rigidities, missteps can occur, while export-orientedeconomies can fall victim to markets slowing elsewhere. Simultaneously, Young people, more moneynew contenders arise for inclusion in the rapid-growth league. Indonesia, Turkey and Vietnam are markets that share three verySigning up the rising stars promising characteristics: a young and growing population, rising levelsSlow growth in developed economies offers business a timely of disposable income and significant under-penetration in banking. Asopportunity to develop strategies for RGMs with exceptional potential. some people are looking to open their first bank account (over 50% of the Vietnamese population), existing customers are looking for new creditIndonesia, Turkey and Vietnam, in particular, merit close study. and savings products (annual loan growth is over 20% in both IndonesiaIndonesia is of growing interest to international companies thanks to a and Turkey). Smartphones are becoming increasingly popular andpopulation approaching 250 million, a broadly positive policy younger customers, in particular, are keen to embrace mobile banking.environment and GDP running at 5.9% this year. Regulations can Banks are expanding their branch networks, especially beyond the majorchange at short notice, and the detail of applications can require cities, but they are also exploiting new technology to reach those withoutprotracted negotiation. That makes some small and medium enterprises bank accounts in more rural areas, without the need for majorfrom Europe wary of Indonesia, but it is attracting larger investors with infrastructure investment. As Ernst & Young’s Global Consumer Bankingthe resources to stay the course, especially in the automotive, mining Survey 2012 showed, the technology-hungry younger generation is alsoand utility industries. more comfortable with a “self-serve” approach to simple bankingTurkey, at the crossroads of Europe, Asia and the Middle East, sustains transactions. As well as upgrading their internet-banking channel,strong growth in a troubled neighborhood, providing a convenient several banks in Indonesia and Turkey are already rolling out networks ofplatform for exporters combined with an internal market of 75 million. new ATMs that offer customers the opportunity to pay utility bills and transfer money.FDI inflows have been strong in industries ranging from automotive tofinance, but many Turkish companies seek out overseas markets and itsconstruction companies are very active in Asia and the Middle East. Infrastructure to support business and retail customersVietnam, meanwhile, has a young and well-educated population of As mentioned earlier in this report, continued investment inalmost 88 million, modest labor costs, growth of 6% targeted next year infrastructure will be crucial for sustained growth. If this does happen,and scope for further economic restructuring. Corruption scandals have we’ll see further product evolution as banks offer more premium banking services, investment products and wealth-management solutions to andrawn attention, but its long-term attractions for foreign investors are increasingly affluent customer base.underpinned by improvements in the economic environment andexpectations of sustained high growth. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 7
    • Sector in focus: banking and capitalmarkets (continued)Opportunities in project financing will be significant as governments NIMs are not going to drop to European and US levels overnight, butdevelop a more robust national infrastructure. Continued improvement of banks are increasingly examining steps to protect their returns on equityskills in the workforce will help the economies of all three markets focus of 20% or more. These include new products and additional fees on theon higher-value industry sectors that will fuel growth in domestic revenue side, and increasingly robust risk management and cost controlconsumption as well as exports. As that happens, trade finance will on the expense side.become an increasingly important enabler for growth in these economies. As demand for credit grows, increasing leverage to deliver volume growthInvestors remain concerned about corporate governance and the size of will also help to protect margins, but banks are already seeing the cost ofthe “unofficial” economy in these countries but, as the situation improves funds increase. There is greater competition for deposits and domesticand the capital markets develop, companies will increasingly look beyond wholesale funding markets are still evolving.vanilla loan financing as they try to expand. Aside from financing,companies are already becoming more sophisticated in their demand for As business and household debt levels rise to fuel both consumption andadditional products, including cash management and FX and interest rate investment, investors in all three economies need to be wary of potentialhedges. shocks and bubbles. Given the precarious state of the global economic recovery, further uncertainty in Europe or a harder landing in China couldNew new entrants destabilize all these economies.All three markets still have a significant number of small sub-scale banks The central banks in all three markets are monitoring this closely toso the potential for consolidation is significant. In the case of Vietnam, the protect their banking systems as well as contain inflation. Followingcentral bank has been explicit in targeting a reduction from 38 to 15 previous crises, they have a track record of intervention to ensure thebanks to strengthen the sector and prepare it for new regulatory growth of the banking sector is sustainable. Banks are also strengtheningstandards. their approach to risk-based pricing. The broader availability of customers’ credit histories will also facilitate more accurate scoring andCombine this with the growth opportunities, and it is clear why all three credit decisions, and help banks to minimize the level of non-performingmarkets are attractive destinations for new foreign banking entrants. To loans.varying degrees, they are all open to foreign investment in the domesticbanking sector as well as to the establishment of new branches and Of the three markets, Vietnam is a longer-term investment opportunitysubsidiaries. However, the source of that investment has changed in the for banks and, given the recent slowdown in exports, not without its risks.last few years — now it is more likely to be banks from the Middle East, As businesses and individuals are impacted by the global economicAsia and Russia that are exploiting these opportunities. slowdown, non-performing loans are on the rise and cash-strapped customers are looking for an increase to their credit limits. However, theEvery silver lining potential upside is significant for those banks prepared to invest.Although sustaining low benchmark interest rates and low inflation is akey target for governments in both developed and emerging markets, thisnew environment does pose particular challenges for banks that are used Contactto high net interest margins (NIMs) — over 4% in Turkey and Vietnam, over Director, Global Banking & Capital Markets Center5% in Indonesia. In Turkey, the banks are also no longer able to rely on Steven Lewis SLewis2@uk.ey.comhigh yields from domestic sovereign debt to deliver additional significant UK + 44 20 7951 9471profits.8 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Relative attractionAdjusting expectations and building hopes Marketing Is a different business model required in the RGMs that are to beThough hampered by the Eurozone slowdown, Poland and the Czech prioritized? What brand positioning is appropriate there? WhatRepublic look set to sustain economic expansion. But growth in marketing channels will be most effective in these new locations?Argentina looks likely to disappoint, while progress in Egypt has been What sales and marketing resources, both human and financial, will behindered by ongoing political uncertainty. needed in these markets to realize the company’s new ambitions?Reshaping business to match shifting growth trends Financing and taxationDemand growth is shifting to new customers in new places. To make the How can this expansion best be financed? Where should the funding bemost of the opportunities arising, companies need to review their own sourced? At what point should financing be matched to countryoperations from top to bottom and align their ambitions and their exposure? What are the potential tax pitfalls, and how can they best bestructures to the present and future outlook. Corporate boards should avoided?consider the following questions: RiskGovernance What are the risks associated with any strategic shift envisaged? WhatDoes the board have the right balance of skills and experience? Should risks arise as RGMs assume a growing place in the business portfolio,new directors be appointed with expertise in (the right) RGMs? Should and how can they best be managed?executives in RGMs be given more say in the strategic direction of the Seizing the market opportunitycompany, or more autonomy? Today, the RGMs account for about 60% of the world population, butStrategy only 30% of GDP. Fast-forward 25 years, and their share of GDP willWhich markets should be targeted for future growth? How should exceed their share of the population. The more marked slowdown inresources best be allocated? Should these markets be developed developed economies today will accelerate the pace of this rebalancing.through organic growth, or could M&A, or partnerships, acceleratemarket access and reinforce expertise and other capacities? Some businesses in developed economies will find export opportunities in RGMs. Others will seek to build market share there throughOperations acquisitions or direct investment. In the meantime companies born inWhat is the optimal way to deliver goods or services to the selected RGMs will expand internationally, deploying their expertise in otherRGMs? Will new facilities be needed to accommodate future growth? countries and regions with similar growth patterns.Where should they be located? Business skills and experience gleaned in rapidly growing economiesSupply chain will be at a premium. Though growth has slowed, the relativeAs demand patterns shift, how must the supply chain be recast to attractiveness of RGMs is stronger than ever.match present and future needs? Do some elements need to beright-sized or reshaped to create national or regional hubs, or bettersupport operations in rapidly growing economies?R&D and innovationHow can the business best ensure it develops the right products orservices at the right price for markets that promise the most futuregrowth? Are in-country research and development or innovationcenters needed to tailor products or services to local customers? Isreverse innovation required to hit price points customers in less-developed markets can afford? Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 9
    • Infrastructure supportingcontinued growthFurther marked commodity price rises or dollar weakness Figure 1would threaten the RGMs’ growth outlook World: export market growthThe international backdrop has deteriorated since the start of the year. % yearAlthough the outlook for the US has altered little since then, in Europe 22 Forecastde-leveraging looks set to curtail growth by more than previously 18expected. Asia 14The RGMs have slowed more rapidly than anticipated but notdramatically so. This partly reflects the deteriorating international 10background, but it is also the product of the 2010–11 tightening cycle 6in the RGMs’ monetary policy, which had a larger than expected impact USon their economies. 2We believe that the RGMs’ growth rates will accelerate over the next -2two years as the ECB succeeds in stabilizing the Eurozone economy, the -6US recovery gathers pace, the RGMs continue to gradually loosen -10monetary policy, and infrastructure spending is used to boost growth. -14To stop what has been a fairly mild cyclical slowdown becoming 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014something worse, the RGMs, with a few exceptions, have scope to easefiscal policy. However, their scope to ease monetary policy is starting tobe constrained by rising commodity prices. We are concerned that the Source: Oxford Economics.US Federal Reserve’s new round of quantitative easing (QE) could Global growth forecast revised down since the start ofcreate new inflationary pressures, restricting the RGMs’ scope to use the yearadditional rate cuts to boost their economies. In addition, QE maystrengthen the currencies of the RGMs against the US dollar, Our forecasts for world GDP growth are similarly subdued for 2012 anddampening their export growth. As yet, neither the commodity price 2013, at 2.2% and 2.5% respectively. Moreover, our forecasts havemoves nor the currency moves are a major concern, but further been revised down noticeably since the start of the year, with growth inincreases would be a risk to the RGM growth outlook. late 2012 and H1 2013 revised down by around 1pp. Primarily, this reflects a disappointing performance in the major advanced economies,Global outlook worse since the start of the year which are now expected to grow by only 1.5% in 2013 (more than aThe global outlook has deteriorated since the start of the year, third slower than anticipated at the start of this year), rather thanimpacting on the outlook for RGMs’ exports and their ability to attract weakness in the RGMs themselves. We now expect growth of 0.2% inFDI. The slowdown in world trade has not been as marked as the one the Eurozone, 1.3% in the United Kingdom and 1.7% in Japan.seen in the depths of the financial crisis, when banks withdrew tradecredit, causing the world economy to seize up. Nonetheless, the annualpace of world trade growth has halved from 6.4% this time last year toless than 3.0% now. Our world trade growth forecast for 2012 is just2.3%, historically a very slow pace. International trade is expected toimprove in 2013 and 2014, as interest rate cuts in the RGMs andbond-purchasing programs in the developed economies take effect,with growth of 4.6% and then 7.2% forecast.10 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Figure 2 US outlook is little alteredGDP growth: changes since January Despite concerns over the looming fiscal cliff, the US economy has once again proven to be a relatively bright spot among the developed % annual growth 5 economies. Consequently, our 2012 and 2013 growth forecasts, of Forecast 2.2% and 2.1% respectively, have changed little since the start of the World, January 2012 4 year and compare favorably with the growth rates anticipated for the Eurozone, the UK and Japan. This is a testament to the steps taken 3 World, September 2012 early in the financial crisis to purge the US banking system of bad assets and then to recapitalize it, along with the aggressive expansion Eurozone, January 2012 2 of the Federal Reserve’s balance sheet. Although the pace of US growth compares well with that seen in the UK 1 and the Eurozone, it is still weak by historical standards and insufficient 0 to cause any major reduction in the US unemployment figures. Consequently, the Federal Reserve has announced that it will also -1 Eurozone, September 2012 implement another round of QE. RGM slowdown is proving worse than anticipated, but not -2 2010 2011 2012 2013 2014 2015 2016 dramatically so … To some extent, the RGMs will be shielded from the deterioration in theSource: Oxford Economics. global outlook by resilient domestic economies and by their havingDe-leveraging is curtailing growth in Japan, the Eurozone eased monetary policy and credit conditions earlier this year. In theand the UK case of China, Brazil, Indonesia and Malaysia, infrastructure spending is also expected to support the domestic economy, helping to offset theIn the case of Japan, this partly reflects growth that was expected in weak external environment. Consequently, while our 2013 growth2013 being brought forward into 2012, as the economy rebuilds more forecast for the advanced economies has fallen by about a third sincequickly than anticipated following March 2011’s devastating tsunami. the start of the year to 1.5%, our forecast for RGM growth is down byIt also reflects the impact of the slowdown in world trade growth on the just a sixth in the same period. In January, we were forecasting thatoutlook for Japanese exports. Indeed, the outlook for Japan has RGM growth would slow from 6.1% in 2011 to 5.3% this year, beforedeteriorated sufficiently for the Bank of Japan to launch another round reaccelerating to 6.7% in 2013. We are now expecting the RGMs toof QE in September. grow by 4.5% this year and 5.5% next year. In short, the slowdown has been worse than expected, but not dramatically so.In the Eurozone and the UK, growth is being curtailed by the ongoingdrag on the economy from de-leveraging and, in the case of the At the regional level, the cuts to the growth outlook for 2012 are mostEurozone, the inability of policy-makers to respond quickly and pronounced in the Middle East and Latin America. The Middle Eastforcefully to the intertwined sovereign debt and banking crises. This has revision is driven by a longer than expected period of civil war in Syriaresulted in an environment of uncertainty, causing companies to put and the tightening of sanctions against Iran, which has hit oil exportsinvestment and hiring decisions on hold. hard. The downgrade for Latin America has been mainly driven by a deteriorating outlook for Brazil as the monetary policy tightening cycle of 2010 and 2011 has slowed the economy sharply. For 2013, the revisions are more evenly spread, but emerging Europe is particularly affected because of its links with the Eurozone, which we expect to hardly grow at all in 2013. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 11
