The BRIC countries (or BRICS if South Africa is included as a fifth member) haven’t been as strong or stable as many investors assumed a few years ago. They’ve been more volatile and also less profitable. That has given rise to new acronyms, such as MINT (Mexico, Indonesia, Nigeria and Turkey), CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and VISTA (Vietnam, Indonesia, South Africa, Turkey and Argentina).
However, EM countries present certain liquidity and currency risks that the core markets do not. “Whereas it’s easier to increase the exposure, when it comes time to exit it’s much more difficult, especially when everyone is trying to leave at the same time,” said Divyang Shah, global strategist at Thomson Reuters.
In the wake of the financial crisis of 2008, there has been much discussion of how EM countries have decoupled from the slower, developed world. In many cases, those economies (consider China and Russia for instance) continued to grow at a fast clip while developed economies had negative growth and then very slow growth. However, the decoupling proved temporary and many EMs have since experienced slowing economic growth; for example Turkey and Russia, as well as India and Mexico. “For a while, EM markets were much better off,” said Shah. “What people realised is that while they performed better in nominal terms, they face issues such as liquidity – the ability to get money out – and volatility. As developed countries emerged into renewed growth, there’s been a shifting of funds and focus.”
The liquidity in some EMs was a result of aggressive monetary easing from the US Federal Reserve, combined with massive demand for commodities from the fast-growing Chinese economy. While people don’t expect an economic ‘hard landing’ in China, there has been a pull back of growth and liquidity, just as the Fed began to taper the quantitative easing programme (QE) that the US introduced in 2009. There are also concerns about credit growth in some of these markets, which have become too reliant on credit.
That’s true in China as well as other EMs, according to Shah, so much so that the Bank for International Settlements’ (BIS) annual report pointed out credit creation as the key challenge for these markets. “For a while it seemed emerging markets were thought of as a free lunch, and there was less balance between growth and risk. Now investors are keeping a closer eye on risk. Investors are no longer looking at these markets through starry eyes,” stated the report.
While EMs as a whole have grown faster than developed economies, “what we’ve seen this year – and the forecast for next year – is that EM countries are slowing down,” said Joydeep Mukherji, managing director and senior sovereign rating analyst at Standard and Poor’s (S&P). That’s in large part because some of the biggest markets, such as Brazil, India and China, are experiencing slower growth this year. The slowdown in these large economies is depressing the overall averages. That has made the former darlings of the EMs, the BRIC economies, less attractive and has given rise to the interest in the new acronym, MINT, although neither is by any means a homogenous group with a common growth rate or growth rate outlook.
A Mixed Performance
As with the BRIC economies, MINT countries are large enough to have an impact on a regional basis. They have all experienced decent growth rates in the past three years, although the outlook is less bright. After a sluggish start to the year, Mexico’s government predicts 2.7% growth in gross domestic product (GDP) for 2014, although the International Monetary Fund (IMF) recently shaved its own projection for the country from 3% to 2.4%.
Turkey, which had been expected to experience a sharp slowdown this year, is exceeding forecasts so far with GDP rising by 4.3% on an annualised basis in the first quarter of 2014. Indonesia, the largest economy in Southeast Asia managed a 5.2% increase in Q114, while Nigeria displaced South Africa in April as Africa’s largest economy based on a recalculation of its GDP – expected to grow by nearly 6.2% this year from 5.5% in 2013.
“All of the MINT countries are large landmass and populous countries with the potential for rapid growth,” said Mukherji. “While they’ve recently slowed down, that doesn’t mean they’ll stay this way forever.”
Slower growth reflects softer commodity prices. Both Mexico and Nigeria are reliant on oil revenues, while Indonesia has significant mining operations. While Turkey is the odd man out of the four, with a stronger industrial base and significantly less commodity dependent, the slowdown in China will have an impact on MINT countries.
