The Economy

Developing Markets: Growing . . . and Dangerous

Emerging markets will overtake the developed world in GDP this year. But CFOs looking at growth opportunities will have to exercise caution.
Andrew SawersJanuary 9, 2013

This year will mark a milestone in the history of economic development, for 2013 will be when emerging-market economies become, in aggregate, bigger than those of the developed world. Just to be clear: measured in terms of purchasing-power parity (PPP), emerging economies will make up more than half the world’s GDP this year.

A report published this month by PricewaterhouseCoopers acknowledges that PPP calculations make allowance for price differentials across economies and that they therefore inflate the size of emerging economies compared with using current exchange rates. Nonetheless, the shift in the balance of GDP “will be a symbolic event that is expected to set the trend for decades to come,” says the report.

Global GDP is expected to expand by about 3.3% this year, finishing up some 10% above the prerecession peak achieved in 2008. But not only will the developed world be “in the back seat” of global growth, three of the BRIC countries — China, India, and Brazil — will together account for almost half the world’s GDP growth in 2013 (in PPP terms).

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Even with the United States expected to climb back near the long-term average growth rate, it will contribute just 10% of world GDP growth. The euro zone will contribute nothing. “In 2013, expansion in the emerging markets will no longer be viewed as a speculative investment, but core to business growth. But it will also bring new risks that have to be assessed and managed,” the firm advises.

Some of those risks were recently highlighted by analysis conducted by Standard & Poor’s, which looked at credit metrics and default rates in what it calls “emerging EMEA.” (The region consists of almost 40 countries, including Azerbaijan, Belarus, Croatia, Czech Republic, Hungary, Poland, Russia, Turkey, Ukraine, Bahrain, Israel, Jordan, Kuwait, Saudi Arabia, United Arab Emirates, Egypt, Morocco, Nigeria, South Africa, and Tunisia.)

S&P’s view is that slow global recovery and regional socioeconomic problems are continuing to weigh on the emerging economies within Europe, the Middle East, and Africa. Demand for commodities from emerging EMEA countries — in particular oil, the largest export — is a key factor in growth.

Corporate-default rates in this sprawling region rose last year, and the decline in credit quality was more pronounced than elsewhere: now only 33% of emerging EMEA-rated corporates are investment-grade, compared with 43% for emerging markets generally and 54% globally.

Inward capital flows are expected to help stimulate growth in the emerging EMEA region, however, and bank-lending conditions are said to have been improving as of the third quarter of 2012.

The European Central Bank’s announcement of its Outright Monetary Transactions policy is also thought to have helped ease lending conditions within emerging Europe and to have been helpful to banks there by opening them up to international funding sources.

But for all the talk about “decoupling” emerging and developed economies since 2008, the slow recovery in the United States and the economic problems in the euro zone will continue to affect emerging economies, S&P says.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.