    • Figure 3 Figure 4GDP growth forecast for 2013: change since January 2012 GDP growth forecast for 2013: changes since January 2012 % annual growth % annual growth 9 Oxford forecast in January 2012 10 Oxford forecast in January 2012 Oxford forecast in September 2012 Oxford forecast in September 2012 8 9 7 8 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 World US Eurozone RGMs, RGMs, RGMs, RGMs, Asia RGMs China India Brazil Russia Korea Indonesia Turkey Total Americas EMEIASource: Oxford Economics. Source: Oxford Economics. Among individual countries, the downgrades for this year are particularly stark for Brazil and Korea. Because of prolonged weakness in its industrial sector, Brazil is expected to grow by just 1.4% in 2012 as a whole, down from 2.7% in 2011, although we expect growth to recover to 4.5% in 2013. The downgraded growth prediction for Korea reflects weaker recent data and the expectation that the cyclical upturn will be delayed in line with China’s.12 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growth… with RGMs expected to reaccelerate later in 2013 andinto 2014 Box 1We expect the global backdrop to improve in future months, thanks to Will rising food prices harm RGM economies?bond buying by the ECB and further QE in the US and Japan. Withfiscal, monetary and infrastructure stimulus boosting their domesticeconomies, we expect growth to reaccelerate in the RGMs in 2013 and Droughts in the US and other parts of the world have caused2014. Growth is forecast to increase from 4.5% in 2012 to 5.5% in wheat, soybean and corn prices to rise over the last months. In2013 and then 6.5% in 2014. If this expected acceleration fails to contrast to 2007–08, this is a supply-side shock rather than amaterialize, then the authorities have some scope to use fiscal and demand-driven one. While upward pressure in commodity prices ismonetary policy to bolster demand. But if it does continue, the rise in an obvious risk to inflation, for most RGMs the main risk is tofood prices seen in recent months would limit their ability to act. In consumer spending and therefore growth. Food prices haveaddition, rising food prices would act as a “tax” on RGM household consistently risen faster than overall consumer price inflation,incomes and hence dampen consumer-spending growth. This would particularly in the BRIC economies, reflecting the changing tasteshappen because food accounts for a comparatively larger share of of a rapidly expanding middle class. Local factors still have ahousehold expenditure in RGMs than in developed economies. significant impact on economies’ food prices, but further rises after several years of price hikes will squeeze consumers in anThis year, droughts have hit wheat, soybean and corn production in the environment of slowing world growth. As a result, we do not expectAmericas and Central Europe. An estimated one-sixth of the US corn a general tightening of monetary policy.crop has been destroyed by drought. Slow-to-appear monsoons havedamaged rice crops in India. As a result, with the exception of rice, the Figure 6prices of the main traded agricultural foods have risen sharply over the World agricultural productspast two months. Grain and oilseed prices, US$ per bushel 18 16 Soybeans 14 12 10 Wheat 8 6 4 Corn 2 0 2004 2006 2008 2010 2012 Source: Oxford Economics; Haver Analytics. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 13
    • Box 1Will rising food prices harm RGM economies? (continued)Background to rising food prices IndiaIn the past five years, there have been two large food price shocks The situation in India is somewhat different, as it has been sufferingand we may now be witnessing a third. World food prices rose 25% in from stubbornly high inflation, with the food component of prices2008, driven in part by the rising price of oil, but also reflecting rising consistently faster than overall inflation. The latterchanging patterns of food demand prompted by the rise of the middle development reflects the changing tastes of a rapidly expandingclasses in RGMs. More recently, poor weather in 2010–11 affected middle class, which is demanding a wider range of foods, especiallywheat production, resulting in lower harvests and higher prices (20% meat. Structural constraints mean that suppliers are unable to keephigher in 2011 than 2010), again exacerbated by rising oil prices. pace with this demand. Food prices have risen by an average of 10.8%And this year, droughts have hit wheat, soybean and corn production p.a. over the past three years, compared with consumer price rises ofin the Americas and Central Europe, with poor monsoons adversely 8.2%. Further increases from an already high base will squeezeaffecting rice crops in India. Almost 80% of agricultural land in the US consumer spending at a time of slowing growth. Half of India’sis affected by the current drought, resulting in widespread crop workforce is still dependent on agriculture for its income. If thedestruction. Unlike the situation in 2007–08, food shortages are not monsoon continues to disappoint, consumer spending would be hit byan issue: stocks are almost certainly higher, and demand growth, reduced incomes and further eroded purchasing power. And, withparticularly from India and China, is not as rapid. inflation still high, the central bank has little scope to lower interest rates this year to support growth.Figure 7RGMs: CPI and food price inflation Figure 8 % increase per year India: inflation 16 % increase per year 14 20 Food prices component of WPI 12 Weighted CPI food 10 price in ation 15 8 10 Total WPI 6 4 5 Weighted CPI in ation 2 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -5 2000 2002 2004 2006 2008 2010 2012Source: Haver Analytics.Nevertheless, with the exception of rice, the prices of the main tradedagricultural foods have risen sharply over the past three months. Source: Haver Analytics; Oxford Economics.While upward pressure in commodity prices is an obvious risk toinflation, in many economies the main risk is to consumer spendingand therefore growth.14 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthEast Asia Food prices across Asia are driven primarily by local factors affecting the supply of staple foods, and largely depend on local tastes,In China, too, a rapidly growing middle class has shifted tastes toward incomes and weather conditions. In Korea there is no evidence ofhigh-quality proteins, especially pork, and has also developed an particular price pressures, but most other East Asian economies haveincreasing thirst for beer. Soya is a major feedstock for pigs, and beer seen increases in the past few months. In Taiwan, for example, foodis produced from wheat, so although China may aim to be self- price inflation reached 8.7% in August compared with 3.3% in Q1.sufficient in rice production it is still exposed to world food prices. As Surging vegetable prices have been responsible. But for richerin India, food price inflation has been consistently higher than overall economies like Taiwan, food represents a smaller proportion of overallinflation, as the economy adjusts to these changing tastes. Price consumer spending, so price changes have a lesser impact on overallrises may be slowing (CPI inflation was 2% in August, with food prices consumption.up 3.4%), but any increase comes on top of an already high base: foodprices were over 13% higher in August 2011 than the year before. Figure 10Even small further increments to prices will affect consumer Emerging Asia: CPI and food price inflationspending. Higher food prices squeeze both consumers and producers, % increase per yearconstraining growth and making the necessary shift toward more 16consumption and less investment harder to achieve. 14Figure 9 12China: CPI and food price inflation Weighted CPI food 10 price in ation % increase per year 24 8 21 CPI food price in ation 6 18 4 Weighted CPI 15 in ation 2 12 0 9 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6 Source: Haver Analytics. 3 CPI in ation 0 -3 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Haver Analytics. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 15
    • Box 1Will rising food prices harm RGM economies? (continued)Central and Eastern Europe Latin AmericaThe picture is mixed in Central and Eastern Europe. Parts of the In Latin America, food prices tend to rise consistently faster thanregion have experienced adverse weather conditions that have overall consumer prices. As the chart below shows, the effects ofaffected their staple crops, wheat and corn. Average food price price controls (in Argentina) can disguise underlying trends for ainflation was over 6% last month, higher than in the past few months time, but food prices are now starting to pick up as a result of thebut by no means as high as the 10%–11% annual increases seen after drought. Brazil’s commercial sector is set to benefit from the highthe poor grain harvests of 2010–11. In Russia, where there has been price of corn. Official estimates suggest that corn output hasupward pressure on inflation, food prices were up 6.5% year-on-year increased by 27% this year, neatly plugging at least some of the gapin August, contributing to a headline inflation rate of 5.9%. Russian left by US shortages. Higher export prices may feed into higherand Ukrainian grain harvests have been affected by drought, resulting domestic prices, though, at a time when consumer confidence andin tighter supplies and higher prices. Consumer spending has spending is already weak. Fuel prices may also rise because Brazilremained fairly buoyant, however, and the central bank of Russia uses a high proportion of ethanol (produced from sugar cane or corn)raised its key policy rate last week in an effort to contain inflationary for transport. For over a year, the Brazilian authorities have tried topressures. It mentioned in particular the influence that higher food kick-start growth with unprecedented levels of monetary looseningprices had on its decision. and fiscal measures. If inflation rises — and with a tight labor market Brazil is more at risk of increases in prices feeding through into inflationary expectations — the authorities would be in the uncomfortable position of having to choose between choking off incipient growth just as the first signs of improvement are showing, or allowing prices to pick up.Figure 11 Figure 12Central and Eastern Europe: CPI and food price inflation Latin America: consumer food prices % increase per year % increase per year 18 25 16 Weighted CPI food price in ation 20 14 Chile Argentina 12 15 Weighted 10 CPI in ation 10 8 6 5 Mexico 4 0 2 Brazil 0 -5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Haver Analytics. Source: Oxford Economics.16 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growth China’s resurgence has been delayed not canceled … National accounts for the second quarter confirmed indications from high-frequency data that China’s economy has slowed. GDP grew by 7.6% year-on-year in Q2, down from 8.1% in Q1. This was the weakest quarterly outcome since 2009. Chinese electricity consumption, whichHow will the RGMs respond? increased by over 12% last year, slowed to just 3.5% in August and, at an industry level, shipbuilders and steel producers have been reportingThe last time there was a scare about rising food prices putting far fewer orders. In August, HSBC’s Manufacturing Purchasingpressure on inflation, RGMs had recovered from the global financial Managers’ Index (PMI) fell to its lowest level since March 2009 and rosecrisis and were growing fairly strongly. Increases in interest rates only very slightly in September, suggesting a continued slowdown. Theseemed a far more reasonable response then than now, when the fall was driven by weakness in orders, particularly foreign ones, asmain consideration for most RGMs is to stimulate demand in Chinese producers struggled against strong global headwinds.response to slowing world growth. Rather than raise inflationaryexpectations, general food price increases are more likely to erode The Chinese economy has decelerated more than expected over thepurchasing power and squeeze consumer spending, thereby course of this year. A combination of the continued slowdown in worlddamaging business confidence. Against this background, RGMs will manufacturing and a bigger than anticipated impact from last year’snot be obliged to tighten monetary policy. tightening of monetary policy means that growth in China is unlikely to pick up this year. Exports to the beleaguered EU alone are worth around 5% of Chinese GDP — when Hong Kong GDP is included — and there is no sign yet of an improvement in European demand. We have cut our growth forecast for 2012 to 7.2%, from 7.5% three months ago, pushing back the cycle into early 2013, when we expect GDP to grow by around 8%.Figure 13 Figure 14RGMs: policy interest rates China: key economic indicators % (unweighted averages) % annual growth 11 4010 35 Central and Eastern Europe Bank loans 30 Electricity 9 Latin America consumption Rail cargo 25 8 20 7 15 6 GDP 10 5 5 4 Asia 0 3 -5 2 -10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Haver Analytics; Oxford Economics. Source: Oxford Economics; CEIC. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 17
    • … domestic demand could start to recover before the end China’s slowdown is having knock-on effects across theof the year region, hitting Korea …The near-term outlook for China is therefore relatively subdued. Slower Weaker Chinese domestic demand and, in turn, weaker imports meaninvestment prompted a 2.6% fall in imports in August, the first drop that slower Chinese growth has repercussions for several othersince 2009 (with the exception of January 2012, which was hit by the economies in the region. Compared with three months ago, we have cuttiming of Chinese New Year). The uncertain external environment is our GDP forecast for South Korea by 0.3% to 2.2% for this year and byalso holding back exports. But domestic demand could start to recover 0.4% to 3.5% in 2013. This reflects weaker recent data and thebefore the end of the year in response to looser monetary policy, fiscal expectation that the cyclical upturn will be delayed in line with China’s.stimulus, and the authorities’ decision to allow the currency to Final GDP figures for Q2 were revised down to 2.3%, and Koreandepreciate slightly against the US dollar. With CPI inflation down from industrial production fell by 1.6% on the month in July, having fallen by4.1% at the end of 2011 to just 2.0% in August, there is scope for 0.2% on the quarter in Q2. With the industrial PMI for August infurther stimulus measures. If the monthly indicators remain weak, we contraction territory for the eighth consecutive month, the weak trendexpect the authorities to continue gradually easing policy. In short, we is likely to continue. To counter this, the Central Bank cut its base ratecontinue to expect the Chinese economy to land softly, because the by 25bp in July and October, and has further scope to stimulate theauthorities are taking action. economy if growth remains subdued.Step up in Chinese infrastructure spending reflects the Figure 15Government’s determination to deliver a soft landing Exports to China as a percentage of total exportsTo help deliver a soft landing, the Chinese Government is stepping upspending on infrastructure projects and, in September, approved plans 2011 Vietnamfor Rmb1t (US$158b) of infrastructure spending. Although sizable, the 2000stimulus package, at around 2% of GDP, is a quarter of the size of the Indonesiaone implemented during the financial crisis. It will be rolled out over Thailandseveral years, because of fears of over-stimulating the economy, ashappened in 2009. Given that many of the measures were already in Malaysiathe pipeline, the latest announcement should be seen as “a call to Kazakhstanaction” and, as a result, further announcements are likely. BrazilThe package of projects that has been approved includes 25 urban