The New World Of Business

Via Fortutne, some commentary by Ian Bremmer on emerging markets:

China’s slowing. Russia’s flailing. Is any emerging market worth putting your money in? We’ve found seven of them.

There was a time, not so long ago, when it seemed the rugged promise of the globe’s economic frontier could be summed up with a simple acronym: BRIC. To investors and corporate prospectors alike, Brazil, Russia, India, and China were like Gold Rush towns high in the hills—deep, rich veins of commerce that could be tapped by anybody quick enough, industrious enough, and brave enough to stake a claim.

Though separated by the imposing bulwarks of geography, language, culture, politics, and history, the four BRICs were kindred spirits—all were populous, underdeveloped lands with governments eager to welcome investment from Western corporations. Or so it appeared to Jim O’Neill, the son of a postman from Manchester, England, who had risen to head global economic research at Goldman Sachs—and who had ingeniously lumped these four behemoths together in a November 2001 analyst report, titled “Global Economics Paper No. 66: Building Better Global Economic BRICs.” That modest 16-page client briefing would inevitably launch untold numbers of BRIC mutual funds and ETFs, indexes, investment conferences, and Wall Street research teams. It would force major companies to rethink their own marketing and manufacturing strategies, reroute supply lines, and send billions of corporate investment dollars into a constellation of once-little-known cities from Bangalore to Shenzhen.


O’Neill’s BRIC conceit, it’s fair to say, redrew the map of global business. Consider that when the Goldman analyst coined the term, Brazil, Russia, India, and China accounted for $2.7 trillion in GDP, or 8% of the world economy. They account for roughly 19% today. (In 2010 the four BRICs invited South Africa to join the group, making them BRICS with a capital “S.”)

Back in 2001, China was just revving its engine, a $1.3 trillion economy that was the world’s sixth largest, trailing the U.S., Japan, Germany, the U.K., and France. As for Brazil, Russia, and India, none was in the global economy’s top 10. Brazil, with a population then of 177 million and a land mass nearly the size of Europe’s, had an economy smaller than Spain’s.

All are giants now. India’s GDP exceeded $2 trillion last year. China’s output is five times that, its economy second in power only to the U.S.’s. Brazil’s growth rate rose, albeit in fits and starts, from 4.3% in 2000 to 7.5% in 2010. Over the same decade, Russia’s middle class doubled in size.

Yet as much as we might celebrate the concept of BRIConomics for its insight and uncanny timeliness, it is time now to put the thing to pasture. As quickly as the world transformed at the start of the millennium, it is changing again. China’s economy is grinding into a lower gear, growing in 2014 at the slowest pace (7.4%) in nearly a quarter-century. Scandal-plagued Brazil stands on the edge of recession. A cliff dive for oil prices, sanctions, and the poor political choices of its leaders have Russia reeling, its economy on track to contract 3.5% this year.

To be sure, O’Neill and his Goldman team were quick to see that these economies would hit their estimated long-term growth targets only if political leaders were willing and able to “maintain policies and develop institutions that are supportive of growth.” In other words, these emerging stars would emerge only if they were well governed.

For many developing countries—BRICs and beyond—that’s been the key missing ingredient. A decade ago it seemed that almost every emerging market would fully emerge. Money flowed into dozens of countries, and their governments were content to let the good times roll. No need for painful reforms when all the lights are green. Middle classes expanded, and public expectations soared for ever-rising standards of living.


Then the financial crisis struck, triggering a global economic slowdown. It suddenly began to matter which of the developing states was well governed and which was not. Political leaders in emerging-market nations found themselves exposed when growth slowed and public anger surged over bad governance, corruption, and lousy public services. The eruption of protests in Turkey and Brazil in 2013 hinted at similar sentiment in other states, and those pressures are still building.

China remains a potent lure for foreign investment, and there will be plenty of opportunities for profit, even as President Xi Jinping’s reform process trims the sails on growth. Yet given the stakes involved in China’s reforms and the pushback Xi will probably receive as he cuts more deeply into the profits and privileges of some of China’s most powerful people, the risk of economic—and political—turmoil is likely to spike.

So where, now, should companies turn for their strategic investments? Well, that has everything to do with what they should look for: stability and resilience. And for that we found seven smart bets. In short, these are markets where it would seem good governance and sustainable growth are likely to go hand in hand.

Voters tossed aside underperforming governments in India and Indonesia last year to elect talented politicians promising positive change. Real reform is now on the agenda in both countries. Meanwhile, in Malaysia, an incumbent government is offering credible pledges for smarter economic management. All three will benefit in coming months from less conflict in the region. With domestic economic reform also on the agenda in China and Japan, leaders of all of Asia’s most powerful states have good reason to avoid the kind of conflict that can destabilize economies. Worth noting is that India, Indonesia, and Malaysia also benefit from political and commercial competition for regional influence among the U.S., China, and Japan.

