Rapid Growth Markets Forecast Winter edition 2013

Ernst & Young Rapid-Growth Markets Forecast

Rapid-growthmarkets

Growing Beyond

Winter edition — January 2013

2 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013

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1Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013

Contents 03Highlights

04The nexus of success

12Lessons learnt from past development paths

26Forecast for rapidly growing countries

54 Detailed tables

Alexis Karklins-Marchay Co-leader of the Ernst & Young Emerging Markets Center

A new year has dawned. A year which will, hopefully, bear witness to expanding economies, increases in employment and rising prosperity. As we turn the page on 2012, the world’s rapid-growth markets (RGMs) will continue to be pivotal to the hopes for sustainable global

recovery. So what can we expect from 2013? Is the fragility and turbulence set to continue or is economic revival imminent?

We have good news to report. This edition of Ernst & Young’s Rapid-Growth Markets Forecast predicts that RGM growth will pick up from 4.7% in 2012 to 5.4% this year and 6.4% in 2014. This data indicates that the lull in RGM expansion which occurred in 2012 was, as hoped, a temporary phase rather than the beginning of something more enduring.

Increasing trade among RGMs themselves, together with monetary and fi scal measures implemented by Asian and Latin American policy-makers in 2012, has been key to this resurgence. Both regions are, as a result, particularly well placed for expansion. In Asia, we expect acceleration from 6.3% in 2012 to 7.8% in 2014; and in Latin America, from 2.6% in 2012 to 4.8% in 2014. Taken together,

we predict that RGMs will underpin a recovery in global growth from 3% in 2012 to 4.2% in 2014. These are impressive — and much-needed — numbers, but how can the recovery be sustained?

The importance of rapidly growing middle-classes as key to sustainable growth has been well established. In addition, when examining the recent histories of countries which have enjoyed sustained rapid growth, four key lessons emerge. Political stability and strong leadership is crucial, especially when augmented by a stable and prudent macroeconomic policy. High capital investment, particularly in infrastructure, is another key driver of growth; as is an open and balanced trade policy that can be adapted over time. Positive action in these four areas will lead to competitive advantage and offers countries the best route toward their shared ambition of rapid and sustainable growth.

One country which has long enjoyed growth of this nature is China. Largely immune to the worst of the economic headwinds arising from the global fi nancial crisis, the Chinese economy — now the world’s second-largest — can look forward to even stronger growth in 2013. We have increased our estimate of growth in greater China, including mainland China and Hong Kong, from 6.9% to 7.4% in 2012, with 8.1% expected in 2013 and 8.8% in 2014.

These advances, which are underpinned by factors such as lower interest rates and rapid export growth, have important implications for business. High infrastructure investment will prompt greater demand for steel, cement and commodities, as well as increased regional development. And at the same time, China is

moving up the value chain by embracing new technologies and research and development. Services, too, are becoming more important; social security, health care and fi nancial services are just a few of the sectors that are replete with opportunities.

Chinese policy-makers have played a key role in creating these conditions. Governments in rapid-growth markets, much like their counterparts in more mature economies, want to apply what works internationally, learn from things that haven’t worked and then tailor the solutions to local circumstances. Addressing challenges such as urbanization and changing demographics, as well as strengthening infrastructure, will contribute to stronger and more sustainable growth.

I hope you fi nd the data and insights in this report useful. With the global economy remaining deeply scarred, the spotlight on those countries that are generating growth is set to intensify even further. By offering timely analyses of such economies, and providing our view of how their progress affects the business landscape, we aim to help you navigate the rapidly changing economic environment. For more information on rapid-growth markets, the business environment and local contacts, please visit www.ey.com/rapidgrowth.

2 Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 2013Ernst & Young Rapid-Growth Markets Forecast Winter edition — January 20132


Highlights

Four key lessons can be learnt from past development paths

• Rapid-growth markets (RGMs) striving to continue upgrading their economies and increasing GDP per capita need to focus on four key growth catalysts: political stability and strong leadership; stable and prudent macroeconomic policy; high capital investment; and following an open, well-balanced and adaptive trade policy.

The rapid-growth markets are expected to lead a pickup in global momentum

• In Q4 2012 encouraging signs started to emerge that the more trade-orientated RGMs, particularly those in Asia, were regaining momentum due to a combination of an improvement in intra-RGM trade and the impact of steps taken earlier in 2012 to ease monetary and fi scal policy.

• With both the Eurozone and Japan ending 2012 in recession, the advanced economies are not expected to contribute to the pickup in global economic momentum in 2013. Only in the US are signifi cant upside risks to growth visible. There, more progress has been made in adjusting the balance sheets of banks and consumers and consequently monetary policy has been more effective.

• As expected, China’s economy appears to have landed softly. Evidence started to emerge in Q4 2012 of the slowdown drawing to an end. We expect growth to pick up to 8.3% in 2013 and 9.0% in 2014.

• China’s recent slowdown has been mainly cyclical, and due to an earlier

tightening of domestic policy and weakness in key export markets such as Europe. However, the new leadership has voiced its commitment to a shift toward more sustainable and balanced growth.

• China’s recovery is expected to give a boost to other Asian RGMs. There are already clear signs that China’s recent improvement is having a positive impact on other RGMs and we expect the Asian RGMs to see their growth rate accelerate from 6.3% in 2012 to 7.8% in 2014 as the recovery broadens.

Enabling Latin America to benefi t from higher demand for commodities

• A strong pickup in the Latin American RGMs is also anticipated. We expect the pace of growth to accelerate from 2.6% in 2012 to 4.8% in 2014, driven by Brazil and Argentina and benefi ting from increased demand for commodities from emerging Asia. Mexico is expected to benefi t from its strong trade links with the United States as import demand improves in the US next year.

But Eurozone uncertainty will continue to weigh on activity in emerging Europe …

• However, weakness in the Eurozone will weigh on the European RGMs. Due to their strong trading and fi nancial links with the relatively depressed Eurozone, the European RGMs are expected to lag behind their Latin American and Asian counterparts in 2013. Consequently, only a muted acceleration in the growth rate of emerging Europe is forecast for 2013, with a rise from 2.3% to 2.9% in 2013, before an acceleration to 4.2% in 2014.

… and slightly lower oil prices will dampen activity in the Middle East

• Growth in the three rapid-growth markets of the Gulf Cooperation Council (GCC), Saudi Arabia, the United Arab Emirates and Qatar, remains robust, although the pace began to slow in H2 2012. Growth is expected to slow a little further in 2013, as tensions in the Middle East moderate, allowing oil prices to fall. But the region is benefi ting from expansionary fi scal policy, a high absolute level of oil prices and rising oil output. Monetary policy is also accommodative.