railprojects, 13 highway construction projects, 7 waterway projects and 9 Chilewaste-water treatment plants. The implementation of these projects will Koreabegin in the coming months, and should boost fixed asset investment.The impact should start to be felt in GDP numbers in the fourth quarter Hong Kongof 2012. % 0 10 20 30 40 50 60 Source: Oxford Economics. We have also cut our forecasts for Hong Kong, Singapore and Taiwan in line with the more downbeat view on mainland China. These economies could also be hit by any further depreciation of the Chinese Yuan (CNY) against the US dollar. There has been a slight depreciation since May, which could be extended, if necessary, to boost Chinese competitiveness.18 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growth… but infrastructure spending will help Malaysia and Figure 16Indonesia buck the trend South East Asia: real GDP % yearThe outlook for other East Asian countries is better, with Thailand, 15 ForecastMalaysia and Indonesia all expected to see GDP growth of comfortably Malaysiamore than 4% this year. We still expect growth of 5.9% in Indonesia this 10year and 6.3% in 2013. Despite the fragile global background, webelieve that Indonesia’s strong domestic fundamentals will underpin 5robust GDP growth, helped in part by the fast-tracking of infrastructureprojects. Consumer confidence rose in August as consumers reported 0improving job prospects, indicating that private spending shouldmaintain strong momentum in H2. In addition, fixed investment rose at -5a double-digit pace in H1. We expect investment to grow by 9.5% in -10 Thailand2012 overall, up from 8.8% last year. Fixed investment should continueto grow strongly in 2013, helped by government spending on -15infrastructure. IndonesiaThe budget for 2013 allows for a 15% rise in capital spending, targeted -20 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015at improving the road network and financing 15 new airports. However,for this ambitious plan to be delivered, the reform agenda will need to Source: Oxford Economics.continue. A combination of complex bureaucracy, nervousness aboutthe involvement of the private sector and a lack of financing has so fardelayed Indonesia in building the infrastructure needed to sustaineconomic growth of more than 6% a year, but if reforms continue, theseobstacles will gradually be overcome. Encouragingly, investorsacknowledge that the Government is already taking steps to improvethe transparency of the bidding process for infrastructure projects andto improve the land acquisition process.Malaysia, too, has benefited from a 26% increase in investment in Q2,which prompted an upward revision of our 2012 growth forecast to4.5% from 4.3% three months ago. These expansionary policies are partof a deliberate attempt by the authorities to maintain strong domesticdemand in the face of a global downturn, although in the case ofMalaysia the spending is also driven by the impending elections. Muchof the spending is on infrastructure projects, which should also raise thecountry’s longer-term growth prospects. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 19
    • Infrastructure needs are great across the RGMs, but FDI is an important source of infrastructure financing, and India hasprogress is being made recently revised its plans and intends to allow greater foreign participation in the economy. It is essential that foreign investors work World Economic Forum: world ranking for infrastructure in harmony with domestic investors, harnessing local and sector- 2011–12 specific knowledge to forge successful public private partnerships. Hong Kong SAR 4 China 69 In China, Indonesia, Malaysia and Thailand, governments are UAE 6 Kazakhstan 78 attempting to offset the global slowdown with higher public spending, Korea 22 Poland 79 much of it directed toward infrastructure. This is good news, but the spending must be sustained by subsequent political regimes in coming Saudi Arabia 23 Ghana 86 decades. While public spending on infrastructure is very high in China, Qatar 26 India 87 the authorities need to find ways to encourage more private Czech Rep 28 Egypt 88 investment. The Brazilian Government is keen to push infrastructure Malaysia 29 Indonesia 92 development forward, and the upcoming World Cup and Olympic Games Chile 31 Russia 101 will help this. However, the economy is ranked 107th in the world for Turkey 34 Brazil 107 infrastructure, so it has some way still to go. Governments must find Thailand 49 Colombia 108 ways of making credit available at cheaper rates to encourage more private financing. Ukraine 56 Argentina 112 South Africa 58 Nigeria 117 Mexico 65 Vietnam 119Source: World Economic Forum’s Global Competitiveness Report 2011–2012.The table above shows the infrastructure score given by the WorldEconomic Forum’s Global Competitiveness Report 2011–2012 for eachof our 25 RGMs. Hong Kong and Korea are further ahead of the rest ofemerging Asia in terms of development, and rank highly forinfrastructure. The Middle East region has made good use ofcommodity revenues to fund infrastructure construction, and the UAE,Saudi Arabia and Qatar have jumped up the rankings in recent years.But Brazil, China, India and Russia rank some way off the top 50.Political instability has been a key constraint on infrastructure spendingover the last decade in India, Thailand, Colombia, Argentina andNigeria. Colombia is a good example of a country that is now takingadvantage of greater political stability to drive infrastructure projectsforward. In India, the Government recently announced a broad set ofreforms designed to tackle the rising budget deficit and rectify some ofthe economy’s structural deficiencies, but the economy has a history ofunderachievement when it comes to targets.20 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthBox 2A review of the 25 RGMs one year onThe 25 countries that make the grade to be included as RGMs are not Large, young, well-educated populations …only economically significant now, but also have strong growthpotential. Consequently, they are strategically important for The demographic trends of the RGMs are very favorable. Indeed, inbusinesses. 10 years’ time, 15 of the RGMs will still have at least five workers for every person over 65. And for 10 of them, this will still be the case inLast year, almost two-thirds of the world’s population lived in one of 25 years’ time. Among the RGMs, the Czech Republic, Poland, thethe 25 RGMs, but only a third of world GDP in nominal terms was Ukraine and Korea will age quickest.produced by these economies. Fast-forward 25 years to 2036 and, asthe chart below shows, the RGMs will enjoy a bigger share of global Figure 18GDP than of population, a neat illustration of the rapid-growth Number of workers to support each person over 65concept.Figure 17 South AfricaRGMs: share of world growth Malaysia India % Egypt70 Forecast Population Vietnam Columbia60 Turkey Indonesia50 US Poland40 GDP, nominal terms Ukraine 2036 Czech Republic30 2021 Germany 2011 Japan20 Number 0 5 10 1510 Source: Oxford Economics. 0 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 For countries with rapidly growing young populations, developing human capital is critical. The chart below illustrates that in Brazil inSource: Oxford Economics. 1990, for example, only half of secondary-age children were still in education; in 2010, 100% attended school. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 21
    • Box 2 A review of the 25 RGMs one year on (continued)Figure 19 Figure 20Percentage enrolment in secondary education Households with an income greater than US$30,000 Number of households, millions 2010 35 2010 Nigeria 1990 2020 Ghana 30 1971 India Egypt 25 Vietnam 20 Indonesia Turkey 15 China Tunisia 10 Columbia Korea 5 Brazil 0 0 20 40 60 80 100 China Brazil Russia Turkey India IndonesiaSource: World Bank. Source: Oxford Economics.… with fast-rising spending power Figure 21 GDP growth per annum from 2011–36Nine RGM countries will see their per capita income increase by amultiple of at least five over the next 25 years. In 10 years’ timeChina will be where Poland is now in terms of per capita income, and JapanPoland will be where the UK and Japan are. Germany USFavorable long-term growth prospects … TurkeyExamining our forecasts for GDP over the next 25 years illustrates Qatarthe RGMs’ phenomenal growth prospects. Nine of our RGMs are Ghanaforecast to grow by at least 5% p.a. for the next 25 years, in contrast Thailandto Japan and Germany, which will both grow by less than 1.5% p.a. NigeriaOnly three RGM countries are expected to grow by 3% or less p.a.over the next 25 years: Argentina, the Czech Republic and Poland. In Indonesiathe case of Poland and the Czech Republic, however, this is partly Vietnambecause they are at a later stage of development. Indeed, in the IndiaErnst & Young M&A Maturity Index 2012, the Czech Republic ranks China %higher than the US and Canada for infrastructure. 0 1 2 3 4 5 6 7 8 Source: Oxford Economics.22 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growth… will propel RGMs up the league table of economic Fiscal and monetary firepower to sparewinners Most RGMs enjoy an enviable position in terms of governmentThe table below suggests that in 25 years’ time, the BRICs — Brazil, budget, particularly compared to Western Europe. Of course, forRussia, India and China — will be among the six largest economies in many of them this has been largely due to a favorable endowment ofthe world. Indonesia will be one of the top 10 economies and South commodities. Even countries such as China and Korea, however,Africa and Nigeria will have joined the top 20. Turkey, Mexico, Korea which are big net commodity importers, enjoy very healthyand Saudi Arabia will also have moved up the rankings. government accounts. And firm improvements have been made over the last decade. Government debt has fallen by around half as a Top 20 economies in the world percentage of GDP in Colombia, Chile, the Ukraine and Egypt. Over 2011 2035 the last 10 years, government debt in Russia has fallen from 70% of GDP, US$b Rank GDP, US$b Rank GDP to just 9% of GDP. China 7,312 2 101,763 1 Figure 22 United States 15,094 1 47,912 2 India 1,840 10 15,999 3 Government debt as a percentage of GDP Japan 5,882 3 9,492 4 Brazil 2,476 6 9,181 5 50 120 Russia 1,856 9 9,032 6 45 United Kingdom 2,431 7 7,207 7 Russia US 100 Germany 3,573 4 6,339 8 (left-hand side) (right-hand side) 40 Indonesia 845 16 5,649 9 35 France 2,777 5 5,641 10 80 Mexico 1,156 14 4,652 11 30 South Korea 1,117 15 4,281 12 25 60 Turkey 775 18 4,260 13 UK Canada 1,740 11 4,205 14 20 (right-hand side) Columbia Italy 2,201 8 3,915 15 (left-hand side) 40 15 Australia 1,486 13 3,902 16 Saudi Arabia 577 20 3,188 17 10 Chile 20 Spain 1,494 12 2,966 18 (left-hand side) 5 South Africa 409 29 2,292 19 Nigeria 228 44 1,922 20 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Oxford Economics. Nominal GDP figures. Source: Oxford Economics. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 23
    • Box 2A review of the 25 RGMs one year on (continued)Improving stability and macro-management Egypt dropped down eight places in the M&A rankings in 2012, as its score for regulatory and political factors fell because of the ongoingThe Ernst & Young M&A Maturity Index 2012 (www.ey.com/ political turmoil. To illustrate how this feeds through to our growthtransactions) assesses the maturity of 148 countries. It applies 23 forecasts, our forecast for GDP growth per annum over the next 10factors from the following five categories: regulatory and political, years has fallen from 5% before the Arab Spring to less than 4% now.economic and financial, technological, socioeconomic, andinfrastructure and assets. It uses these factors to derive an overall ... while others are knocking on the doorM&A maturity score. On the basis of their projected growth rate, population size,Many of the RGMs have made firm progress in macroeconomic demographic trends and wage competitiveness, Bangladesh andmanagement and political stability in recent years. Indeed, two RGMs Pakistan appear to have what it takes to be RGMs. However, both— Korea and mainland China — made it into the top 10 of the index. have M&A maturity scores of less than 50, raising significantThree more, Thailand, Malaysia and the UAE, are in the top 20. Egypt concerns. The only RGMs with an M&A maturity score of less than 50fell by eight places in the M&A rankings in 2012, but Malaysia and are Ghana and Nigeria, but both of these countries have a higherBrazil both gained two places in the rankings. score for regulatory and political factors than Bangladesh and Pakistan.But several countries are at risk of removal from our listof RGMs ... The Philippines is forecast to grow by an average of 5% p.a. over the next 25 years and enjoys a large, young population. Its M&A maturityIn addition to lower long-term trend growth, Poland and the Czech score is some way behind those of India and Indonesia, though. And,Republic enjoy less fiscal scope to stimulate than do Asia and Latin while in India and Indonesia the number of households earning moreAmerica. They will also age quicker. But in Poland, per capita income than US$30,000 will rise by at least eight times over the next 10is expected to quadruple over the next 25 years and more than years, in the Philippines the gain over the next 10 years will be justtwo-thirds of pupils now stay in education past the age of 18. Poland 2.5 times. Nonetheless, the Philippines is definitely a country weis expected to grow by 2.5% this year, one of few countries in Europe should continue to monitor closely.expected to achieve positive growth, due largely to strong domesticdemand.While the Czech Republic, whose economy is heavily dependent onexports to the Eurozone, might seem at risk, it has a number offactors still in its favor. In 25 years’ time, the Czech Republic will bewhere the US and Japan are now, and the economy already enjoys anM&A maturity score in line with the global average. The CzechRepublic should be able to harness this maturity to attractinvestment and to diversify in coming years.Across Latin America, Argentina is forecast to enjoy the slowestgrowth, the fastest aging and the slowest increase in per capitaincome. It has a lower M&A score than Brazil, Mexico, Chile andColombia, and its ranking fell in 2012, so it is a country we must keepour eye on.24 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthPersistently high inflation means that, unlike China, India According to the Planning Commission’s 12th Five Year Plan, India aimsdoes not have scope to ease policy to counter slowing to increase capacity by 88,425 megawatts by 2017. This is about 44%growth … higher than current capacity and requires an average growth rate of nearly 7.5% p.a. About half of the additional capacity would come fromAs expected, Indian annual GDP growth was weak in Q2 at 5.5%. In private investment. But a note of caution comes from the evidence thatcontrast to the GDP data, the manufacturing PMI held up well in Q2, the Government has missed every electricity expansion target it has setaveraging 54.9 (over 50 indicates expansion), although it has since since 1951. And, despite these shortages, the Government continuesfallen back to 52.8 in August. To make matters worse, power shortages to subsidize energy prices for consumers. Among the RGMs, India hasare constraining production and causing a backlog of orders. A lack of one of the largest government budget deficits, at 6.8% of GDP last year,external demand is also a problem, and the authorities have little room and cannot afford to invest enough in structural improvements while itto stimulate domestic spending by cutting interest rates as inflation is paying these subsidies.remains high. Recent rises in global food prices, together with a poormonsoon, offer no short-term relief. We therefore expect relatively Attracting the private sector investment necessary to improve India’ssubdued growth (by India’s standards) of around 5.6% this year, rising to infrastructure will require a less bureaucratic environment in which to6.6% in 2013 and above 7% in 2014 and 2015. do business. There are a number of political obstacles that prevent the changes needed to encourage sufficient private sector spending on… and an inability to attract investment in infrastructure infrastructure. Unfortunately, the current coalition government, whichis preventing it from fulfilling its longer-term growth is due to remain in power until 2014, seems to lack the will needed topotential overcome these obstacles. Until the Government addresses India’s fundamental structural problems, actual growth will not matchIndia is ranked 87th in the world by the World Economic Forum for its potential.infrastructure, a constraint which limits Indias longer-term growthprospects. Encouragingly, the Government has recently announced plans to open up the retail sector to foreign-owned supermarkets. The Indian retailOver 80% of India’s electricity is thermal, much of it produced from sector needs to attract sizable investment and to encourage foreignburning coal, but despite having the fifth-largest coal reserves in the participation in order to remove the current supply-chain bottlenecks.world, India still imports coal. This imposes significant costs on powergenerators, because imported coal costs roughly five times more than In Latin America, Mexico is weathering the storm …domestic coal. The state monopoly supplier, Coal India, has been unable In Latin America, this year’s gulf between the relative economicto increase output to match demand, and an inadequate transport and performances of Mexico and Brazil may now be closing. Mexico is stillgrid network hampers supply. weathering the economic storm. The manufacturing PMI is strong,In the power sector, there has been a history of underinvestment, standing at over 55 in August. Taken together with high levels of newundershooting capacity targets, poor market structure and ineffective orders, driven largely by the car industry, this indicates that theregulation. As a result, India cannot produce enough electricity to meet economy is still able to extract growth from the US. The combination ofdemand. Approximately 27% of electricity disappears through theft or solid demand from the US for Mexican exports and fairly healthytransmission losses, according to the Central Electricity Authority, so consumer-spending trends has shielded the economy from the widersome of the bank lending to power suppliers funds losses rather than manufacturing slowdown and helped to keep unemployment in check.new investments. Meanwhile, an expanding middle class means that Nevertheless, our GDP forecast for 2013 has only come down fromelectricity demand has been skyrocketing in recent years. 5.0% in January to 3.5% now, and the risks are on the upside if exports to the US continue to expand. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 25