Another region showing great promise is sub-Saharan Africa, now home to the world’s fastest-growing middle class. Investors continue to think of Africa almost entirely as an exporter of oil, gas, metals, and minerals, but services are playing an ever larger role across the continent. And governance in many countries has improved sharply. The World Bank’s 2013–14 “Doing Business” report asserted that sub-Saharan Africa has benefited more than other regions from regulatory improvement. Few countries offer greater promise than Kenya.

Finally, even in regions where growth is uneven, there are emerging markets where improved governance provides value. Latin America, Mexico, and Colombia offer opportunities that Brazil and Chile, let alone Argentina and Venezuela, cannot. Europe is in for a rough ride this year as political consensus on further reform of the eurozone erodes and external threats from various jihadi groups and Vladimir Putin’s Russia add pressure on beleaguered political leaders. Poland offers a rare bright spot.

While we couldn’t come up with a clever acronym for the lot—and we won’t make a prediction beyond the next five years—here are our lucky seven.


Change has come to India, the lone BRIC country that’s worth holding on to. An obstructionist opposition is slowing the pace of reform, but Prime Minister Narendra Modi’s consolidation of power and his Bharatiya Janata Party’s state election victories should ultimately bring deep structural changes that ought to boost growth. The central and state governments’ liberalization of labor and environmental regulations, coupled with generous new financial incentives for investment, is improving the outlook for the manufacturing sector too. Authorities are redesigning policies to attract additional foreign investment into the manufacturing, hydrocarbons, insurance, defense, and railways sectors. With all of the above, the rate of economic growth, frustratingly slow in recent years, is likely to gather steam.


There’s also a fresh new face in Indonesia. President Joko Widodo, whom Fortune named to its inaugural list of “The World’s 50 Greatest Leaders” last year, has already cut costly fuel subsidies, and his administration is likely to enact business-friendly changes for the oil and gas sector. Savings from subsidy reduction will help fund ambitious infrastructure development plans, higher spending on education should gradually improve worker productivity, and a rapidly expanding middle class will create new commercial opportunities. Though he faces some resistance to more sweeping reforms, like the lifting of a ban on raw-ore exports, voters have made clear they expect better governance, and their new President appears committed to risking his political capital to deliver on his promises.

A worker navigates the construction site of a new pier at New Priok container terminal in North Jakarta in November. Indonesian President Joko Widodo said his government plans to build 24 seaports over the next five years.


In Malaysia, the incumbent government is trying to stay ahead of increased demand for change. Prime Minister Najib Razak scrapped fuel subsidies and will enact a 6% goods and services tax in April to improve his government’s fiscal position. Najib will likely accelerate his Economic Transformation Program by introducing further tax incentives for foreign investors. Further liberalization of the manufacturing and financial services sectors is likely as well. It’s a fair bet that as growth tapers in China (and the impact of that slowdown is felt in Malaysia), Najib’s government will feel pressure to boost public spending on infrastructure, education, and health care. That’s a good thing—particularly if authorities, as expected, continue to advance a broad fiscal reform agenda, with support from the middle class, to balance the nation’s budget by 2020.


Since President Enrique Peña Nieto took office in December 2012, Mexico has undergone a deep reform process, enacting changes to the energy industry, labor market, telecom sector, educational system, and the government’s fiscal framework. And in the run-up to the 2015 and 2018 federal elections, the government seems all the more eager to attract foreign investment, particularly in its energy sector. Given the need to develop and renovate infrastructure in the industry, near-term opportunities will continue to arise in the construction and operation of pipelines, highways, ports, and other areas. Mexico’s economy should also benefit from an expanding U.S. economy, as better times north of the border bring more tourists and Mexican citizens working in the States increase the remittances they send back home.


Our bet is that President Juan Manuel Santos will reach a peace deal with left-wing rebels of the Revolutionary Armed Forces of Colombia (FARC) by the end of this year. That would enable the government to expand the rule of law, deepen rural development, and attract investors worried primarily about security. The Santos administration and opposition leaders broadly agree on economic policy, meaning political battles are unlikely to undermine the business environment.



No country has gained more influence in Europe in recent years than Poland, where good government is helping to grow a promising emerging-market economy. The ruling Civic Platform Party will in all likelihood return to power (as the leading party in the country’s governing coalition) following elections in 2015, enabling the government to continue its bid to liberalize the economy, encourage foreign investment, and develop national infrastructure. With that, structural reforms and government investment should accelerate, especially in the defense and energy sectors, though perhaps not until next year.


Africa’s other large economies, Nigeria and South Africa, face more than their share of political and economic turmoil these days, but Kenya appears headed in the other direction. Backed by a majority in both legislative chambers, President Uhuru Kenyatta appears poised to advance long-delayed plans to develop the country’s power sector and national infrastructure. His government has strengthened the state’s security bureaucracy in the wake of recent terrorist attacks—and the decision by the International Criminal Court to withdraw charges against Kenyatta brings a new measure of stability. The implementation of IMF-supported fixes to central bank and treasury management ought to keep inflation in check and the currency stable as well.

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.