China’s gradual move up the value chain will create opportunities for other RGMs

• As China progresses up the value chain, it will create opportunities for lower cost producers in Africa and Southeast Asia, including Indonesia, Thailand and Vietnam.


The nexus of success

India’s expansion remains subdued, but today’s sub-trend growth should gain momentum during 2013 thanks to rising regional and US demand, and probably lower interest rates.

In Latin America, Brazil is poised to accelerate after a disappointing 2012 and Argentina has picked up a little. Meanwhile, Mexico is confi rming its resilience as a regional export hub and is benefi ting from a US recovery — which should help other Latin American trading partners too.

European RGMs, especially Poland and the Czech Republic, are held back by Eurozone weakness. But overall, they should see modest growth acceleration from 2.3% in 2012 to 2.9% in 2013. Further east, Turkey is bouncing back, while Russia’s recovery is helped by consumer spending but dampened by weaker oil prices.

We expect non-energy commodity prices to fall by 0.2% this year. And, as supply increases, oil prices are forecast to fall almost 6% to average US$105.2 per barrel during 2013. This will help moderate RGM infl ation from 4.4% in 2012 to 4.1% in 2013.

Nonetheless, the oil-exporting RGMs of the Gulf Cooperation Council — Saudi Arabia, the United Arab Emirates and Qatar — will prove resilient, benefi ting from increased trade with Asia and Latin America. Stronger Asian demand for commodities should also assist African RGMs, notably Nigeria and Ghana.

Riding the rebound

Business leaders will need to tailor their expansion ambitions to the emerging opportunities. A sea-change is underway in the global business outlook. Uncertainties that clouded the global picture are fading as growth picks up, worries about the future of China and the Eurozone ease, and better US data accumulates. Meanwhile, investor interest is broadening beyond the BRICs (Brazil, Russia, India and China), triggering a wider spread of investment and growth.

Three additional trends will capture attention. First is the mounting attraction of consumer demand in emerging markets, where surging prosperity and expanding middle classes add to the breadth and scale

Back on track

Business and political leaders alike may exhale a sigh of relief. The slowdown of rapid-growth markets (RGMs) during 2012 seems certain to be merely a stumble from which they are now recovering. Signs of a pickup in the more trade-oriented RGMs, especially those in Asia and Latin America, emerged during the fi nal quarter of last year. They are now becoming the locomotives of a global recovery in which developed economies will be the laggards. Those charged with shaping corporate strategy or public policy should look closely, and ask themselves: how must I realign my organization and its goals to benefi t from the improving outlook?

Our new forecast is that RGM growth overall will accelerate from 4.7% in 2012 to 5.4% this year and 6.4% in 2014. This pickup will be underpinned by increased trade between RGMs and by the monetary and fi scal easing implemented in Asia and Latin America during 2012. The most powerful engine of growth in the next few years will be Asian RGMs. Among them, growth is expected to accelerate from 6.3% in 2012 to 7.8% in 2014. Simultaneously, growth in leading Latin American RGMs will surge from a disappointing 2.6% in 2012 to 4.8% in 2014.

Together, these markets will drive a resurgence in global growth — from 3% in 2012 to 4.2% in 2014. With feeble growth rates in the Eurozone, Japan and the UK likely to continue, the US is the only developed economy that could provide a fi llip. But a boost from the US depends heavily on the nature of any long-term political deal to solve its deferred “fi scal cliff” challenge.

Faster growth sooner — or later

Just as the pattern of global growth will be uneven, emerging regions will expand at different paces. The slowdown in China, now the world’s second-largest economy, is ending. We have revised our estimate of growth in greater China (embracing mainland China and Hong Kong) upwards from 6.9% to 7.4% for 2012, with 8.1% expected in 2013 and 8.8% in 2014. As recovery broadens across Asia, we also anticipate faster growth in Korea, Indonesia, Thailand and Malaysia.


of internal consumption. Second is the opportunity arising as investment — by the private and public sectors alike — reshapes emerging economies. And fi nally, there is the likely tendency of investment to fl ow to those economies where policy reform and structural adjustment help accelerate growth. Such a trend creates incentives for policy-makers to innovate in search of better governance and more effi cient service delivery, thereby triggering a virtuous spiral.

China, the driver

Evidence that China is undergoing both a cyclical recovery and a successful structural transition is the cornerstone of our renewed optimism about the outlook for rapid-growth markets. Lower interest rates, eased bank reserve requirements and lighter restrictions on property purchases all suggest that a hard landing has been avoided. Meanwhile, the sought-after rebalancing to substitute higher domestic consumption for rapid export growth appears to be succeeding.

Historically, investment has been the principal motor of Chinese growth. But in the fi rst three quarters of 2012, consumption provided 55% of economic growth, according to the country’s National Bureau of Statistics.1

Fueled by investment

The implications for business are far-reaching. As the December 2012 opening of the 2,298km Beijing to Guangzhou high-speed rail line confi rms, China’s infrastructure investment remains high. The stimulus package unveiled in 2012 is equal to around 2% of GDP. It centers upon road, rail, water and power infrastructure. Though the private sector is being encouraged to assume a larger share of fi xed investment, central and local government, together with state-owned enterprises and banks, retain a key role. Better connections enable increasing emphasis on regional development and affordable housing, for example. This underpins demand for steel, cement and commodities, but also aids the spread of production, employment and consumption to second-tier cities.

Some existing industries that rely on low-cost labor are moving inland, away from coastal cities where wages have tripled in a decade. This trend contributes to increased regional development.

Moving up-market

Meanwhile, China is climbing the value chain. Seven strategic industries are planned to generate 8% of GDP by 2015. These are: energy conservation and environmental protection; new-generation information technology; biotechnology; high-end equipment manufacturing; new materials; new energy; and clean-energy vehicles.2

Already, China is at the forefront of some technological development. Incentivized Chinese companies sought more patents than their US peers in 2011. Competition with international rivals is beginning to occur at the forefront of technology, with a growing focus on research and development — though talent shortages remain. As this trend develops, China-based companies will seek wider profi t margins built on their ability to sell desirable, high-specifi cation products rather than simply offering the best value for money.

These factors will contribute to an economic transformation. For example, we believe China’s share of the world pharmaceuticals market will reach 15% in the next decade. And we expect its share of the global mechanical engineering market to rise to a third. Western pharmaceutical fi rms, already wrestling with diminished new product pipelines, generic competition and government pressure on pricing, are seeking a bonanza among the newly-prosperous Chinese middle classes. But they will not have the fi eld to themselves. Western engineering leaders, meanwhile, will fi nd themselves in an intensifying race to innovate.