    • … Brazil may at last be turning a corner … Of the US$66b, 68% will be invested in the construction of 12 railways spanning 10km, and the remaining 32% in the construction orOf the RGMs, Brazil is perhaps the country that has suffered most over expansion of 9 roads spanning 7,500km. More than half of thethe course of the year. Despite cutting interest rates from 11% in investment is to take place within 5 years, the remainder over theDecember 2011 to just 7.5% now, and implementing substantial fiscal following 20 years. The President also said that the Government wouldstimulus, domestic activity remains very weak, particularly in the soon announce more investment aimed at airports, ports andindustrial sector. Industrial output has fallen on the quarter for the last transportation on waterways, as well as other areas in which seriousfive quarters to Q2 2012 and further stimulus seems likely. Since the deficiencies have been noted.start of the year, our 2012 growth forecast for Brazil has been reducedfrom 3.1% to 1.4%. Although they come too late to have much impact this year, we expect these policies to support activity further ahead: growth should rise toFigure 23 4.5% in 2013 and 5.0% in 2014. But, unless the pickup is carefullyLatin America: manufacturing Purchasing Managers Index managed, inflation could become a risk, and there have been some(PMIs ) early signs that it may be ticking up. This could be exacerbated by any Index further fall in the exchange rate, which has remained relatively stable since June. 55 Mexico Figure 24 Brazil: ranking of GDP and infrastructure quality Rank out of 144 countries 50 0 6 20 45 Brazil 40 40 60 80 35 2005 2006 2007 2008 2009 2010 2011 100 100 107Source: Oxford Economics. 120 123But, as the chart above shows, the Brazilian economy is at last showing 134 135 140some signs of recovery. Having recorded the largest monthly gain in 15 GDP Railways Overall Roads Air transport Portsmonths in June, the Economic Activity Index rose again in July and the infrastructureAugust PMI picked up to 49.3 from 48.7. Seasonally adjusted industrialproduction was also up on the month in July, by 0.3%. A further modest Source: World Economics Forum; Oxford Economics.boost to growth should come from a new transport infrastructureinvestment program worth up to US$66b over the next 25 years.26 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growth… and hosting the World Cup and the Olympics should Argentina is in choppier waters after an expansionaryboost the medium-term outlook decadeBrazil is due to host the World Cup in 2014 and the Summer Olympic After a decade of relative stability and strong growth, Argentina’sGames in 2016. But the World Economic Forum ranks Brazil 107 out of home-grown economic model of state nationalism and social priorities142 countries for its infrastructure, raising many concerns may be starting to unravel. Growth slowed to 5.2% in H1 this year frominternationally about how successfully Brazil will be able to manage the 8.9% in 2011, with indicators suggesting the deceleration will continue.influx of people. From 2011 to 2014, the Government is expected to Currency controls to reduce capital flight from the country, togetherspend US$80b p.a. (around 1% of GDP) as part of its ”Growth with import restrictions to halt a declining trade balance, have hitAcceleration Program,” and the Operations Director for the World Cup’s Argentina’s car industry, which was already suffering from fallinglocal organizing committee estimates that US$11b is being invested in Brazilian demand. Drought and an overvalued currency have added toinfrastructure projects specially for the tournament. The authorities are the difficulties, and recent political moves indicate a shift toward moreplanning to spend a total US$14b of public funds on the World Cup, and state control. As a result, we expect growth of just 1.4% in 2012 anda further US$11.5b on the Olympics. The authorities in Rio de Janeiro 3.1% in 2013.are building four dedicated bus lanes, and a new underground line. The Moreover, slower growth may be revealing some of the problemsnew bus lanes will cover a total of 150km across the city and will be inherent in Argentina’s interventionist economic model, and politicalinaccessible to cars, cutting journey times by at least 50%. difficulties are mounting too. In contrast to the rapid growth since theBut concerns remain about poor infrastructure in other parts of the 2001 debt crisis, we expect growth over the next five years to averagecountry, and a report by the government-backed Institute for Applied only 3.6%.Economic Research said earlier this year that of the 13 airportterminals being upgraded, 10 are unlikely to be completed by June Investment in mining should lead a strong recovery in2014. There are a number of obstacles that discourage private Colombiainvestment in Brazil. Long-term financing in reals is very expensive and, Colombia is a significant producer of oil and coal, and high world energyalthough the Brazil National Development Bank offers loans at more prices and rising investment in the sector have helped drive robustaffordable rates, this has the effect of crowding out other lenders. growth in recent years. After rising 4.0% in 2010, GDP grew even fasterAcquiring environmental licenses in order to begin large projects is in 2011, by 5.9% (and 6.1% in Q4 2011), led by mining and stronganother obstacle. The process for obtaining these licenses is very domestic demand and credit. Our 2012 GDP forecast is little changeddrawn-out and this often causes delays to projects. at 4.4% from 4.5% three months ago, as we expect higher governmentThe economy is expected to grow by 4.0% p.a. from 2012 to 2016, and spending to offset lower global demand. We expect growth to pick up tofixed investment is expected to grow by 6.1% p.a. over the same period. 4.5% in 2013, and to remain at around 4% in the medium term.If the structural reforms were to happen sooner than we expect, this The three mountain chains that cut through the most denselywould be likely to boost GDP growth in the medium to long term. populated areas of Colombia raise the cost of infrastructure. Partly as a result of this, infrastructure needs have been neglected over the past 20 years. Indeed, last year a leading politician in Colombia told the National Infrastructure Agency (ANI) that “guerrillas start when roads end,” highlighting the importance of good infrastructure in fostering development. But in recent years, FDI into Colombia has grown rapidly, totaling US$13.2b last year, up from just US$2b 10 years ago, and the country has gained investment grade credit ratings. With peace talks planned with rebels from the Revolutionary Armed Forces of Colombia (FARC), the energy and mining sector is attracting more attention from investors. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 27
    • Figure 25 sovereign default in parts of the Eurozone, which would trigger a sharpColombia: inward Foreign Direct Investment fall in oil prices, capital flight to safe havens and a steep contraction in external demand. Russia is particularly vulnerable to capital outflows, US$b 14 which have persisted since 2008. Emerging European countries vulnerable to further 12 Eurozone worries 10 Despite the increased stability exhibited by their currencies and stock markets since the ECB announced its intention to carry out more bond 8 purchases, the emerging European countries remain vulnerable to changing market sentiment. However, most have the scope to cut 6 interest rates, should another bout of the Eurozone debt crisis cast an extended shadow over their growth prospects. Aggressive reductions 4 are unlikely, though, as global food prices are high and the authorities want currency stability. GDP in both Hungary and the Czech Republic is 2 expected to contract this year, while Poland, Turkey and the Baltic states should achieve modest growth. 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Figure 26Source: Oxford Economics. Central and Eastern Europe: GDPIn September, the Government announced plans to auction off US$20b % increase per year 15worth of road infrastructure, enabling 8,000km of roads to be built and Russiatravel times to be reduced by 30%–50%, mostly through public private 12partnerships with 20-year contracts. Concessions would include turning 9a section of the route from the capital, Bogota, to the Pacific port ofBuenaventura into a four-lane road to boost trade with Asia. The head 6of the ANI has also proposed issuing up to US$22.7b in 25-year 3investment-grade bonds from mid-2013 to improve transport Polandinfrastructure further. 0 CzechSome signs that Russia is no longer defying world -3 Republicmomentum -6Russia had at one time appeared to be defying world momentum, with -9growth driven largely by consumer spending and underpinned by astrong labor market. But the GDP estimate for Q2 indicated that growth -12 1998 2000 2002 2004 2006 2008 2010 2012had slowed to 4%, somewhat below our forecast. Although, on the faceof it, this figure appears inconsistent with monthly indicators of activity, Source: Oxford Economics.we have incorporated it into our forecast and now expect GDP growthof 3.4% in both 2012 and 2013. There are signs of weakness in themore externally exposed manufacturing sector, and we expect industrialactivity to remain subdued in the near term. The main risk is of28 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthThe weakness shown by the global economy in recent Gulf countries are becoming more cautious about governmentmonths has now spread to the Middle East and North spending, as non-oil deficits rise and the breakeven oil price increases.Africa Recent food price rises have added to their concerns: because the increases are a result of supply problems, they are more likely to erodeMost of the Middle East and North Africa is now experiencing slower consumer purchasing power and to slow growth than to raisegrowth, albeit for a variety of reasons. The Arab uprisings are yet to inflationary expectations. Indeed, we do not expect countries to tightensucceed fully in delivering political change. They have also failed to monetary policy in response. Furthermore, a dramatic rise in foodresult in visible macroeconomic improvements in Egypt, Morocco or prices could induce further civil unrest throughout the region,Tunisia. Governmental scope for policy maneuver has narrowed, and particularly in North Africa.FDI inflows have been discouraged by both the political uncertainty andthe global slowdown. ConclusionFigure 27 The international backdrop has deteriorated since the start of the year,Middle East and Gulf Cooperation Council (GCC) impacting on the outlook for the RGMs. We have revised world growth down in late 2012 and H1 2013 by around 1pp. These downward % increase per year15 revisions reflect a disappointing performance in the major advanced Forecast GCC economies, which are now expected to grow by about a third less than had been anticipated at the start of the year.12 The slowdown in RGMs is not dramatically worse than anticipated, 9 because they are being partially shielded from the worsening global outlook by resilient domestic economies. Domestic demand has been boosted in the RGMs by fiscal stimulus and by the early setting of 6 appropriate monetary policy and credit conditions. In the case of China, Brazil, Indonesia, Thailand and Malaysia, infrastructure spending is also 3 expected to support the domestic economy, helping to offset the weak external environment. Consequently, while our 2013 growth forecast Middle East 0 excluding for the advanced economies has fallen by about a third since the start Libya Middle East of the year, to 1.5%, our forecast for RGM growth is down by just a sixth -3 in the same period. We now expect the RGMs to grow by 4.5% this year 1990 1993 1996 1999 2002 2005 2008 2011 2014 and by 5.5% in 2013.Source: Oxford Economics.Political instability and geopolitical risk are also harming growthprospects in Syria, Lebanon, Yemen, Bahrain and Iran. A comparativelystable oil price has held back growth. Though prices have ralliedrecently, we expect the oil price to average around US$111pb in 2012,a drop of about 0.5% on 2011. Furthermore, movements in oilproduction have flattened, with some countries experiencing smalldeclines in recent months. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 29
