Etude marche emergent -Ernst1Young Oxford

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Etude marche emergent -Ernst1Young Oxford

  1. 1. Growing BeyondRapid-growthmarketsErnst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
  2. 2. WelcomePublished in collaboration with2 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
  3. 3. 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
  4. 4. 2 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. … 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
  21. 21. 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
  22. 22. 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

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