1 http://www.economist.com/blogs/freeexchange/2012/10/rebalancing-china2 China unveils plan for new strategic industries, Chinadaily.com, 21 July 2012 —

http://www.chinadaily.com.cn/business/2012-07/21/content_15605361.htm


Sustainable economic growth is an ambition that unites policy-makers across the world. Shifting demographics, urbanization and climate change, together with the ongoing fi nancial crisis, have left a fast-evolving and challenging global environment for governments to navigate.

Even though it’s far from straightforward, sustainable growth can be achieved – as the examples below demonstrate.

The histories of countries which have enjoyed recent economic success demonstrate that political stability and strong leadership from government are key, especially when augmented by a stable and prudent macroeconomic policy.

High capital investment, particularly in infrastructure, is another key driver of growth, as is an open and balanced trade policy that can be adapted over time. As shifts in capital from North to South and from West to East grind relentlessly onward, positive action in these four areas will lead to strong competitive advantage.

Still, emerging markets are not all alike. The role of government varies depending on the maturity of the market. It can act as funder and provider of services where there is a tax base in place or, alternatively, it might be the benefi ciary of development funds and serve as the initiator or facilitator of private sector development. And in many instances, governments are the creators of new market structures through regulation, legislation and policy.

Governments are in a position where they can set the conditions for successful entrepreneurship by promoting education and culture; highlighting the important contribution of entrepreneurship; facilitating easy establishment of new businesses; and offering grant programs for people who require funding for new businesses — ranging from micro credit to government grants programs. Policy-makers also play a major role in creating strong linkages with industry. After all, economic growth depends upon government and industry working together.

Identifying what works where

Governments in Russia, India and Brazil, for example, are all focused on preserving economic growth in times of signifi cant slowdown, creating jobs for millions of young people (India, for example, will have 500 million people under the age of 24 by 2020) and taking advantage of their natural resources.

China, by contrast, has moved ahead. Its surging middle class represents a huge new consumer base. And this trend, together with continuing urbanization, means it is well placed for ongoing and signifi cant growth. As a result, Chinese policy-makers are concentrating on meeting the increasingly diverse needs of a very large population. These include rising demands for sophisticated health and social services.

Other emerging countries have alternative challenges to address. These include constructing economic and social infrastructure, creating markets, ensuring food security, strengthening education and managing the avoidance of crises.

In many of these countries, technology is set to drive growth and change. Examples such as mobile banking in Africa and the use of a Unique ID card in India are expected to become increasingly common in the years ahead. And high-speed internet access is seen by many as a driver of entrepreneurship and the emergence of increasing numbers of small businesses.

In many instances, rapid-growth economies aim to adopt best practice from mature markets, learn about what has worked and what has not worked, and then “leapfrog” to world class performance. China is a prime example for this, with its government offi cials very well informed about what works in other parts of the world.

Sector in focus: the role of governments in rapid-growth markets


Governments in many African and South-East Asian countries work closely with International Development Partners such as the World Bank. As benefi ciaries of development funds, they need to be clear about what is needed in their countries; ensure the allocation of these funds in an accountable and transparent way; fi ght against corruption; and demonstrate the achievement of outcomes to the development partner.

Governments in emerging and mature markets alike are seeking new solutions to complex problems and striving to deliver public services in the most effi cient way possible. Ernst & Young works closely with governments to meet these challenges. Visit www.ey.com/government to learn more.

Uschi SchreiberGlobal Government & Public Sector [email protected]

Servicing and consuming

Services will acquire greater importance in the Chinese economy. Public services — social security, health care and education — will expand, alongside fi nancial services, tourism and retail.

In some sectors, from running hospitals and business schools to insurance and lending, international fi rms are succeeding in exporting lessons and business models honed elsewhere.

In consumer goods, meanwhile, a race is underway to build brands and market share. And Chinese consumers are proving as fond of fi zzy drinks, coffee, cakes and confectionary as their counterparts elsewhere. The food and beverage sectors in particular offer outstanding growth opportunities for companies with strong brands. With an eye to wider markets in decades to come, it is important to note that developing or acquiring brands and products that have particular appeal to local tastes can give a competitive edge.

Time to shift gear

China’s recovery is just one element in an improving RGM economic outlook. After half a decade of heightened uncertainty in which companies have often hesitated to invest, we are edging into a more predictable future — and that has massive implications. Businesses must start to extend their time horizons and focus much more on the future. As they plan with increasing confi dence, they will be able to invest and hire.

As the fog clears, volatility in fi nancial markets should reduce, encouraging investors to return.

Companies can at last shift gear. Those who have invested in RGMs can seize the chance to consolidate or improve their operations. They can accelerate their growth in leading markets and start to achieve long-awaited profi ts from existing investments.

Investing more widely

A second group of companies, that have yet to invest in RGMs, or who want to invest in new, often “‘second-tier” RGMs, can seek out opportunities more widely. Mid-sized European companies are recognizing the need to seek growth beyond Europe. They are beginning to ask where they should go, for example, in Latin America beyond Brazil; or whether they should be in Indonesia, Turkey, Taiwan, Thailand or further afi eld.

The nexus of successThe nexus of success


As fi rms restructure BRIC operations, sometimes setting up in “second-tier” RGMs, they are obliged to recast their supply chains, perhaps creating more regionalized structures.

Spreading the benefi ts

Low-cost Asian neighbors such as the Philippines, Vietnam and even Myanmar now compete energetically with inland China for labor-intensive industries displaced by rising wages in China’s coastal cities. These include textiles, footwear and electronic assembly. We expect Indonesia, Thailand and Vietnam to double their share of world textiles production to 10% over the next 25 years.

Companies casting around for the next low-cost labor pool will scrutinize secondary factors, including infrastructure, education and skills. Here, Asian countries are likely to remain better-placed than many of those in Africa, where labor may be cheap and plentiful, but sound education and transport infrastructure are often lacking.

That said, African, Asian and Latin American suppliers of commodities should see the upside of accelerating economic growth in China. Such benefi ts are likely to range from increased purchases of cocoa to enable rising chocolate consumption, to oil and other minerals, power, manufacturing and construction.

Buying opportunities

Against this backdrop, more companies are using mergers and acquisitions to access, consolidate or extend their ability to benefi t from growth in RGMs. But the traffi c is not one way. Companies in RGMs clearly stepped up their drive to buy resources, technology and expertise in 2012.

M&A deals involving emerging markets totaled US$505.4b in 2012. This is up 5% on 2011 and equal to 23.2% of global deals, according to Mergermarket.3 The rise was particularly strong in the fourth quarter, when deals involving BRIC countries rose 117%, year-on-year.