    • Box 3Indonesia, Turkey and Vietnam have strong long-term growth prospectsWhen we compare the various RGMs according to our criteria, Figure 28Indonesia, Turkey and Vietnam stand out as high-potential economies Indonesia: investment and debt as a percentage of GDPalongside China and India. All five countries are expected to grow by % of GDPat least 5% p.a. over the next 25 years. All have favorable 90 35demographic trends and rising household incomes. And all are 80 Investmentexpected to contribute a much greater share of global GDP over the (right-hand side) 30next 25 years. In this section, we will look at Indonesia, Turkey and 70Vietnam in more detail. 25 60Indonesia 50 20In 25 years’ time, Indonesia will not just have the fourth-largest 40 15population in the world — it will also be the ninth-largest economy.Despite the uncertain global background, we expect Indonesia’s 30 10strong domestic fundamentals to support GDP growth of 5.9% this Government debt 20 (left-hand side)year, ahead of India and down only slightly from last year’s 6.5%. 5 10Many of the emerging Asian economies are export-led, and exportsaccount for less than a third of GDP in just three countries: China, 0 0 1990 1994 1998 2002 2006 2010India and Indonesia. And the demographic trends are very favorable:25 years out, Indonesia will still have at least five workers for every Source: Oxford Economics.person over 65. In 1990, under half of secondary-age children wentto school and now 80% do so. By 2020, Indonesia will have more In the 2009 parliamentary elections, the incumbent party won 25% ofhouseholds earning over US$30,000 than China does today. seats in Parliament, as opposed to 7.5% in 2004. This has facilitated a greater push toward reform in recent years.Indonesia has made firm progress in macroeconomic managementand political stability in recent years. As the chart below shows, The authorities are targeting average growth of 7% p.a. by 2014, andgovernment debt has fallen sharply to 25% of GDP in 2011. And, are gradually implementing reforms to ease the cost of doingwithin 10 years of the Asian crisis, the share of investment in GDP in business and to build infrastructure. In December 2011, the House ofIndonesia had returned to pre-crisis levels. The quality of port Representatives passed a compulsory land acquisition law, which willinfrastructure was rated at 3.6 out of 7 last year by the World Bank. provide greater certainty for land acquisitions for public use.While this is lower than the ratings for China (4.5) or Korea (5.5), it Indonesia’s logistics costs are about 14% of production costs, higherhas risen from 2.6 in 2007, a bigger improvement than that of Korea than Japan’s (around 5%). In March, the Government issued aor China. blueprint for the development of a national logistics system. Two of the three major ratings agencies, Moody’s and Fitch, upgraded the country to investment grade status earlier this year. This should boost investment sentiment and facilitate an increase in long-term financing. Indonesian bonds can now be included in a wider range of funds, an important boost given the continuing repercussions of the30 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthEurozone debt crisis. The authorities are particularly keen to Figure 29encourage foreign investors to invest in longer-term assets, Turkey: inflation and budget deficitprotecting Indonesia’s financial markets from global turmoil. % annual growth % of GDP 100 0Standard & Poor’s are holding back from upgrading Indonesia’s rating.This is due in part to the authorities’ last-minute backtracking over 90 In ation (left-hand side) -2their decision to cut fuel subsidies, which slightly damaged their 80credibility. It also casts doubt on the speed at which the much-needed 70 -4reforms will be implemented. 60Turkey Budget de cit as a % of GDP -6 50 (right-hand side)Turkey is one of only two countries among the RGMs whose GDP -8 40growth forecast for this year has not been downgraded from a yearago. It is the 18th-largest country in the world, in terms of both 30 -10population and GDP. Although we expect quite subdued growth this 20year, as the authorities try to curb inflation and rein in the external -12 10deficits, over the next 25 years we expect GDP growth of 5% p.a. 0 -14Over the past decade, macroeconomic policy has been much more 1996 1998 2000 2002 2004 2006 2008 2010stable, with the Government focusing on reducing both inflation and Source: Oxford Economics.the budget deficit. Huge improvements have been made to bringinflation under control and we have seen single-digit inflation for the Turkey has a massive domestic market, and in 10 years’ time therepast three years, down from rates of more than 25% in the years to will be over 11 million households earning more than US$30,000, the2003. There is still more work to be done, however, to ensure inflation same number as Canada has now. And the demographic trend is verycomes down to the 5.5% target and stays there. Lower inflation has favorable. In 25 years’ time there will still be five workers for everyfacilitated a large increase in bank lending over the last 10 years, elderly person in Turkey, while in Japan and Germany there will beboosting domestic demand. And the Government has made good less than two. The population is well-educated, with almost half ofprogress in reducing the budget deficit, down to just 1.4% of GDP in school-leavers going on to education beyond the age of 18, up from2011. just 12% in 1990. Turkey is also well-placed externally. Indeed, in 2011, almost half of Turkey’s exports went to the EU and just over half went to the Middle East, North Africa and Asia. There has been a notable increase in trade with the Middle East, North Africa and Central Asia over the last decade. This reflects the superb geographic position Turkey enjoys, which allows the economy to trade easily with both Europe and Asia, sharing a sizable part of the working day with each. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 31
    • Box 3Indonesia, Turkey and Vietnam have strong long-term growth prospects (continued)Throughout most of the second half of the 20th century, Turkey Within the last few years, mobile phones and related accessories haveadopted a broadly pro-Western foreign policy, even having quite close become the second-largest export item from Vietnam (afterlinks to Israel. However, in recent years its positioning has changed, garments), according to the World Bank, accounting for 10.5% of totaladopting a more neutral stance with respect to the US and dropping exports. By 2013, the World Bank expects this category to haveits links with Israel. These moves, together with the strong overtaken garments as Vietnam’s largest source of export revenue.performance of the Turkish economy, have spurred improving links Being able to attract and retain foreign firms in high-valuewith the Middle East. Accession talks and integration with the EU manufacturing products such as electronics, computers and phonescontinue, while Turkey has also maintained its presence in NATO. is a big plus point for Vietnam, as some of its neighbors have found it harder to move up the value chain.Last year, Turkey had the largest current account deficit as apercentage of GDP of all the RGMs, but its strong global links should Figure 30ensure that external financing remains plentiful. Excluding 2009, Vietnam: exports of telecoms excluding TVsgoods imports have risen by at least 20% p.a. in every year since2002. The deficit does leave the economy vulnerable to movements US$m 1,600in global financial flows, but it is easily financed at the moment. 1,400Vietnam 1,200Vietnam is expected to grow by almost 6% p.a. over the next 25years, making it the third-fastest growing country among the RGMs. 1,000The authorities are targeting growth of more than 6% next year.Vietnam is the 13th most populous country in the world, and its 800population is young and increasingly well-educated. The number ofchildren educated to secondary level is almost 80%, having more than 600doubled in the last 20 years. Per capita income is expected to grow by 400more than six times over the next 25 years, while the number ofhouseholds earning over US$30,000 will rise from less than 6,000 200last year to more than 60,000 in 10 years’ time. 0Manufacturing wages are estimated at almost half those of China and 1997 1999 2001 2003 2005 2007 2009Thailand, encouraging some manufacturers to move operations toVietnam to diversify production and take advantage of lower costs. Source: Oxford Economics.This has enabled Vietnam to attract more than US$6.5b in FDI in eachof the last five years. Since signing a bilateral trade agreement withthe US in 2000, and joining the WTO in 2007, Vietnam has becomethe second-largest supplier of clothing and footwear to the US behindChina.32 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Infrastructure supporting continued growthThe authorities adopted a stabilization package in February 2011,in response to the increasing pressures on inflation and thecurrency that took place in late 2010, and they tightenedmacroeconomic policies significantly last year. These policies werevery successful. Inflation slowed from 23% August 2011 to 6.5% inSeptember while the currency has also been more stable. This isreflected in the World Economic Forum’s Global CompetitivenessReport 2011–2012, which shows that Vietnam moved up 20places for its macroeconomic environment. In June, Standard andPoor’s upgraded Vietnam’s outlook from negative to stable, butthe agency stressed that price stability must continue to beprioritized. The Central Bank has already cut interest rates fivetimes this year to support activity, but it must be careful not toloosen policy too much.Vietnam has also been very successful in recent years in improvingits trade and current account balances, and the current accountmoved into surplus in 2011 from a deficit of 12% of GDP in 2008.Stronger revenue growth and spending cuts meant the fiscaldeficit shrank last year. The World Bank expects that progress onreducing the fiscal deficit will be slower this year, as the state isexpected to incur more costs toward bank and enterpriserestructuring, but the IMF will be happy that the macroeconomicreforms are continuing. Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 33
    • Forecast for rapidly growingcountriesArgentinaBrazilChileMainland China and Hong Kong special administrative region (SAR)ColombiaCzech RepublicEgyptGhanaIndiaIndonesiaKazakhstanKoreaMalaysiaMexicoNigeriaPolandQatarRussiaSaudi ArabiaSouth AfricaThailandTurkeyUkraineUnited Arab EmiratesVietnam34 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • 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 Autumn edition — October 2012 35
    • ArgentinaGDP growth slows to 1.4% in 2012 According to official data, consumer price inflation remained just under 10% in August. We expect the official inflation rate to average 10% thisThe economy slowed sharply in Q2 as a result of sluggish world growth, year, although unofficial estimates put the “true” rate closer to 25%.waning Brazilian demand for manufactured goods, and distortionscreated by trade and currency controls. The seasonally adjusted We have reduced our 2012 GDP growth forecast to 1.4%, from 3.3% ineconomic activity indicator (EAI) fell to 0.9% on the year in Q2 from the Rapid-Growth Markets Forecast — Summer edition — July 2012, with4.5% in Q1, and Q2 industrial production was 3.3% down on a year the factors dampening activity in Q2 expected to persist into the secondearlier, with lower car production acting as the most significant drag. half of the year. We still expect growth to pick up to 3.1% next year, however, and to average 4% in the medium term.Tough currency controls have been introduced to contain the flight ofcapital out of the country. Stricter controls on imported goods andforeign currency purchases have also bolstered the trade surplus inrecent months. Exports in Q2 were down 7.8% on a year earlier, whileimports fell 10.2% over the same period.Figure 31 Figure 32GDP and industrial production World: commodity prices % increase per year % increase per year 25 Forecast 24 Industrial production 20 20 15 16 Food prices 10 12 5 0 8 -5 4-10 0-15 GDP -4 Manufacturing Consumer-20 producer prices prices-25 -8 1990 1994 1998 2002 2006 2010 2014 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 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 1.4 3.1 4.7 4.2 3.9 CPI inflation (% per year) 9.8 10.0 9.7 7.7 5.7 4.3 Current account balance (% of GDP) -0.1 0.3 -0.2 -0.1 -0.2 -0.2 External debt total (% of GDP) 30.3 30.4 29.4 27.0 25.3 24.1 Short-term interest rate (%) 10.7 11.8 12.9 11.2 9.0 8.4 Exchange rate per US$ (year average) 4.1 4.5 4.9 5.1 5.3 5.4 Government balance (% of GDP) -1.6 -1.6 -1.5 -1.2 -0.9 -0.7 Population (millions) 40.8 41.2 41.5 41.9 42.2 42.6 Nominal GDP (US$b) 447.8 462.2 479.4 521.7 556.3 584.1 GDP per capita (US$ current prices) 10,972.4 11,228.1 11,545.5 12,458.1 13,175.8 13,723.136 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • BrazilSigns of recovery on the horizon October. This will bring rates to 7.25%, which we think will represent the floor for rates in the current cycle.Latest National Accounts data reveals that activity in the Brazilianeconomy continued to slow in the second quarter of 2012, with GDP The President recently announced a new infrastructure investmentgrowth slowing to just 0.5% compared with a year earlier. But the program worth US$66b and has indicated that a port and waterwayeffects of earlier monetary and fiscal stimulus now appear to be having package is forthcoming. Private concessions will be granted to buildan impact. More recent data, such as the monthly economic activity new roads and railways, funded by state-subsidized loans. A number ofindicator and retail sales, suggests that the Brazilian slowdown has doubts about the program remain, including how many of the projectsreached a trough. Activity should therefore begin to regain momentum are actually new and whether excessive bureaucracy will act as anin the second half of 2012, ensuring GDP growth recovers to 4.5% in impediment, as it has done in the past. Nevertheless, the program2013 and 5.0% in 2014. marks a clear and welcome shift toward long-term investment that should help to ease infrastructure bottlenecks.As expected, the Central Bank cut rates to a record-low 7.5% at itsAugust meeting and we expect one more cut of 25 basis points inFigure 33 Figure 34Contributions to GDP growth Prices and earnings % increase per year % increase per year12 45 Forecast Forecast 4010 35 8 GDP Producer 30 Consumer prices Domestic prices 6 25 demand 4 20 15 2 10 0 5-2 0 Net exports-4 -5 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics.Table 2Brazil Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 2.7 1.4 4.5 5.0 4.8 4.3 CPI inflation (% per year) 6.6 5.3 5.8 5.1 4.1 4.1 Current account balance (% of GDP) -2.1 -2.3 -2.2 -2.2 -2.3 -2.3 External debt total (% of GDP) 11.8 12.9 12.4 12.3 12.2 12.1 Short-term interest rate (%) 11.7 8.5 7.8 8.4 7.9 7.9 Exchange rate per US$ (year average) 1.7 1.9 1.9 2.0 2.2 2.3 Government balance (% of GDP) -2.6 -2.4 -2.3 -1.9 -1.8 -1.9 Population (millions) 196.9 198.6 200.3 201.9 203.5 205.0 Nominal GDP (US$b) 2,476.4 2,314.8 2,628.3 2,700.5 2,729.9 2,812.9 GDP per capita (US$ current prices) 12,577.6 11,655.7 13,123.2 13,374.5 13,415.5 13,720.9 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 37
    • ChileDomestic activity holding up well As the global economy begins to gather speed in 2013, we expect employment in Chile to rise, with inflation picking up a little asLatest national accounts data reveal the economy expanded by 1.7% in consumer spending increases. The Central Bank is likely to tightenQ2 2012, underpinned by resilient domestic demand. Some of this monetary policy from Q3 2013, raising rates to 6% from 2014 onward.demand leaked into imports, however, which were up a robust 5.7%. Inflation is expected to remain within the Central Bank’s target range,The IMACEC indicator of economic activity rose 0.4% on the month in averaging 2.6% in 2013.July, suggesting continuing expansion. Although we expect the pace of The policy interest rate has been held at 5% so far this year, and wegrowth to slow in H2, we have raised our forecast for the year to 5.2% expect this to continue into early 2013. However, there is a risk thatto take into account the strong first half. We expect growth in 2013 to continued import growth, together with a strong currency, could resultpick up slightly from H2 this year, resulting in an expansion of 4.5%. in rising inflation. This, combined with buoyant domestic demand, would result in tighter monetary policy sooner rather than later.Figure 35 Figure 36Exchange and interest rates Monthly indicator of economic activity Peso/US$ % 2008 = 100 (IMACEC, seasonally adjusted)300 16 120350 14400 Peso/US$ 110 (left-hand side) 12450 10500 100550 8600 90 6650 Nominal 4 interbank rate700 80 (right-hand side) 2750800 0 70 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 5.2 4.5 4.5 4.4 3.9 CPI inflation (% per year) 3.3 3.0 2.6 3.0 3.0 3.0 Current account balance (% of GDP) -1.3 -3.1 -0.8 1.1 1.8 2.0 External debt total (% of GDP) 36.0 36.7 36.9 36.0 34.9 33.9 Short-term interest rate (%) 4.9 4.9 4.8 5.3 5.3 5.3 Exchange rate per US$ (year average) 483.7 487.4 494.7 503.7 506.9 507.8 Government balance (% of GDP) 1.5 1.1 0.6 0.2 0.0 0.0 Population (millions) 17.3 17.4 17.6 17.7 17.9 18.0 Nominal GDP (US$b) 248.7 259.7 274.4 295.0 316.8 339.0 GDP per capita (US$ current prices) 14,381.9 14,891.4 15,593.6 16,629.3 17,712.2 18,807.638 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Mainland China and Hong Kong special administrative region (SAR)Supportive policy likely to boost subdued activity As a consequence, we have lowered our forecast of Mainland China’s GDP growth to 7.2% this year. However, the shape of the cycle has notThe Chinese economy is weakening further in Q3 as the impact of the changed — it has just been pushed back a quarter — and we continue toongoing crisis in the Eurozone is compounded by a synchronized expect that the authorities will manage to ensure a soft landing. Weslowdown in global manufacturing. Export growth (in US$ terms) was expect a strong recovery, with growth of around 8% and 9% in 2013 andjust 1% in July and 2.7% in August as exports to the EU dropped 2014 respectively.sharply. Exports to the EU (including those from Hong Kong) accountfor around 20% of Chinese exports, equal to over 5% of GDP, so the There are signs that infrastructure projects are being stepped up tocrisis in Europe is acting as a significant drag on activity. support growth, including affordable housing, 25 urban rail lines, 13 highways, seven waterways and nine waste-water treatment plants. TheIn addition, the aftereffects on the domestic economy of pricking the central government has also announced investments in energyproperty bubble continue to be felt, but policy has not yet been conservation and emission-reduction measures.successful in stabilizing growth.Figure 37 Figure 38Mainland China: inflation Hong Kong: stock market % increase per year 24 32,000 20 28,000 16 Food prices 24,000 12 Hang Seng 8 20,000 index 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 7.2 8.1 9.1 8.7 8.1 CPI inflation (% per year) 5.4 2.7 2.6 3.4 3.6 3.2 Current account balance (% of GDP) 2.7 2.6 2.7 2.5 2.1 1.9 External debt total (% of GDP) 8.3 8.4 8.3 8.0 7.8 7.6 Short-term interest rate (%) 5.3 4.8 3.9 3.8 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 -1.5 -1.8 -1.3 -1.4 -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$b) 7,332.4 8,071.0 9,141.5 10,579.6 12,049.2 13,645.8 GDP per capita (US$ current prices) 5,376.9 5,881.5 6,620.5 7,616.4 8,625.3 9,714.9 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 39