There are significant differences among the four. Turkey and Mexico are middle income countries with per capita income around US$10,000, while Nigeria and Indonesia are at the low end. “These two countries are structurally different than Mexico and Turkey,” Mukherji said. In Turkey and Mexico, there’s a strong middle class and basic infrastructure exists. “In Nigeria and Indonesia, the production base is different.”
Of the four MINT countries, only Mexico, at BBB+ is rated investment grade with a stable outlook by the main credit ratings agencies (CRAs).
- Indonesia’s (BB+ stable) rating is kept below investment grade in large part because of the country’s low per capita GDP, at around US$3,300. “The economy has been growing quite well,” Mukherji said. “The country’s debt profile has improved because of all that growth.”
- Nigeria (BB- negative) faces issues related to the weakening of the political environment, with various groups jockeying for power and restricting the government’s ability to modernise the economy. In addition, the country remains highly dependent on its oil sector. The fiscal benefits from oil revenues are somewhat offset by the government’s subsidy on domestic consumption.
- Turkey’s (BB+ negative) biggest vulnerability is the current account deficit. “To the extent that country can reduce its external vulnerability through a lower current account deficit, or fund more of the deficit with FDI inflow, that would help it sustain economic growth,” notes Mukherji. The focus is on the underlying economy, how productive it is and how well it will be able to export.
- Mexico (BBB+ Stable) has a strong industrial base and good access to the US market but it has not been able to grow very rapidly over the last decade on average. However, following the recent passage of reform to liberalise the energy sector, “we could see a rise in investment and eventually GDP growth in the coming couple of years,” Mukherji predicted.
According to Shah, MINT is not the only acronym or expression. Last year, as the Fed’s tapering programme got underway there was talk of a new group dubbed the ‘Fragile Five’: India, Indonesia, South Africa Turkey and Brazil. These markets suffered because there was growing concern about current account balances, at a time when investors were pulling their funds out of EMs.
Instead of viewing emerging markets as homogenous, says Shah: “People are starting to realise they have to do their homework; each country is different. There are political risks but there are some willing to enact economic reforms. Countries that are making the tough choices are being rewarded; just take a look at the sharp recovery seen in India after the installation of Raghuram Rajan as the new Reserve Bank of India (RBI) governor and the recent election of the Modi government.”
The volatile environment has been an extremely important theme for most markets, according to Ron Leven, head of FX pre-settlement strategy at Thomson Reuters, an economist and an adjunct professor at Columbia University. Leven notes that there’s been a dramatic decline in volatility across asset classes. That’s true for bonds, stock, currencies and even commodities – despite recent Middle East turmoil, oil price volatility remains low by historical standards. “While it’s not a uniform story for every currency,” Leven said, noting that Brazil volatility levels have recently picked up, “the overall levels are historically low.”
There are several reasons for this low. First, central bank policies have kept interest rates low. “Low interest rates are generally bearish for volatility,” Leven explained. “By nature of pushing rates close to zero, you trap interest rate volatility in an increasingly low range.”
With rates falling even in emerging economies, there’s less discrepancy between markets. “Bigger interest rate spreads are generally associated with greater volatility in FX,” he said. While volatilities are unlikely to go any lower, Leven doesn’t see an immediate uptick. “It’s going to be a good year or more before you see any substantial pick up in cyclical volatility.” He expects to see volatility remain low for emerging markets as well as others. As rates begin to pick up and the Fed withdraws support in the form of bond purchases, “there’s a point in the future where vols will pick up.”
In addition, he pointed to a secular phenomenon, the shift to electronic trading and more rapid price discovery. “That leads to a more fundamental dampening of volatilities,” he said. “In a sense, it’s a less dangerous market.”
But while volatility has been historically low, it’s starting to creep back up, according to Shah. The question is what triggers another lesson. He expects a mini shock when the Fed hikes US interest rates sometime next year, but not a lasting one. The difference between now and the Asian financial crisis of 1997-98 is that more emerging economies have allowed free trade flows with other countries and the currencies are more freely floating, allowing for easier adjustments to let the steam out. In 1997-98, many of the currencies were hard pegged to the US dollar (USD).
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