Overall, China was involved in a quarter of deals involving BRIC countries. The data shows that European companies are especially active in buying businesses in emerging markets. This is evidence that they are seeking opportunities beyond the stalled European economy.

Many international companies are sitting on piles of cash. Looking ahead, accelerating growth may prompt more acquisitions in RGMs, while expanding champions from these markets cast around for opportunities among accessible rivals in developed countries. But outbound M&A originating in emerging markets is also a major component of transactions.

China looks abroad

Many Chinese manufacturers are investing in Vietnam, Bangladesh or Myanmar to escape double-digit annual wage growth in Chinese coastal cities. High tech and capital goods enterprises are also buying brands, market share, operations and technology in the relatively open markets of Western Europe and the US. Others are setting up greenfi eld operations there.

The Chinese government has launched a “go global” strategy to channel foreign exchange reserves into international investments. A study by Ernst & Young4 found that Chinese outbound foreign direct investment has spread to 18,000 companies across 177 countries, embracing assets totaling almost US$2t by the end of 2011. In that year, Chinese enterprises invested over US$10b in Europe (a threefold rise), making it their second top destination after Latin America. The Eurozone crisis has rendered some European assets more affordable. Already, 350 of the 8,000 foreign businesses in the Netherlands — which is often seen as a gateway to Europe — are Chinese.

Today, many Chinese operations in Europe are relatively small and devoted to services, sales and support, or logistics and distribution. But they constitute a bridgehead from which to advance.

Looking east, looking west

China’s year-end uptick clearly foreshadows a growth recovery in two of the other big RGM economies that slowed markedly in 2012: India and Brazil. Each recognizes that improved infrastructure is essential to the next phase of growth, and seeks to accelerate it with private capital. Yet the use of Public-Private Partnerships (PPP) in these big RGM champions offers contrasting choices for private infrastructure investors.

3 Mergermarket M&A Round-up for 2012, 2 January 2013. www.mergermarket.com

4 China going global: the experiences of Chinese enterprises in the Netherlands. Ernst & Young.



India underwent a massive boom in PPP in the past decade as companies built toll-roads, airports, power stations and other infrastructure. Since 2007, the private sector invested US$225b in Indian infrastructure.5 Many private sector partners used special purpose vehicles to undertake design, build and operate (DBO) projects. But they often bumped up against delays and have found their investments slow to deliver profi ts, leaving these vehicles highly leveraged.

A study by Ernst & Young found that translating investments into physical infrastructure remains a challenge in India. It proposed urgent reforms to India’s PPP framework to get the country’s infrastructure program back on track.6

These troubled greenfi eld opportunities contrast with the brownfi eld privatizations being pursued in Brazil. In December, President Dilma Rousseff said her government would privatize airports at Rio de Janeiro and Belo Horizonte, along with 270 regional aerodromes, in a drive to attract US$9.2b of investment to these facilities.7

Part of the aim is to improve airport infrastructure before Brazil hosts football’s FIFA World Cup in 2014 and the Olympics in 2016. Operating and upgrading brownfi eld infrastructure of this sort may prove very appealing to international infrastructure operators, offering more predictable returns than greenfi eld alternatives.

Propelling prosperity through smart policy

Alongside high capital investment, especially in infrastructure, three further factors are required of states seeking to join the RGM league. These are political stability and strong leadership; stable and prudent macroeconomic policy; and an open and well-balanced trade policy.

The evidence from countries such as Korea, Ghana and Botswana demonstrates the importance of these factors in facilitating economic take-off. With GDP growth of 14.4% in 2011 and 7.1% expected for 2012, Ghana is regarded as a beacon of economic and political stability in sub-Saharan Africa. As a member of the Economic Community of West African States (ECOWAS), Ghana is among the African countries active in regional economic integration. Its

burgeoning middle-class now supports a fast-growing fl ock of low-cost airlines.8 Meanwhile, the political opposition is contesting the outcome of the country’s December 2012 elections not in the streets, but in its Supreme Court.

The combination of good governance and market liberalization exemplifi ed in Ghana is being replicated in many African states through the vehicle of regional economic integration, which helps to create a more attractive investment environment.

Policy-makers everywhere need to examine what works, and what doesn’t, whilst simultaneously assessing their current priorities and future challenges. Those who implement the right strategies will also attract the investments that are essential to enhancing prosperity.

As they sift investment options, shrewd business leaders will take a keen interest in market opening and trade policy, as well as political stability, and macroeconomic and demographic indicators.

Today, it is clear that enduring economic growth stems from good governance and the simultaneous, symbiotic development of public policy and private sector operators, cohabiting within a predictable framework.

As RGMs, led by China, become the locomotives of global growth, this will be the nexus of RGM success.

5 Infrastructure in India — RIPPP: The Economist, 15 December 2012.6 India Infrastructure Summit 2012 — Accelerating Implementation of

Infrastructure Projects, Ernst & Young.7 Brazil plans to privatise Rio airport — Financial Times, 20 December 2012.8 Ghana’s modest middle takes to the skies — Financial Times, 28 December 2012.



To start a business in the EAC now requires an average of 10 procedures, and costs an average 55% of income per capita — markedly better than in 2005.

The EAC already intends to create a tripartite 26-nation Free Trade Area with two regional integration zones under construction whose membership overlaps that of the EAC. The Common Market for Eastern and Southern Africa (COMESA) includes 19 states totalling more than 400 million people, whilst the Southern African Development Community (SADC) counts South Africa, a leading economy, among its 15 more geographically-focused members.

In West Africa, meanwhile, the Economic Community of Western African States (ECOWAS) brings together 16 countries, including francophone West African countries that share a common currency, the CFA franc, with Anglophone Nigeria and Ghana.

Governments participating in these organizations are seeking not only to break down barriers to trade, but to develop and implement common standards and rules, and to integrate infrastructure projects. By promoting better governance, they help make it easier to do business. They also create opportunities for investors, for example in construction of infrastructure. Improving power supply and transport, for instance, also makes new kinds of business possible in new locations.

Reducing tariffs in Africa is a thorny issue. But by bringing states together, regional integration can facilitate international trade deals, with the European Union for example.

Completing a pan-African single market will take decades. But businesses with African ambitions should be tracking the goals and timetables of regional integration in their target markets.

Breaking down business barriers in Africa

A continent-wide drive to enhance economic integration is starting to erode some of the well-established diffi culties of doing business in Africa.

Last year, leaders of the African Union endorsed a plan to create a Continental Free Trade Area (CFTA) by 2017. They see this as a key step in their strategy of boosting trade within Africa. Oxford Economics trade forecasts expect exports within sub-Saharan Africa to double over the next ten years.