    • ColombiaCommodities prices affect growth Inflation was 3.1% in August, the midpoint in the central bank’s 2% to 4% target range. This gave the authorities room to cut the key policyColombia’s economy is slowing, with GDP growth falling to 4.7% in Q1 interest rate by 25 basis points to 5% last month, in a bid to stimulatefrom 5.9% in 2011. Since then, industrial output growth has slunk into demand. There may be scope for further rate cuts in the next fewnegative territory, down 0.1% on the year in Q2. Retail sales volumes months, if inflation does not pick up much further.have also slowed, up just 0.7% on the year in Q2 after an increase of6.1% in Q1. Our 2012 GDP forecast of 4.4% is little changed from 4.5% in the Rapid-Growth Markets Forecast — Summer edition — July 2012. HigherExports were up only 2% on the year in Q2 as coal and oil prices eased, government spending will offset weaker global demand this year. Webut imports rose more than 9%. This resulted in a small trade deficit, expect growth to pick up again in 2013, to 4.5%, and to remain atand we expect the current account deficit to rise to 4.1% of GDP this around 4% in the medium term, led by mining.year and 3.9% in 2013 before easing back in 2014 as oil prices riseagain.Figure 39 Figure 40Real GDP growth Inflation % increase per year % increase per year 8 Forecast 45 Forecast Latin America 40 6 and Caribbean 35 Western 4 30 hemisphere 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 4.4 4.5 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 -3.9 -3.7 -3.6 -3.6 External debt total (% of GDP) 22.2 23.7 26.5 28.8 31.1 32.9 Short-term interest rate (%) 4.0 4.5 6.0 6.9 6.9 6.9 Exchange rate per US$ (year average) 1,848.1 1,830.0 1,950.2 2,052.8 2,159.6 2,245.0 Government balance (% of GDP) -2.1 -2.1 -1.7 -1.6 -1.5 -1.5 Population (millions) 46.9 47.5 48.1 48.8 49.4 49.9 Nominal GDP (US$b) 333.2 362.9 368.3 377.7 386.1 399.0 GDP per capita (US$ current prices) 7,102.7 7,635.9 7,651.0 7,747.3 7,820.7 7,991.140 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Czech RepublicA milder recession, but medium-term growth revised expect economic activity to continue to shrink in H2 2012 and forecastdown GDP will fall 1.1% in 2012 as a whole (up from -1.4% in the Rapid- Growth Markets Forecast — Summer edition — July 2012) reaching aCzech GDP dropped by 0.2% on the quarter in Q2 2012, following a trough in Q3 2012. In 2013, growth is expected to return into positive0.8% contraction in Q1. Although the decline of GDP in Q2 was less territory but to stay below 1%, supported by a rebound of domesticpronounced than we envisaged, the domestic economic conditions have demand.deteriorated in the last few months. In particular, consumer spendingfell by 3.3% on the year in Q2, having fallen by 2.4% in Q1, while Growth in the Eurozone is expected to remain weak in the medium terminvestment growth was very subdued. as a result of significant de-leveraging by both the private and public sectors. Weak external demand will weigh on Czech exports and weNet-export contribution to GDP growth declined to 2.5 percentage forecast GDP growth will average 2.5% in 2014–16, down from apoints (pps) in Q2, from 3.6pps in Q2. Moreover, the external outlook previous forecast of 3.3% — and well below the pre-crisis average ofremains characterized by extreme uncertainty, and foreign demand 4.5% in 2000–08.growth is likely to remain subdued in the short term. As a result, weFigure 41 Figure 42Consumption and investment Unemployment % increase per year % 25 Forecast 11 Forecast 20 Investment 10 9 15 8 10 7 5 6 0 5 -5 4 Consumption-10 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) 1.7 -1.1 0.8 2.4 2.5 2.7 CPI inflation (% per year) 1.9 3.3 2.2 1.8 1.8 2.0 Current account balance (% of GDP) -2.9 -1.9 -2.5 -3.1 -3.5 -3.4 External debt total (% of GDP) 46.1 50.9 54.1 56.9 59.2 59.6 Short-term interest rate (%) 1.2 1.0 0.6 1.0 1.2 1.3 Exchange rate per US$ (year average) 17.7 19.6 20.5 22.0 23.0 22.9 Government balance (% of GDP) -3.7 -3.5 -3.1 -2.8 -2.4 -2.0 Population (millions) 10.5 10.5 10.6 10.6 10.6 10.6 Nominal GDP (US$b) 215.4 193.9 189.7 185.8 185.9 196.3 GDP per capita (US$ current prices) 20,435.7 18,386.4 17,980.3 17,597.0 17,607.7 18589.4 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 41
    • EgyptPolitical situation beginning to stabilize but growth But there remains a serious threat of a balance of payments crisis. Theremains weak current account recorded a deficit of US$2.3b in Q1 this year, probably the largest ever and up 11.5% from a year ago. And while unchanged oilProgress toward civilian and democratic rule appears to have been prices may dampen import growth, we still expect the current accountmade during August, with the newly-elected President reorganizing his deficit to widen to US$7.5b in 2012 from US$6.5b in 2011.staff. Going forward, the President will need to continue to show he iscommitted to both constitutional government and respecting human The economy remains very weak, with activity likely to have fallen in therights. last two quarters. After rising by around 1.8% in 2011–12, we expect similarly poor growth of 1.9% in 2012–13, as the economy is hit byHopes are rising of an imminent IMF deal, which would boost policy continuing political uncertainty, the Eurozone crisis and less favorablecredibility and raise capital inflows and foreign reserves, the latter down base effects. But in the longer term, once the situation is more stable,to just US$15.1b in August. growth will exceed 5%.Figure 43 Figure 44Real GDP growth Government budget balance % increase per year US$b % of GDP8 Forecast 0 0 Egypt7 -4 -36 -8 -65 US$b -12 (left-hand side)4 -9 -163 % of GDP (right-hand side) -12 -202 Middle East and Forecast -151 North Africa -240 -28 -18 1991 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015Source: Oxford Economics; World Bank. Source: Oxford Economics.Table 7Egypt Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 1.8 1.8 1.9 4.5 5.9 5.9 CPI inflation (% per year) 10.1 7.4 7.3 6.7 5.7 5.0 Current account balance (% of GDP) -3.3 -3.4 -2.8 -2.5 -2.0 -1.5 External debt total (% of GDP) 15.4 15.5 16.2 15.9 15.3 14.8 Short-term interest rate (%) 14.0 12.2 10.5 9.5 8.0 7.5 Exchange rate per US$ (year average) 5.9 6.1 6.5 6.7 6.9 7.0 Government balance (% of GDP) -9.8 -11.0 -10.1 -8.9 -7.8 -7.2 Population (millions) 82.5 83.9 85.4 86.8 88.2 89.5 Nominal GDP (US$b) 231.2 246.7 254.2 274.0 298.4 323.2 GDP per capita (US$ current prices) 2,801.6 2,938.7 2,978.3 3,158.0 3,383.6 3,610.942 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • GhanaMedium-term prospects boosted by oil despite inflation In spite of rising domestic fuel prices, inflation was 8.7% in 2011, thefears first single-digit full-year result in 40 years. But heavy state spending and further rises in fuel prices have pushed inflation higher again, toThe start of oil production lifted GDP growth to just over 14% in 2011, 9.5% in August 2012, and the key interest rate was raised by 250 basisalmost double the pace of 2010. The year-on-year growth rate peaked points in H1 this year, to 15%.at over 20% in Q2 last year, but has slowed since then to 8.7% in Q12012. Growth will remain quite robust this year as oil output rises Exports climbed 60% last year on the back of oil exports and highgradually; our forecast remains at just over 8% for the full year, before commodity prices. However, a 46% jump in imports and rising netslowing to about 7% in 2013. While Ghana will only be a small oil outflows of services and income meant that the current account deficitproducer, its production has boosted medium-term growth prospects widened sharply to US$3.7b in 2011, equal to 9.4% of GDP. But despite— we expect the economy to grow by some 5% p.a. over the medium high import growth, the deficit is forecast to start to fall in the next fewterm. Oil revenues are expected to bolster the public finances and the years as oil revenues build.balance of payments, despite higher government spending.Figure 45 Figure 46Inflation Real GDP growth % increase per year % increase per year60 Forecast 16 Forecast 1450 12 Ghana40 10 830 Ghana 620 4 2 Sub-Saharan Africa10 Africa 0 0 -2 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.Table 8Ghana Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 14.4 8.2 6.9 5.6 5.0 4.6 CPI inflation (% per year) 8.7 9.4 8.3 6.7 5.6 5.0 Current account balance (% of GDP) -9.4 -9.3 -4.5 -2.6 -1.6 -1.7 External debt total (% of GDP) 26.3 31.5 31.3 30.1 28.6 27.6 Short-term interest rate (%) — — — — — — Exchange rate per US$ (year average) 1.5 1.8 1.9 2.0 2.0 2.0 Government balance (% of GDP) -3.1 -5.1 -4.6 -4.1 -3.7 -3.5 Population (millions) 25.0 25.6 26.1 26.7 27.3 27.9 Nominal GDP (US$b) 39.2 38.9 42.1 46.0 50.4 54.7 GDP per capita (US$ current prices) 1,569.3 1,521.4 1,609.3 1,721.9 1,845.5 1,959.3 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 43
    • IndiaGrowth moderates but no room to cut interest rates GDP growth will continue to be held back in the medium term by insufficient infrastructure. While telecom and oil and gas investmentsGDP growth remained subdued in Q2, with the economy expanding have been on target, India has under-achieved on investments in5.5% year-on-year after a 5.3% increase in Q1. Looking ahead, we several other areas of infrastructure, during the Government’s 11th Fiveexpect the growth rate to remain below trend this year and next, as the Year Plan (2007–12). GDP growth will also be held back over thechallenging global conditions and subdued domestic demand weigh medium term due to persistent inflation and slowdown in investmentheavily on the economy. We now forecast that GDP will grow on average flows. The Government recently announced several bold measures,by 5.6% in 2012 and 6.6% next year, compared with 5.7% and 7.5% in however, such as allowing FDI in retail, aviation and broadcasting andthe Rapid-Growth Markets Forecast — Summer edition — July 2012. these should boost investor sentiment. GDP growth will continue to beDespite acknowledging the gloomier outlook, the Reserve Bank has held back over the medium term due to persistent inflation andlittle room to ease monetary policy. Wholesale price inflation picked up slowdown in investment flows. However, the medium- to long-termto 7.6% and the deregulation of diesel prices and the recent declaration picture is extremely positive with growth expected to average 7.2% outof drought conditions in some parts of the country will put upward to 2016.pressure on commodity prices. We now expect wholesale prices toaverage 7.6% this year.Figure 47 Figure 48HSBC manufacturing Purchasing Managers’ Index (PMI) Interest rate and wholesale price index inflation 50 = expansion/contraction breakeven point %65 10 Repo rate 860 655 4 250 045 -2 Wholesale price index non-food40 -4 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011Source: Markit. Source: Oxford Economics.Table 9India Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.5 5.6 6.6 7.7 8.0 8.0 WPI inflation (%) 9.5 7.6 5.8 4.4 4.3 4.1 Current account balance (% of GDP) -3.4 -3.9 -3.6 -3.7 -3.7 -3.5 External debt total (% of GDP) 17.1 18.6 16.6 15.3 14.1 13.1 Short-term interest rate (%) 7.8 8.1 7.6 7.1 7.0 7.0 Exchange rate per US$ (year average) 46.7 53.1 51.8 51.8 52.1 52.4 Government balance (% of GDP) -6.8 -5.9 -5.2 -4.0 -3.4 -2.9 Population (millions) 1,232.8 1,249.0 1,265.0 1,280.7 1,296.1 1,311.3 Nominal GDP (US$b) 1,840.5 1,854.2 2,157.2 2,424.9 2,712.7 3,023.1 GDP per capita (US$ current prices) 1,492.9 1,484.5 1,705.4 1,893.5 2,093.0 2,305.544 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • IndonesiaDomestic activity is very robust In June, the Deputy Finance Minister stated that US$2.6b of its 2012 infrastructure budget could be used for stimulus spending if the weakDespite the fragile global background, we still expect that Indonesia’s global economy hits domestic activity more than we expect. The budgetstrong domestic fundamentals will underpin robust GDP growth of 5.9% for 2013 allows a 15% rise in capital expenditure, which will be targetedthis year, rising to 6.3% in 2013. The Government is forecasting growth at the road network and building 15 new airports.of 6.3%–6.5% this year, but we are slightly more cautious given theexternal risks. Policy-makers have some room for maneuver, however, if Global headwinds remain strong, as concerns about financial contagionthe global economy deteriorates sharply. within the Eurozone are still high and activity in China is subdued. Against this background, Indonesia’s exports are unlikely to make muchDomestic activity remains firm. Consumer confidence rose in August on headway in H2 2012. But with domestic activity strong and inflationreports of improving job prospects while car sales grew by 15.1% in moderate, we expect rates to remain on hold into next year.July, the fourth straight month of 10%+ growth. Fixed investment grewat a double-digit pace in H1 2012, helped by government support.Figure 49 Figure 50Inflation Bank lending growth % increase per year % increase per year 35 Producer prices Forecast 45 30 40 25 Consumer prices 35 20 30 15 25 10 20 5 15 0 10 -5 5-10 0 2000 2002 2004 2006 2008 2010 2012 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Oxford Economics. Source: Bank Indonesia; Haver Analytics.Table 10Indonesia Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 6.5 5.9 6.3 6.0 5.4 5.5 CPI inflation (% per year) 5.4 4.4 5.1 4.9 4.9 4.8 Current account balance (% of GDP) 0.2 -2.0 -1.7 -0.9 -0.6 -0.6 External debt total (% of GDP) 26.1 26.8 24.4 21.9 20.3 18.8 Short-term interest rate (%) 6.5 4.7 5.4 7.1 7.5 7.5 Exchange rate per US$ (year average) 8,789.4 9,365.8 9,353.7 9,257.1 9,402.9 9,584.3 Government balance (% of GDP) -1.1 -2.6 -2.6 -2.1 -1.8 -1.5 Population (millions) 235.3 237.7 240.0 242.3 244.5 246.6 Nominal GDP (US$b) 845.4 884.3 990.1 1,111.6 1,209.6 1,311.7 GDP per capita (US$ current prices) 3,593.1 3,720.5 4,125.3 4,588.4 4,947.9 5,319.5 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 45
    • KazakhstanActivity has slowed this year but recovery should be The current account surplus was unchanged at US$7.6b in H1,strong compared with a year ago. But, with oil prices in H2 likely to be lower than in 2011, we expect the annual surplus this year to narrow toGrowth continued to weaken in Q2, with the short-term economic US$11.7b or 5.9% of GDP from just over US$14b or 7.7% of GDP inindicator slowing to an implied 3% growth after 4.6% in Q1. Falling oil 2011. Merchandise exports are forecast to rise by 3.6%.production and weak growth in metals output has seen industrialproduction grow just 1.6% in H1. Agriculture was down 6.3% after a GDP is forecast to grow by just 4.8% in 2012, reflecting both weakermuch poorer grain harvest, and construction output has stayed broadly growth in key export markets and falls in metal and oil prices. However,flat. growth is being supported by government spending and private consumption. We expect GDP growth to pick up to 6.4% in 2013 on theConsumer prices have slowed this year, reflecting favorable global back of a rise in both global growth and commodity prices and to exceedfactors, administrative measures and the trade-weighted Kazakhstani 7% in 2014.Tenge’s continued appreciation. But we believe that inflation is close tobottoming out and anticipate that it will rise only modestly, averaging5.0% in 2012 and 6.4% in 2013.Figure 51 Figure 52Real GDP growth Inflation % increase per year % increase per year 15 Forecast 50 Forecast Kazakhstan 45 10 40 Europe and Central Asia Europe and 35 5 Central Asia 30 0 25 20 Kazakhstan -5 15 10 -10 5 -15 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank. Table 11 Kazakhstan Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.5 4.8 6.4 7.5 7.1 6.7 CPI inflation (% per year) 8.3 5.0 6.4 6.2 6.0 5.5 Current account balance (% of GDP) 7.7 5.9 2.0 0.6 0.0 -0.3 External debt total (% of GDP) 67.9 65.0 59.3 51.5 44.5 39.0 Short-term interest rate (%) 1.9 3.0 4.4 5.5 6.5 7.0 Exchange rate per US$ (year average) 146.6 149.3 154.0 160.7 165.5 170.5 Government balance (% of GDP) -3.7 -3.9 -3.1 -3.2 -3.5 -3.7 Population (millions) 16.2 16.4 16.5 16.7 16.9 17.0 Nominal GDP (US$b) 183.1 199.9 215.0 235.2 259.2 283.3 GDP per capita (US$ current prices) 11,304.3 12,208.5 12,994.9 14,072.2 15,352.4 16,622.246 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • KoreaSluggish global trade and subdued domestic demand At the same time, while the domestic side of the economy is stilldampen growth growing, it is only doing so at a modest pace, with consumer spending subdued despite a healthy labor market and lower inflation. Against thisDespite its continuing competitiveness, Korean manufacturing has been background, the Bank of Korea reduced the base rate by 25 basis pointshit by the weakening trends in the US, Eurozone and China in recent in both July and October. And there is room for further monetary andmonths. While we still expect that the easing in Chinese policy will lead fiscal boosts if the global situation worsens significantly.to a pickup in domestic demand there, and a boost to regional trade,this process is taking longer to materialize than we had expected. Reflecting these factors, we have cut forecasts for Korean GDP growthMoreover, the external risks remain firmly on the downside, not just to 2.2% in 2012 and 3.5% in 2013, down from the Rapid-Growthfrom the uncertainty about China but also the still notable danger from Markets Forecast — Summer edition — July 2012’s estimates of 2.6%developments in the Eurozone. and 4.1% respectively. But we expect growth to pick up to around 5% in 2014 and 2015.Figure 53 Figure 54Contributions to GDP growth GDP and industrial production % increase per year % increase per year 15 Forecast 30 Industrial Forecast production GDP 25 10 20 5 15 10 0 5 Net exports -5 0-10 -5 GDP Domestic -10-15 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 2.2 3.5 5.0 4.8 4.4 CPI inflation (% per year) 4.0 2.3 2.5 2.7 2.6 2.6 Current account balance (% of GDP) 2.4 2.9 2.1 1.4 0.9 0.7 External debt total (% of GDP) 35.3 36.7 33.5 30.6 28.6 26.9 Short-term interest rate (%) 3.4 3.3 3.3 4.7 4.9 4.9 Exchange rate per US$ (year average) 1,108.2 1,135.6 1,107.1 1,087.9 1,090.9 1,094.0 Government balance (% of GDP) 1.5 0.0 0.0 0.1 0.1 0.1 Population (millions) 48.7 48.8 48.9 49.1 49.2 49.3 Nominal GDP (US$b) 1,116.7 1,126.4 1,222.9 1,337.3 1,429.0 1,521.1 GDP per capita (US$ current prices) 22,943.3 23,074.4 24,986.1 27,256.5 29,065.4 30,883.5 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 47