Expectations that economic growth in sub-Saharan Africa will continue to mirror the 5%-plus achieved in the past decade are heightening investor interest. But the fragmentation of national markets behind high tariff and non-tariff barriers deters local and foreign direct investors alike. Building a common market like that of the European Union would transform the picture.

Delivering on the African Union’s ambitious timetable for a pan-African market may prove diffi cult. Yet regional economic integration is already beginning to enhance the attractions of investing in some regions of Africa.

Four emerging regional markets stand out. The East African Community (EAC) launched a customs union in 2005 and its common market in 2010, and is increasingly regarded as a beacon. It embraces Burundi, Kenya, Rwanda, Tanzania and Uganda, offering a potential market of 142 million people with a combined GDP of US$86.1b, according to Oxford Economics.

A series of programs are underway within the EAC to promote entrepreneurship and facilitate trade. They include plans to develop better international port, road and rail connections. An independent study9 concluded that, in the past six years, the EAC implemented 11 trade facilitation reforms in areas such as electronic submission of documents and joint border inspection.

9 Doing Business in the East African Community 2012 — www.doingbusiness.org — 11 April 2012

Box 1

Regional integration in Africa


Learn more about investing in the African market

Foreign direct investment (FDI) into Africa has increased signifi cantly over the last decade and this trend is set to continue.

As highlighted in Building bridges: 2012 Africa attractiveness survey, regional integration is critical to accelerating and sustainable growth. Creating larger markets with greater critical mass will not only enhance the African investment proposition, it is also the only way for Africa to compete effectively in the global economy.

Bridging the infrastructure gap will be a key enabler of regional integration, growth and development. It also remains a key challenge and opportunity for investors.

However, the decision on where to invest in this vast and diverse continent can prove challenging.

Our Africa by numbers: Assessing market attractiveness in Africa report outlines the risk profi le of 17 of the most popular countries for investment in Africa and balances them against the rewards that are on offer.

Download your copy at www.ey.com

The nexus of successThe nexus of success


RGMs can approach the future having learnt lessons from the past

As RGMs strive to continue upgrading their economies and increasing GDP per capita, there are a number of lessons to be learned from countries that have enjoyed sustained rapid growth in the past. Four key growth catalysts emerge: political stability and strong leadership; stable and prudent macroeconomic policy; high capital investment, particularly directed at infrastructure, education and health care; and following an open and well-balanced trade policy and adapting it over time.

For example, Korea’s path to high income status since 1980 shows that trade liberalization is an important growth catalyst because it increases the level of competition industries face. This raises effi ciency, spurs innovation and increases productivity growth. All the RGMs have reduced tariff barriers over the last 20 years, opening their economies to trade and the sharing of knowledge. But policies toward trade have varied widely across regions and analysis shows that it is important to plot a careful balance between export promotion and import substitution.

Meanwhile, in sub-Saharan Africa, political stability and stronger leadership have enabled some countries to move onto a much fi rmer footing and enjoy sustained rapid growth. Efforts to achieve political stability and set a strong and stable macroeconomic policy have helped attract foreign direct investment (FDI) to some countries in the region enabling them to enjoy sustained rapid growth.

RGMs to lead an improvement in global momentum in 2013

We expect the pace of global growth, on the basis of purchasing power parity (PPP), to accelerate from 3.0% in 2012 to 3.5% in 2013 and then 4.2% in 2014. The initial phase of this acceleration will be driven by the RGMs rather than the major advanced economies. In Q4 2012, encouraging signs started to emerge that the more trade-orientated RGMs, particularly those in Asia and Latin America, were regaining momentum due to a combination of an improvement in intra-RGM trade and the impact of steps taken earlier in 2012 to ease monetary and fi scal policy.

Lessons learnt from past development paths

This process is expected to continue over the next couple of years, enabling growth in the Asian RGMs to accelerate from 6.3% in 2012 to 7.8% in 2014, while growth in the Latin American RGMs is forecast to rise from 2.6% in 2012 to 4.8% in 2014. In contrast, the growth in the Middle Eastern RGMs is expected to slow a little as tensions in the region moderate, allowing oil prices to fall. The weakness of the Eurozone economy will limit the pace of recovery in the eastern European RGMs. Nevertheless, overall we expect RGM growth to accelerate from 4.7% in 2012 to 5.4% in 2013 and then 6.4% in 2014. In other words, 2012’s slowdown was just a soft patch from which the RGMs are now recovering.

Figure 1G7 and emerging markets: GDP growth

% year

-8

-6

-4

-2

0

2

4

6

8

10

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Emerging markets

G7

Forecast

Source: Oxford Economics.

The pace of growth in advanced economies is not expected to improve until 2014

Unlike the RGMs, the developed economies are not expected to contribute initially to the pickup in global economic momentum: in 2013, growth of just 1.3% is forecast, unchanged from 2012. It will not be until 2014 that the advanced economies gain further momentum, with growth expected to nearly double to 2.5%, as Japan and the Eurozone pull slowly out of recession. Both Japan and the Eurozone ended 2012 in recession and recovery in 2013 is expected


to be weak and heavily dependent on the anticipated upturn in world trade to offset subdued domestic demand. Much the same is true of the UK. Monetary policy in developed countries faces an uphill struggle if it is to offset the fi scal squeeze in Europe and force down the value of the yen in Japan.

Only in the US are signifi cant upside risks to growth visible. More progress has been made there in adjusting the balance sheets of banks and consumers than in the UK and Europe, and consequently monetary policy has been more effective at stimulating growth. Lending growth is stronger than in the UK and Eurozone and the housing market is showing clear signs of recovery. This will help boost construction output and consumer spending via wealth effects. Other factors in the US economy’s favor include its high degree of international competitiveness and the “shale gas revolution” that is making the US less dependent on others for energy.

With less upward pressure from commodity prices, infl ation will remain controlled

The relatively weak global growth outlook will mean global non-fuel commodity prices fall by 0.2% in 2013. Moreover, oil prices are forecast to fall by nearly 6% during 2013 due to new supply and a declining risk premium, assuming that geopolitical tensions ease. As a result, despite monetary policy remaining loose, 2013 is expected to see RGM infl ation drop a little from 4.4% in 2012 to 4.1% in 2013.