    • MalaysiaFiscal stimulus is boosting activity but external risks But while this investment strength underpinned strong annual growth inremain high import volumes, up 8.1% on the year, export volumes struggled, with growth easing to just 2.1% on the year in Q2. July data suggests thatThe economy maintained solid momentum in Q2 this year, thanks to activity has continued to soften in Q3 with exports in US$ terms fallingvery strong domestic demand. Private spending grew by more than 6% by 7.3% on the year, the biggest fall since 2009, and annual growth infor the ninth quarter in a row while annual growth in investment picked industrial output slowing to 1.5% on the year.up to 26.1%, the fastest pace in more than 10 years. Governmentspending has picked up very strongly in the last 12 months. We now Despite gloomy prospects for external demand, the Central Bank hasforecast growth of 4.5% in 2012, up from 4.3% in the Rapid-Growth left the policy interest rate on hold at the last seven meetings, as strongMarkets Forecast — Summer edition — July 2012, after the stronger domestic activity has supported robust growth. We expect rates tothan expected performance in Q2, with growth little changed at 4.3% in remain unchanged in the coming months but with inflation of little2013. concern (1.4% in August), the bank has the scope to cut rates if the global outlook were to deteriorate further.Figure 55 Figure 56Exports and imports Industrial production % increase per year % increase per year 50 30 40 Exports 20 30 (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 4.5 4.3 5.3 4.8 4.2 CPI inflation (% per year) 3.1 1.8 2.5 2.9 3.0 3.0 Current account balance (% of GDP) 11.0 8.5 8.1 8.5 9.0 9.5 External debt total (% of GDP) 28.7 28.2 26.7 25.0 23.5 22.3 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 3.1 3.0 3.0 3.0 Government balance (% of GDP) -4.7 -5.3 -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$b) 288.1 301.7 326.9 356.4 385.3 414.4 GDP per capita (US$ current prices) 10,143.8 10,462.1 11,172.9 12,009.2 12,805.6 13,585.348 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • MexicoSolid 2012 growth continues could pick up faster than we expect if exports continue to show solid growth. Domestic demand should remain supportive, with continuedGDP grew by a seasonally adjusted 0.9% on the quarter in Q2 this year scope for improvement after the sizeable fall seen in 2009. We expectafter a 1.2% rise in Q1 last year, with year-on-year growth slowing to GDP growth to pick up slightly to 3.7% in 2013, before accelerating to4.1%, from 4.6%. Retail sales volumes rose a healthy 1.5% on the just under 5% in 2014 as the US economy rebounds more strongly.quarter in Q2, and the evidence so far available for Q3 indicates thatthe pace of activity is holding up. Seasonally adjusted exports of Higher food prices and a weaker exchange rate meant consumer pricemanufactured goods rose on the month in July, driven by car exports, inflation rose to 4.8% in September. We expect inflation to exceed 4%most of which go to the US. The unemployment rate has been little this year but to remain in the 3.5%–4% range in 2013. The Central Bankchanged at 4.9% in recent months. has kept interest rates on hold at 4.5% since 2009, and we do not expect any changes to the policy rate this year.Our GDP growth forecast for this year is 3.5%, slightly lower than ourexpectation of 3.8% in the Rapid-Growth Markets Forecast — Summeredition — July 2012, reflecting subdued US growth. But the economyFigure 57 Figure 58Merchandise trade: US vs. Mexican growth Consumption and investment % increase per year per US$ % 50 Forecast 16 Forecast 70 40 14 60 Exchange rate (left-hand side) 30 Mexican goods exports 12 50 20 10 40 10 8 30 0 6 20 -10 4 Short-term interest rates US goods imports (right-hand side) -20 10 2 -30 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics. Source: Oxford Economics. Table 14 Mexico Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 3.9 3.5 3.7 4.9 4.6 4.4 CPI inflation (% per year) 3.4 4.2 3.9 3.5 3.0 3.0 Current account balance (% of GDP) -1.0 -0.2 -0.6 -0.7 -0.4 -0.3 External debt total (% of GDP) 17.7 17.8 16.5 15.6 14.8 14.1 Short-term interest rate (%) 4.4 4.4 4.6 4.9 4.9 4.8 Exchange rate per US$ (year average) 12.4 13.1 12.9 13.1 13.2 13.4 Government balance (% of GDP) -2.3 -2.2 -1.9 -1.8 -1.5 -1.4 Population (millions) 115.0 116.3 117.6 118.9 120.2 121.4 Nominal GDP (US$b) 1,156.0 1,175.8 1,285.0 1,377.7 1,467.3 1,561.1 GDP per capita (US$ current prices) 10,056.3 10,110.1 10,923.1 11,582.6 12,205.8 12,854.5 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 49
    • NigeriaGDP growth slowing slightly, but still strong in non-oil removal of fuel subsidies in January 2012 led to inflation rising tosector almost 13% in April and it has remained close to this level since (underlying inflation is even higher at 15%). We expect inflation toGDP growth slowed to a little over 6% in H1 this year from 7.5% in 2011 average 12% this year, before easing to 10% in 2013.overall. The main drag continues to come from the oil sector, which fell0.2% on the year in Q2, while non-oil sector growth remains buoyant, Oil prices are expected to remain high in the next few years: after thealbeit slowing slightly to 7.5%. We now forecast GDP growth of about 40% surge in 2011, Brent crude will average some US$108 (pb) this6.5% this year, with a similar pace seen in 2013. The rebasing of the year and US$101pb in 2013. High oil prices probably lifted the 2011national accounts, expected soon, may see a 40% rise in the level of current account surplus to US$15b–US$20b, but we expect the surplusGDP and a cut in some key ratios such as debt to GDP. to shrink this year and next as oil exports dip slightly and imports continue to climb. But the external position should remain solid,The strong pace of growth and loose fiscal policy have kept inflation underpinning GDP growth of 5%–6% p.a. over the medium term.high, averaging 10.8% in 2011 and 10.3% at the year-end. The partialFigure 59 Figure 60Inflation Real GDP growth % increase per year % increase per year80 Forecast 12 Forecast70 10 Nigeria60 8 Sub-Saharan Africa50 640 430 2 Africa Nigeria20 010 -2 0 -4 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.Table 15Nigeria Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 7.5 6.5 6.5 6.1 5.5 5.1 CPI inflation (% per year) 10.8 12.0 10.0 8.5 8.0 8.0 Current account balance (% of GDP) 7.4 4.9 0.5 1.0 2.3 2.4 External debt total (% of GDP) 3.8 3.6 3.4 3.2 3.0 3.0 Short-term interest rate (%) 10.6 12.0 10.0 8.5 7.5 7.0 Exchange rate per US$ (year average) 153.9 158.5 160.8 163.1 166.2 170.5 Government balance (% of GDP) -3.1 -3.1 -3.0 -2.4 -1.6 -0.8 Population (millions) 162.7 167.0 171.2 175.5 179.8 184.6 Nominal GDP (US$b) 228.4 264.5 305.4 346.8 387.7 428.9 GDP per capita (US$ current prices) 1,403.7 1,584.2 1,783.2 1,975.6 2,156.5 2,323.150 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • PolandGrowth slowing and external headwinds intensify Risks to the current forecast are skewed to the downside. Although net exports contributed positively to Q2 GDP, supported by a relativelySeasonally and working day adjusted real GDP rose by 0.4% on the weak PLN, this could sharply reverse in the case of a disorderlyquarter in Q2 2012, roughly in line with our forecast. Household sovereign default in the Eurozone, which would trigger a much deeperconsumption growth remained fairly muted, reflecting the recent recession in Poland’s key trading partner. Recent comments by seniordeterioration in labor market conditions, while fixed investment officials suggest that the pace of fiscal tightening may be eased shoulddynamics fell in both Q1 and Q2 this year, with business confidence growth prospects continue to deteriorate. However, scope for asapped by heightened global uncertainty. significant policy stimulus is limited by the proximity of governmentSince the Rapid-Growth Markets Forecast — Summer edition — July debt to the 55% threshold, which would trigger automatic tightening2012, we have marginally downgraded our real GDP forecast for 2012 measures.to 2.5%, largely due to historical revisions that created weaker baseeffects. We expect growth to remain fairly subdued in 2013 beforegradually gaining momentum in 2014–15 as external conditionsimprove.Figure 61 Figure 62Contributions to GDP growth Government budget balance and debt % increase per year % of GDP % of GDP12 Forecast 2 Government balance Forecast 80 Domestic demand (left-hand side)10 0 GDP 70 8 -2 6 60 4 -4 2 -6 50 0 -8 -2 Government debt 40 -10 (right-hand side) -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 2.5 2.5 3.4 3.6 3.7 CPI inflation (% per year) 4.2 4.0 3.2 2.8 2.5 2.5 Current account balance (% of GDP) -4.9 -4.0 -3.6 -3.5 -3.8 -4.0 External debt total (% of GDP) 67.5 78.7 80.0 82.6 85.8 85.3 Short-term interest rate (%) 4.3 4.8 4.2 4.2 4.2 4.2 Exchange rate per US$ (year average) 3.0 3.3 3.2 3.3 3.4 3.4 Government balance (% of GDP) -5.1 -3.4 -3.0 -2.5 -2.1 -1.8 Population (millions) 38.2 38.2 38.2 38.2 38.2 38.2 Nominal GDP (US$b) 515.2 492.4 524.8 546.4 562.4 601.1 GDP per capita (US$ current prices) 13,488.1 12,892.3 13,741.0 14,307.7 14,729.7 15,748.4 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 51
    • QatarFiscal spending driving growth As we anticipated, the 2011 current account surplus has been revised up sharply to US$52b, equal to 30% of GDP. For 2012, we expect aThe fiscal surplus in the fiscal year to end March 2012 was revised small fall in the surplus to about US$50b. Merchandise exports aresignificantly higher to some 8.6% of GDP. This was achieved thanks to projected to rise by 6% while imports are seen growing by 15%.the surge in hydrocarbon revenues and despite a 16% jump ingovernment spending. We expect a further 11% rise in government GDP growth is set to slow to 6.2% this year from 14.1% last year, mainlyspending this year, focused on infrastructure spending related to the reflecting the self-imposed moratorium on Liquefied Natural Gas (LNG)megaprojects for the 2022 football World Cup. The budget will remain expansion and less favorable oil developments. Growth will thereforein large surplus. become more heavily dependent on government spending.Inflation jumped for a second successive month to 2.2% in July. Anumber of largely domestic factors were responsible. Externaldevelopments are likely to continue to restrain inflation during the restof 2012 and in 2013, but policy loosening will probably push inflationhigher, averaging 2% this year and 3.9% in 2013.Figure 63 Figure 64Real GDP growth Inflation % increase per year % increase per year30 Forecast 18 Forecast Middle East and 1525 North Africa Middle East and Qatar North Africa Qatar 1220 915 610 3 5 0 0 -3-5 -6 1991 1994 1997 2000 2003 2006 2009 2012 2015 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank. Table 17 Qatar Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 14.1 6.2 4.5 6.4 6.4 6.0 CPI inflation (% per year) 1.9 1.9 3.9 4.0 4.0 4.0 Current account balance (% of GDP) 30.0 25.5 20.6 19.0 18.0 16.9 External debt total (% of GDP) 50.4 42.5 39.7 35.5 32.0 29.0 Short-term interest rate (%) − − − − − − Exchange rate per US$ (year average) 3.6 3.6 3.6 3.6 3.6 3.6 Government balance (% of GDP) 2.9 7.1 4.6 5.8 7.1 6.8 Population (millions) 1.8 1.8 1.9 1.9 2.0 2.0 Nominal GDP (US$b) 127.3 173.5 204.0 221.2 246.4 269.0 GDP per capita (US$ current prices) 72,388.9 95,666.0 109,190.6 114,978.9 124,543.0 132,327.952 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • RussiaSlowdown intensifies but we expect soft landing Risks to the forecast are probably skewed to the downside, with the potential for the European sovereign debt crisis to trigger a much deeperThe first estimates indicate that growth slowed sharply to 0.1% on the contraction in economic activity. This would quickly transmit to Russiaquarter in Q2 2012, slightly below our forecast. An expenditure through lower commodity prices and a surge in capital flight. Over thebreakdown is not available, but we expect net trade and investment to medium term, growth is set to remain fairly steady at 3.5%–4%.have primarily driven the slowdown, with retail sales data indicating thathousehold spending remained fairly robust. Inflation has risen sharply in recent months, largely due to the implementation of regulated utility price hikes, which were delayed fromWe have reduced our forecast for real GDP growth in 2012 to 3.4%, their traditional January timing. With medium-term inflationary riskscompared with 4% expected in the Rapid-Growth Markets Forecast — building, we expect some modest monetary tightening to commence thisSummer edition — July 2012. This is largely due to a downward revision year.to Q1 growth and the small negative surprise in Q2.Figure 65 Figure 66Contributions to GDP growth Inflation % increase per year % increase per year15 Domestic Forecast 60 demand 5010 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 3.4 3.4 4.2 4.1 4.1 CPI inflation (% change year-on-year) 8.5 5.1 6.5 5.7 5.7 5.4 Current account balance (% of GDP) 5.4 4.6 2.3 1.4 0.9 0.2 External debt total (% of GDP) 28.7 30.7 32.2 33.8 35.5 36.8 Short-term interest rate (%) 5.5 7.2 8.0 8.1 7.4 7.3 Exchange rate per US$ (year average) 29.4 31.2 30.8 31.5 32.6 33.6 Government balance (% of GDP) 2.1 -0.4 -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$b) 1,856.1 1,944.5 2,144.2 2,313.8 2,457.9 2,611.3 GDP per capita (US$ current prices) 12,998.5 13,630.0 15,043.7 16,250.5 17,284.1 18,388.4 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 53