A soft landing for China’s economy …

In our October 2012 forecast, we predicted that China’s slowdown could run its course before the end of the year. Evidence has now started to emerge that China’s slowdown is indeed coming to an end, with Q3 GDP up 7.4% year-on-year. This implies that the economy expanded at a seasonally adjusted annualized rate of 9.1%, the strongest pace since Q3 2011. The most recent readings for industrial output, investment and retail sales have all picked up, suggesting that the improvement continued in Q4 2012. But import values rose by just 2.8% year-on-year in Q4, compared with a rise of 24.9% in 2011. This is a reminder that while the economy is no longer slowing, the pace of the recovery will be modest.

… supporting our forecast of acceleration in 2013 …

Refl ecting the more promising recent data, our 2012 GDP estimate for mainland China and Hong Kong has been revised up from 6.9% to 7.4%. We expect growth in China to accelerate to 8.3% in 2013, before reaching 9.0% in 2014. Some of that acceleration comes from an improvement in domestic demand as earlier stimuli feed through. However, most of the acceleration is due to a forecast increase in Chinese export growth from 2.5% in 2012 to 8.7% in 2014, as the improvement in sales seen in recent months to the Association of Southeast Asian Nations (ASEAN) and the US continues. Our forecasts for bilateral trade over the next 10 years indicate that trade between the emerging Asian economies will continue to increase, as demand rises for more sophisticated consumer products from the expanding middle classes.

Figure 2China: manufacturing Purchasing Managers’ Index (PMI)

50 = expansion/contraction line

35

40

45

50

55

60

2005 2006 2007 2008 2009 2010 2011 2012

Source: China Federation of Logistics and Purchasing; Markit.


China’s slowdown was driven by sharply lower export demand, particularly from Europe but also from the US and the rest of Asia. We now have 11 months of trade data for 2012 which shows annual export growth slowed from 21.1% in the fi rst 11 months of 2011 to just 7.3% in the same period of 2012. And the chart below shows that although the drop in demand was worst in the EU, demand also slowed notably in the US and the rest of Asia.

Figure 3China: export growth

% annual growth

2011

2012

World Rest of Asia EU US-10

-5

0

5

10

15

20

25

30

Source: Oxford Economics; CEIC.

The slowdown in 2012 was also driven by the substantial tightening of monetary policy in 2010 and 2011. China’s central bank raised the key prime lending rate from 5.31% in September 2010 to 6.56% by July 2011, before cutting it back to 6% between June and August 2012 to boost domestic activity. The bank raised the ratio of reserves that banks are obliged to hold from 15.5% at the end of 2009 to 21.5% by November 2011. It was cut to 20% in 2012. As fi gure 4 shows, the signifi cant monetary tightening in 2010 and 2011 had the desired effect of curbing growth of property prices and bank lending, both of which had previously been surging. This has sharply reduced the risk of a much harder landing for China.

China’s recent slowdown: cyclical or structural?

Box 2

Figure 4China: bank lending and property prices

% annual growth, three-month moving average

2000 2002 2004 2006 2008 2010 2012-10

-5

0

5

10

15

20

25

30

35

Bank loans

Property prices

Source: Oxford Economics; Haver Analytics.

The authorities spent substantially less protecting the economy from the global downturn in 2012 than they did in 2008-09. In 2012 the Government spent around 2% of GDP on stimulus to protect the economy from the worst of the global downturn. The stimulus of more than 10% of GDP in 2008-09 boosted imports so much that the current account surplus narrowed and the reliance on investment, and particularly on state-led investment, represented a backward step on the road to economic rebalancing. A key feature of the 12th fi ve-year plan (2011 to 2015) is for China to make substantial progress in rebalancing the economy toward consumption-led growth, so the smaller state response to the 2011-12 downturn suggests the Government is keen to reduce the role of the state. This year’s stimulus, even at 2% of GDP was still quite sizable, however.


New leadership in China, but similar policies?

China’s new leader, Xi Jinping, who will take over in March, has just been appointed both General Secretary of the Communist Party and head of the army. But whether the end of the Communist Party’s 18th Congress marks the start of a smooth transition to a more balanced economy is less certain.

A reduction of the Politburo Standing Committee from nine to seven members may make it easier to achieve consensus. And the man who will become prime minister in March, Li Keqiang, may be in favor of reform: earlier this year he signed off a controversial World Bank report recommending measures to curb the power of state-owned companies and to encourage private investment. But of the three candidates for appointment to the committee that were known as keen reformers, two of them didn’t make it onto the committee and the third was given a non-economic role heading anti-corruption. The party secretary of Tianjin province, who is known to favor state control of economic activity, was appointed to the committee.

Concerns that the recovery has so far been quite state led

Much of the improvement so far appears to be state led, raising doubt about the authorities’ commitment to reforms that would promote the rebalancing of the economy. A statement from National Bureau of Statistics of China that accompanied the release of November 2012’s manufacturing PMI indicated that, while the pace of growth expanded for a third successive month for large (and therefore predominantly state-controlled) fi rms, smaller fi rms saw a retrenchment, with the smallest companies experiencing the steepest declines. The HSBC PMI for services also dropped back in November (though it remained above 50), suggesting that private activity is still subdued. New services business rose at its slowest pace in three months.

Annual bank lending growth also slowed in November for the second successive month. With little further detail available, it is hard to tell whether this merely refl ects a slowdown in property-related lending (as the heat has been taken out of house price rises this year) or whether poor access to credit is holding back private sector

investment. In 2007, before the fi nancial crisis, short-term projects attracted half of all lending; now their share has fallen to 40%. This may suggest that more funding is fi nding its way to state-controlled fi rms than to private companies.

Doubling real GDP by 2020 is targeted

The leadership changes do not necessarily suggest an early shift in the direction of economic policy.

We will have to wait until the next fi ve-year plan to see how the authorities decide to rebalance the economy and to reform key sectors. In his farewell address, the outgoing president stated that China would aim to double real GDP (and income) between 2010 and 2020. Starting with growth of 7.5% in 2012, the economy would need to expand by 6.9% a year for the rest of the decade to achieve this, signifi cantly below growth rates over the previous 10 years. Population aging will also constrain growth.

But what will 7% growth mean for the labor market?

But it is interesting to look at what this implies for the labor market, given that a key policy consideration is the need to keep unemployment low. The answer depends in part on what happens to productivity. Productivity growth could slow as the economy is rebalanced away from investment toward consumption and services. One of the drivers of whole-economy productivity growth has been the transfer of workers from agriculture to industry, which is a more productive activity.

But China is a very heterogeneous economy, with its regions varying substantially in terms of incomes, structure and development. While on average whole-economy productivity growth may slow, many regions are still moving from producing largely primary goods to producing secondary goods — so these regions will still see large productivity gains.