    • Saudi ArabiaSteady private sector growth despite slowdown in fiscal forecast to narrow from 27% of GDP in 2012 to around 18% of GDP inspending 2013, owing to expectations of declining oil prices and a continuing, steady growth in imports.Private sector activity continues to be strong, with recent PurchasingManagers’ Index (PMI) data consistently in robust expansion territory. With both the oil and non-oil sectors looking healthy, growth in 2012 isBanking data also point to buoyant consumer spending, with point-of- seen at around 4.8%. Nevertheless, this represents a slowdownsale transactions and credit growth accelerating according to the most compared with the 7% growth registered in 2011. Governmentrecent data for June. spending is expected to slow this year as there are growing concerns about the dependence on oil revenues. Having surged by 23% last year,Oil production is also expected to hold up well this year and next, with we indeed expect government spending to slow in coming years, at angrowth seen at 5.1% and 2.4% respectively. The Kingdom is expected to average of 6.5% p.a. over 2012–13.contribute to offsetting the fall in supply from sanctioned Iran in thisperiod. Despite robust production, the current account surplus isFigure 67 Figure 68Real GDP growth Current account balance % increase per year US$b % of GDP 10 Forecast 210 Forecast 90 180 75 US$b 8 (left-hand side) 150 Middle East and 60 North Africa 6 120 45 90 4 30 60 15 % of GDP 2 30 (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) 7.1 4.8 4.4 4.4 4.2 4.1 CPI inflation (% per year) 5.0 4.5 4.4 3.5 3.5 3.5 Current account balance (% of GDP) 26.5 26.4 17.8 16.0 15.8 15.5 External debt total (% of GDP) 14.6 14.0 13.9 12.7 11.4 10.4 Short-term interest rate (%) 0.7 0.7 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) 11.5 9.9 2.0 1.3 1.1 1.0 Population (millions) 28.1 28.7 29.3 29.9 30.5 31.1 Nominal GDP (US$b) 597.1 636.1 646.8 704.6 765.4 822.2 GDP per capita (US$ current prices) 21,274.4 22,176.8 22,074.2 23,549.7 25,065.4 26,407.154 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • South AfricaGrowth still robust despite global downturn increasing real incomes and the recent cut in interest rates. A cautionary note should be given on status of current outcomes of laborSupported by domestic demand, South Africa’s economy has continued negotiations.to grow steadily, with GDP increasing by 0.8% quarter-on-quarter in Q2after a 0.7% expansion in Q1. Despite the positive start to 2012, the Inflation has continued on its recent downward trend, falling back toglobal slowdown will put a drag on the economy and we expect GDP to 4.9% in July from 5.5% in June. Driving this was a smaller thanexpand by around 2.4% overall. As conditions improve, this is set to expected rise in the electricity tariff and moderating food price inflation.accelerate to around 3.0% in 2013. In the medium term, growth will With both food and oil prices on the rise, we expect inflation to bouncepick up to around 5% in 2014 and 2015. back over the rest of this year, and average 5.6% over 2012.Robust growth in domestic demand has been the driver of the economy, In the last few months the country has seen a widening of its tradewith retail sales volumes growing by 2.1% on the quarter in Q2. Looking deficit as import growth has outpaced export growth. We expect theahead, consumption will be supported by the improving labor market, current account deficit to widen this year.Figure 69 Figure 70Retail and car sales GDP and industrial production % increase per year % year % increase per year160 15 12 Forecast Retail sales140 (right-hand side) 12 GDP 8120 9 4100 6 0 80 3 60 -4 0 40 Car sales (left-hand side) -8 -3 Industrial production 20 -12 -6 0 -9 -16-20 Three-month moving average-40 -12 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 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) 3.1 2.4 3.0 4.8 5.0 4.7 CPI inflation (% per year) 5.0 5.6 5.4 5.3 4.9 4.8 Current account balance (% of GDP) -3.3 -6.2 -6.2 -4.9 -4.2 -3.8 External debt total (% of GDP) 11.5 12.7 12.7 12.3 12.0 11.7 Short-term interest rate (%) 5.6 5.4 5.1 5.3 6.3 7.2 Exchange rate per US$ (year average) 7.3 8.1 8.4 8.4 8.5 8.6 Government balance (% of GDP) -4.1 -4.8 -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$b) 409.5 395.1 418.0 456.1 497.2 536.9 GDP per capita (US$ current prices) 8,109.4 7,783.8 8,195.2 8,903.9 9,662.2 10,386.1 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 55
    • ThailandDomestic activity has firm momentum but exports are Consumer spending rose by a seasonally adjusted 1.2% on the quarterweak in Q2 and increased again in July. Consumer confidence rose in August, helped by the minimum wage increase and the easing of politicalExports fell from a year earlier in July and August. The slowdown in tension. These factors should help spending maintain strongglobal demand has reduced intra-Asian trade, hurting Thai exports. momentum into 2013. Strong reconstruction efforts underpinned firmExports to China fell in July and August while shipments to the rest of investment in H1, but seasonally adjusted industrial output fell in JuneSoutheast Asia fell in July for the first time since 2009. and July, suggesting that the weak external situation might be slightlyThe Bank of Thailand left rates on hold again this month, confident that undermining domestic momentum.the positive trend in consumption and investment is likely to continue. Seasonally adjusted GDP expanded by 3.3% on the quarter in Q2, drivenThe chance of a rate reduction later this year has increased, however, by robust domestic demand. We now expect GDP growth of 5.4% inand the Bank is ready to take action if global or domestic activity 2012 and 4.9% in 2013.weakens. At the interest meeting in September 2012, two of fivecommittee members voted to cut rates.Figure 71 Figure 72Exports 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$)-45 80 1995 1997 1999 2001 2003 2005 2007 2009 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: Customs Department; Haver Analytics. Source: Bank of Thailand; Haver Analytics.Table 21Thailand Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 0.1 5.4 4.9 6.3 5.6 4.9 CPI inflation (% per year) 3.8 2.9 2.7 2.3 2.3 2.5 Current account balance (% of GDP) 1.7 -1.5 -1.2 -0.5 -0.7 -1.0 External debt total (% of GDP) 20.9 20.6 20.8 21.1 21.4 20.9 Short-term interest rate (%) 2.9 3.0 3.4 5.0 5.6 5.6 Exchange rate per US$ (year average) 30.5 31.3 32.8 35.0 36.7 37.2 Government balance (% of GDP) -1.6 -3.9 -3.3 -2.5 -2.0 -1.8 Population (millions) 68.6 68.9 69.3 69.6 70.0 70.3 Nominal GDP (US$b) 346.1 362.4 372.3 380.3 391.3 415.5 GDP per capita (US$ current prices) 5,046.3 5,256.3 5,371.8 5,460.4 5,591.1 5,910.856 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • TurkeyExports drive growth in Q2 while global fears spur policy loosened monetary conditions quite significantly since mid-June,relaxation despite the fact that core inflation is still rather high, at over 7%. The Bank’s action appears to have been prompted by worries aboutGrowth was higher in Q2 than in many other RGMs, with seasonally attracting too much money — and thereby reversing the gains inadjusted real GDP increasing by 1.8% on the quarter (3.2% on the year). competitiveness achieved in late 2010 and H1 2011 — together withHowever, this surge was overwhelmingly driven by soaring export concerns about the negative impact of an increasingly fragile globalvolumes while imports were flat, reflecting subdued consumer spending economy. However, the more relaxed policy stance will result in a slowerand investment. Moreover, a large part of the rise in exports was driven fall in inflation over the next few years than we had previously forecast.by a big increase in gold sales to Iran, which will presumably betemporary. We expect that GDP growth will be about 2.7% this year, and should speed up in 2013 and 2014 as easier policy feeds through and theSizeable capital inflows have comfortably financed the large current world economy picks up.account deficit this year (albeit the latter is still a key vulnerability ifglobal financial tensions really were to soar). The Central Bank hasFigure 73 Figure 74Monthly trade balance Interest rates US$m (seasonally adjusted) % 0 24 Average bank lending rate -1,000 22 -2,000 20 -3,000 18 -4,000 16 -5,000 Policy rate 14 (instrument changed in May 2010) -6,000 12 -7,000 10 -8,000 -9,000 8 -10,000 6 -11,000 4 1997 1999 2001 2003 2005 2007 2009 2011 2006 2007 2008 2009 2010 2011Source: Turkish Statistical Institute; Haver Analytics. Source: Oxford Economics; Central Bank of Turkey; Haver Analytics.Table 22Turkey Source: Oxford Economics. 2011 2012 2013 2014 2015 2016 Real GDP growth (% per year) 8.5 2.7 4.2 5.5 5.3 5.3 CPI inflation (% per year) 6.4 8.9 5.9 5.4 5.0 4.6 Current account balance (% of GDP) -9.9 -7.4 -7.1 -7.2 -7.3 -7.0 External debt total (% of GDP) 39.8 40.4 38.8 38.6 38.3 36.4 Short-term interest rate (%) 8.4 7.9 7.2 8.9 9.5 9.5 Exchange rate per US$ (year average) 1.7 1.8 1.8 2.0 2.1 2.1 Government balance (% of GDP) -1.4 -2.0 -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$b) 777.3 798.8 851.4 884.5 921.7 1,003.9 GDP per capita (US$ current prices) 10,540.4 10,706.3 11,282.8 11,593.7 11,954.8 12,888.8 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 57
    • UkraineGrowth slowing in 2012, but pick-up expected on stronger pick up heading into 2013. Slow growth and rising state spending areexports also pushing up the fiscal deficit this year, adding to the need for more borrowing.With growth below target at just 2% in January–July and elections duein October, the Government has promised more public investment and An IMF deal and an EU association agreement, both of which wouldsupport to offset the industrial export slowdown. But this will add to an boost capital inflows, remain on hold until after the elections,already rising budget deficit and, with the current account gap also complicated by retention of energy subsidies that are linked to high gasrising, adds to risks of depreciation of the Ukraine Hryvnia. We have prices still charged by Russia.lowered our 2012 growth forecast to 1.7%. Despite the downside risks, reviving exports to the EU may see growthSlower growth has helped to bring down inflation more than expected, pick up to about 4% in 2013, with over 5% p.a. seen in 2014–16, as thewith consumer prices in January–August up 0.9% on the year. Inflation outlook for gas exports improves and a stronger recovery in the EUin 2012 will be well below the 7.9% projected in the budget but, with boosts exports and capital flows.energy prices set to rise in Q4 after the elections, we expect the rate toFigure 75 Figure 76Government budget balance Inflation US$b % of GDP % increase per year 2 Forecast 2 45 Forecast 0 0 40 35 -2 -2 30 Ukraine -4 -4 25 -6 -6 % of GDP US$b 20 (right-hand side) (left-hand side) -8 -8 15-10 -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) 5.1 1.7 3.8 5.9 5.9 5.4 CPI inflation (% per year) 8.0 2.0 7.0 6.0 5.5 5.5 Current account balance (% of GDP) -5.5 -7.5 -6.6 -5.5 -4.6 -4.2 External debt total (% of GDP) 76.1 80.8 81.3 78.2 76.0 73.1 Short-term interest rate (%) 7.8 7.3 7.0 7.0 7.0 7.0 Exchange rate per US$ (year average) 8.0 8.1 8.5 8.7 8.9 9.1 Government balance (% of GDP) -4.0 -4.1 -3.2 -2.6 -2.3 -2.0 Population (millions) 45.2 45.0 44.7 44.5 44.2 44.0 Nominal GDP (US$b) 165.2 168.0 178.4 196.7 212.7 231.8 GDP per capita (US$ current prices) 3,655.6 3,736.6 3,991.0 4,422.4 4,810.5 5,269.458 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • United Arab EmiratesOil and non-oil growth both seen picking up next year recover. There is evidence of a patchy recovery in the housing sector, in Dubai in particular, but the picture in Abu Dhabi is considerably weaker,We expect GDP growth of 3.0% in 2012. Lower oil prices, a weak global and the overall outlook is uncertain.backdrop and relatively tighter fiscal policy account for the slowdowncompared with 2011. However, the continuing recovery in the non-oil There are a number of risks to our forecast. A deterioration in theprivate sector, combined with higher oil production to offset some of Eurozone would impact Dubai, mostly through financial channels, as thethe presumed fall in Iranian output, lead us to expect growth to pick up Emirate continues to repair its balance sheets over the medium term.to 3.9% next year and to average 4.5% in the medium term. Dubai is also likely to be impacted by sanctions on trade partner Iran, though a lack of timely data makes this effect difficult to quantify.Price pressures remained weak throughout 2012, and we expect CPIinflation to have averaged 0.9% by the year-end. We expect this to pickup to 2.3% next year, as food price caps end and house prices (the mainsource of deflationary pressure) begin to bottom out and graduallyFigure 77 Figure 78Real GDP growth Government budget balance % increase per year US$b % of GDP 21 Forecast 40 Forecast 30 18 Middle East and North Africa 30 20 15 US$b (left-hand side) 12 United Arab Emirates 20 % of GDP 10 9 (right-hand side) 10 6 0 3 0 0 -10 -10 -3 -6 -20 -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 3.0 3.9 4.5 4.5 4.2 CPI inflation (% per year) 0.9 0.9 2.3 2.7 3.0 3.0 Current account balance (% of GDP) 9.1 10.5 4.3 2.5 2.4 2.2 External debt total (% of GDP) 35.4 29.9 27.0 22.8 20.1 17.7 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) 6.9 8.8 7.0 7.1 7.5 7.5 Population (millions) 4.8 4.9 5.0 5.1 5.2 5.3 Nominal GDP (US$b) 338.7 367.3 370.7 394.2 423.0 452.1 GDP per capita (US$ current prices) 70,399.1 74,787.6 74,059.5 77,297.3 81,457.0 85,511.1 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 59
    • VietnamPolicy will support strong recovery But EU recession, sluggish US growth and the banks’ rising bad debts are downside risks to short-term growth. Progress on reducing theFollowing this year’s fifth reduction in main interest rates (with the fiscal deficit will be slower this year than last.refinancing rate cut to 10% in July), the Central Bank has orderedcommercial banks to lower their lending rates. This will restart domestic Annual GDP growth picked up to 4.7% in Q2, from 4.0% in Q1. Thecredit growth, which stalled during H1 as businesses scaled down Government has announced stimulus measures, however, aimed atinvestment plans. lifting the rate toward the full-year target of 6%, though it admits that 2012 growth is likely to be 5.6%–5.8% at most. We expect growth ofThe Central Bank is increasingly confident that lower interest rates will 4.8%, as stock levels remain high and the EU recession and the sluggishnot weaken the Vietnamese Dong (VND) or revive inflation, which US economy are constraining export growth. The Government’s aim isdropped to 5.0% in August, the lowest since 2009. With gradual VND to offset this with stronger domestic investment and so reach thedepreciation supporting markets for price-sensitive exports, the current 6.0%–6.5% official 2013 growth target.account will remain close to balance, despite stronger growth next yearlifting imports, as higher-value exports start to expand.Figure 79 Figure 80Real 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) 5.9 4.8 6.1 7.2 6.9 6.6 CPI inflation (% per year) 18.7 9.6 7.8 6.4 4.8 4.5 Current account balance (% of GDP) 0.2 3.8 0.0 -0.9 -0.9 -0.5 External debt total (% of GDP) 27.7 21.5 19.3 18.1 17.2 16.2 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 21,402.2 21,995.1 22,497.6 22,900.3 Government balance (% of GDP) -2.8 -3.5 -3.3 -3.0 -2.8 -2.6 Population (millions) 88.8 89.7 90.6 91.5 92.4 93.2 Nominal GDP (US$b) 123.6 139.5 155.4 172.6 189.0 206.8 GDP per capita (US$ current prices) 1,392.4 1,555.9 1,715.7 1,885.7 2,044.3 2,217.960 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 61
    • Detailed tables62 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
    • Cross-country tablesReal GDP growth 2011 2012 2013 2014 2015 2016Americas 4.2 2.6 4.1 4.9 4.6 4.2 Argentina 8.9 1.4 3.1 4.7 4.2 3.9 Brazil 2.7 1.4 4.5 5.0 4.8 4.3 Chile 5.9 5.2 4.5 4.5 4.4 3.9 Colombia 5.9 4.4 4.5 4.4 4.1 4.0 Mexico 3.9 3.5 3.7 4.9 4.6 4.4EMEIA 6.1 3.8 4.5 5.5 5.6 5.5 Czech Republic 1.7 -1.1 0.8 2.4 2.5 2.7 Egypt 1.8 1.8 1.9 4.5 5.9 5.9 Ghana 14.4 8.2 6.9 5.6 5.0 4.6 India 7.5 5.6 6.6 7.7 8.0 8.0 Kazakhstan 7.5 4.8 6.4 7.5 7.1 6.7 Nigeria 7.5 6.5 6.5 6.1 5.5 5.1 Poland 4.3 2.5 2.5 3.4 3.6 3.7 Qatar 14.1 6.2 4.5 6.4 6.4 6.0 Russia 4.3 3.4 3.4 4.2 4.1 4.1 Saudi Arabia 7.1 4.8 4.4 4.4 4.2 4.1 South Africa 3.1 2.4 3.0 4.8 5.0 4.7 Turkey 8.5 2.7 4.2 5.5 5.3 5.3 Ukraine 5.1 1.7 3.8 5.9 5.9 5.4 United Arab Emirates 4.2 3.0 3.9 4.5 4.5 4.2Asia 7.5 5.9 6.9 7.9 7.6 7.1 China and Hong Kong 9.1 6.9 7.9 8.9 8.5 7.9 Indonesia 6.5 5.9 6.3 6.0 5.4 5.5 Korea 3.6 2.2 3.5 5.0 4.8 4.4 Malaysia 5.1 4.5 4.3 5.3 4.8 4.2 Thailand 0.1 5.4 4.9 6.3 5.6 4.9 Vietnam 5.9 4.8 6.1 7.2 6.9 6.6Total 6.3 4.5 5.5 6.5 6.3 6.0 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012 63
    • Cross-country tablesCPI inflation 2010 2011 2012 2013 2014 2015Americas 5.4 5.1 5.2 4.5 3.7 3.6 Argentina 9.8 10.0 9.7 7.7 5.7 4.3 Brazil 6.6 5.3 5.8 5.1 4.1 4.1 Chile 3.3 3.0 2.6 3.0 3.0 3.0 Colombia 3.4 3.3 3.5 3.4 3.3 3.3 Mexico 3.4 4.2 3.9 3.5 3.0 3.0EMEIA 7.1 6.1 5.6 4.7 4.6 4.4 Czech Republic 1.9 3.3 2.2 1.8 1.8 2.0 Egypt 10.1 7.4 7.3 6.7 5.7 5.0 Ghana 8.7 9.4 8.3 6.7 5.6 5.0 India (WPI inflation (%)) 9.5 7.6 5.8 4.4 4.3 4.1 Kazakhstan 8.3 5.0 6.4 6.2 6.0 5.5 Nigeria 10.8 12.0 10.0 8.5 8.0 8.0 Poland 4.2 4.0 3.2 2.8 2.5 2.5 Qatar 1.9 1.9 3.9 4.0 4.0 4.0 Russia (% change year-on-year) 8.5 5.1 6.5 5.7 5.7 5.4 Saudi Arabia 5.0 4.5 4.4 3.5 3.5 3.5 South Africa 5.0 5.6 5.4 5.3 4.9 4.8 Turkey 6.4 8.9 5.9 5.4 5.0 4.6 Ukraine 8.0 2.0 7.0 6.0 5.5 5.5 United Arab Emirates 0.9 0.9 2.3 2.7 3.0 3.0Asia 5.2 2.8 2.8 3.4 3.4 3.1 China and Hong Kong 5.4 2.8 2.6 3.4 3.5 3.1 Indonesia 5.4 4.4 5.1 4.9 4.9 4.8 Korea 4.0 2.3 2.5 2.7 2.6 2.6 Malaysia 3.1 1.8 2.5 2.9 3.0 3.0 Thailand 3.8 2.9 2.7 2.3 2.3 2.5 Vietnam 18.7 9.6 7.8 6.4 4.8 4.5Total 5.9 4.4 4.2 4.1 3.9 3.764 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
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