Lessons learnt from past development pathsLessons learnt from past development paths


China’s recent slowdown: cyclical or structural? (continued)

Box 2

Figure 5China: employment by sector

Millions Millions

100

150

200

250

300

350

400

450

330

380

430

480

530

580

630

680

730

780

830

1990 1994 1998 2002 2006 2010

Primary(right-hand side)

Tertiary(right-hand side)

Total(left-hand side)

Secondary(right-hand side)

Source: CEIC.

If part of the rebalancing effort over the next 10 years attracts workers from agriculture and industry to the services sector (initially in the coastal regions and the cities), this productivity bonanza will fade because, as fi gure 6 shows, the tertiary sector is about half as productive as the secondary sector. Productivity may also be held back by the slow pace of implementing economic reforms to aid entrepreneurship and innovation. So growth rates of around 7% may be enough to maintain a stable labor market.

Figure 6China: productivity by sector

RmB 1990 prices

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2000 2001 2003 2005 2007 20092002 2004 2006 2008 2010

Secondary

Primary

Tertiary

Total


The policy of rebalancing growth toward the consumer means switching some spending from investment to consumption. As investment is one of the key drivers of productivity, lower investment rates will result in slower productivity growth.

If China can continue to boost its productivity at current rates, it would have to more than double GDP between 2010 and 2020 in order to maintain low unemployment. But there are good reasons to think this may not be realistic. Slower productivity growth, resulting from the impact of rebalancing and the slow pace of economic reform to aid entrepreneurship and innovation, suggests that medium-term growth is also likely to slow toward 7% a year.


infrastructure are addressed. The Government has taken some steps in the right direction in the past year, but its recent track record is not promising. To encourage more FDI, this strategy must be continued and expanded further to enable knowledge sharing and to upgrade the technical capacity of the economy.

China’s soft landing is expected to give a boost to other Asian RGMs …

There are already clear signs that China’s recovery after a successful soft landing is having a positive impact on the other developing markets. We expect the Asian RGMs to see their growth rate accelerate from 6.3% in 2012 to 7.8% in 2014 as the recovery broadens and trade across Asia improves.

… and Korea is already showing positive signs …

Korean GDP increased by just 0.1% on the quarter in Q3, as activity was held back by uncertainty about the state of the global economy, prompting fi rms to cut investment and run down stocks. But the more encouraging news from China seems to be having a positive impact on the Korean economy, suggesting that the low point has now been passed. Export growth has moved back into positive territory, industrial output rose in both September and October, and the manufacturing PMI picked up in October and November. We expect an improvement in the pace of economic growth over the next two years, from 3.3% in 2013 to 5% in 2014, driven mainly by exports and business investment. Consumer spending growth is expected to remain fairly modest, with households held back by overhanging debts.

… building on 20 years of successful development

Over the past 20 years Korea has grown rapidly. GDP per capita has increased from just 20% of US levels in 1982 to 65% last year, and now amounts to US$33,079. This was achieved through a sustained increase in labor productivity, driven by a commitment to upgrade technical capacity and to improve education and infrastructure. Spending on research and development (R&D) shot up from the equivalent of 0.5% of GDP in the mid-1960s to over 2% by 1995. Chiefl y fuelled by the private sector, R&D spending has continued to grow. It reached 3.4% of GDP in 2008 and is now ahead of spending in the Organization for Economic Co-operation and Development (OECD) nations.

India’s full potential is yet to be realized

Growth in India remains subdued. GDP growth slowed from 5.5% on the year in Q2 2012 to 5.3% on the year in Q3 — the weakest pace in three and a half years. Industrial production was up just 0.5% on the year in Q3, while the composite Purchasing Managers’ Index (PMI) has been somewhat volatile in recent months. Household spending is still being held back by high infl ation and the investment climate remains challenging. Although the reforms recently announced by the Indian Government will go some way to improving the economic environment, it remains to be seen whether they will be fully implemented by the states.

We expect the economy to grow by just 5.4% in 2012, the slowest pace since 2002, and a downward revision from the 5.6% we predicted in our October forecast. Looking ahead, some of the headwinds that held back growth in 2012 are expected to ease in H2 2013. Infl ation has already begun to stabilize, and the recent increase in diesel prices and impact of the Indian Rupee’s depreciation in H1 2012 will drop away in 2013. External demand is also forecast to pick up, driven by accelerating growth in the US and China. As a result, we expect growth to accelerate from 5.4% in 2012 to 6.0% in 2013. With growth still below trend and infl ationary pressures set to fall, we expect the policy interest rate to be cut over the course of the next two years.

But promising FDI reforms should help the Indian economy upgrade

China has made greater progress than India since 1980, when the two countries had similar levels of per capita GDP. Analyzing the reasons for China’s success and India’s relative failure can help to identify which countries are likely to grow fastest in the next few years and therefore offer the best investment opportunities. While China has grown rapidly since 1980, the Indian economy stagnated in the 1980s and the early 1990s as its inward-looking growth model prevented it from taking full advantage of world trade. Events reached crisis-point in 1991 when India, on the brink of economic collapse, was bailed out by the International Monetary Fund (IMF).

More economic liberalization imposed by the IMF in the 1990s helped the Indian economy to chalk up fi ve consecutive years of GDP growth, which exceeded 7% between 2003 and 2007, and toward the end of that period the economy was expanding by over 9% a year. Moreover, investment rose markedly as a proportion of GDP from 23.2% in 2002 to 30% last year. This suggests that India could now sustain a higher growth rate, at least if the constraints imposed by its inadequate



Figure 7Research and development spending

0 1 2 3 4

Korea

OECD

China

Czech Republic

Russia

Brazil

South Africa

India

Turkey

Poland

Malaysia

Mexico

Colombia

Egypt 2009

1995

Or closest available year

% of GDP

Source: World Bank.

Korean companies were initially encouraged to import technologies and expertise so they could master new industries. Later, as they developed indigenous expertise, they pursued a more sophisticated import-substitution strategy, replacing imported inputs with domestically produced ones. The targeted industries received preferential government treatment, tax incentives and greater access to capital. Critically, the success of each industry was judged on its competitiveness in the global market and its ability to build market share.

China is also upgrading but must balance many vastly differing regions

China is well on the way to upgrading its economy to achieve higher income levels. As in Korea, the authorities have made good use of FDI in order to expand the country’s technical capacity, particularly from Japan. As the chart below shows, in 2011 the World Intellectual Property Organization reported that, for the fi rst time, companies registered in mainland China and Hong Kong applied for more patents on new products or services than companies in North America. And 97.5% of the applications from greater China came from the mainland.

Figure 8Total patent applications

Thousands

0

100

200

300

400

500

600

1980 1984 1988 1992 1996 2000 2004 2008 2011

North America

KoreaChina and Hong Kong

EuropeJapan

India

Source: World Intellectual Property Organization.

Human capital is critical to rapid growth. Last year, China had nearly 500,000 postgraduate students, more than fi ve times as many as a decade ago, illustrating the commitment to education in China. And most return to use their skills in China — over 70%, according to a recent government report. From the 1960s onwards, India has also invested heavily in education and it continues to spend much more heavily per person on university education than other emerging nations. Large numbers of technical graduates meant India was ideally placed to benefi t from the ICT revolution. India’s software and medical tourism sectors have grown rapidly, giving India a strong foothold in a number of high-tech industries. But China and India still have a long way to go in developing research and technical capabilities. Though student numbers are rising fast, the proportion of the population entering higher education is low compared with the OECD.



China’s heterogeneity is enormous and this provides an unprecedented challenge for the Government. While the coastal areas are losing competitive advantage in low-wage assembly, many rural areas are still building capabilities in these industries. Decentralization is crucial to managing this dilemma. Cities and provinces must be given the ability to make their own decisions, supported by the center, enabling different cities and regions to compete against each other for investment. Certain areas, for example nationwide infrastructure, such as railways, benefi t from being handled at a central level, but region-specifi c decisions are better handled at a state level. Indonesia has been particularly successful at decentralizing policy. Indonesia’s capital is growing at a similar rate to the rest of the country. This is in contrast to nearby Malaysia and Thailand, whose capital cities tend to grow faster than the rest of the country.

Our 2012 growth estimates for Malaysia and Thailand have been revised up

Expansionary fi scal policies in Thailand, Malaysia and Indonesia have continued to boost investment and support consumer spending, enabling these economies to maintain strong growth. Since our October 2012 forecast, we have increased our 2012 growth estimates for Malaysia and Thailand by at least 0.5 percentage points.

However, with investment expected to moderate in 2013 as factories fi nish fl ood-related repairs and equipment replacement, Thailand’s GDP growth is forecast to slow to 5.3% in 2013, before improving exports enable GDP growth to reaccelerate to 5.4% in 2014. We also expect Malaysia’s exports to pick up in H2 2013. But investment is also expected to moderate after the high levels seen in 2012, leading GDP growth to slow to 4.3% in 2013.

Aided by robust domestic demand, Indonesian growth is expected to have remained above 6.0% in 2012, despite seven months of falling exports. Improving trade with China and the rest of emerging Asia is forecast to boost exports sharply, enabling GDP growth to remain at or above 6% in 2013 and 2014.

A strong pickup in the Latin American RGMs is anticipated

We expect the pace of growth in the Latin American RGMs to accelerate from 2.6% in 2012 to 3.8% in 2013 and 4.8% in 2014. This growth will be chiefl y driven by Brazil and Argentina. Mexico is also expected to benefi t from its strong trade links with the US, as import demand in the US is forecast to pick up in 2013.

Figure 9Brazil: industrial production and real sales

2006 = 100

80

90

100

110

120

130

2005 2006 2007 2008 2009 2010 2011 2012

Industrial production

Manufacturing real sales


The growth rates of Brazil and Argentina lagged behind those of the other Latin American RGMs in 2012, with expected growth rates of 1.0% and 1.7% respectively. However, we believe they will catch up during 2013 as world growth improves.

We have cut our forecast for Brazilian growth in 2013 to 3.9%, from 4.5% previously. Nevertheless, exports should slowly improve as China’s economy begins to pick up again during 2013, increasing demand for commodities. Brazil’s competitiveness, however, is still hampered by an overvalued exchange rate.



In contrast to Brazil, Argentina had a better end to 2012 than expected, so we have revised up our 2012 growth forecast from 1.4% to 1.7%. There were signs that the economy improved in H2 2012, with retail sales, car output and the seasonally adjusted indicator of economic activity all up. Our forecast assumes a better outlook for world growth and in particular that the very early signs of improvement in Brazil will continue. There is scope to raise our expectations further if the recent positive signs are maintained over the next few months.

Unlike Brazil and Argentina, Mexico took 2012’s global slowdown in its stride, with GDP growth last year expected to have been in line with 2011’s at 3.9%. Mexico benefi ts from its proximity to the US, a competitive exchange rate and relatively cheap labor. This is expected to have enabled Mexico to increase its exports, many of which are consumer goods sold in the US, by around 5.6% in 2012. As world trade improves and the US accelerates out of a soft patch related to the fi scal cliff, we expect exports to grow even faster in 2013, by about 6.7%.

In Chile meanwhile, we expect GDP growth for 2012 to have slowed only very slightly, moderating from 5.9% in 2011 to 5.7%, despite export growth slowing to less than 2% in 2012. Exports were hit hard by weak demand from China and the Eurozone, but resilient domestic demand, particularly investment, enabled GDP growth to hold up. Although GDP growth is expected to slow to closer to 4.5% in 2013 and 2014 as the impact of earlier monetary stimulus fades and interest rates begin to rise in Q3 2013, growth will become better balanced.

Eurozone weakness expected to weigh on emerging Europe

Due to strong trading and fi nancial links with the relatively depressed Eurozone, the emerging European RGMs are expected to lag behind their Latin American and Asian counterparts in 2013. Consequently, we forecast only a muted acceleration in the growth rate of emerging Europe, from 2.3% in 2012 to 2.9% in 2013.

We have become more pessimistic about the outlook for Poland, cutting our 2012 growth estimate from 2.5% to 2.2% and our 2013 forecast from 2.5% to 1.6%. Concerns about the outlook for the economy led the central bank to cut the reference rate by 0.25 percentage points in November, December and January. We expect the interest rate to be cut to 3.5% by H2 2013, implying a cumulative rate cut of 1.25 percentage points. GDP picked up by only 0.4% on the

quarter in Q3, with private spending, investment, exports and imports all falling. Leading indicators are not particularly promising either. Confi dence declined across all main sectors in October, while the manufacturing PMI, although improving modestly, remained close to historically weak levels. Until the Eurozone diffi culties are resolved, the outlook for Poland and most of the rest of emerging Europe is unlikely to improve.

Eurozone weakness is also expected to weigh on the Czech Republic over the next two years. We forecast GDP will fall by 0.5% in 2013, after an estimated 1.1% decline in 2012. The recovery of the export sector and the improvement of credit conditions will depend on growth in the Eurozone, which is expected to remain weak over the next few years. As a result, we expect a gradual recovery of the Czech economy in the medium term, with growth expected to average 2.6% p.a. between 2014 and 2016 — around half of the pre-Eurozone-crisis average.

The fl ash estimate for Q3 GDP in Russia suggested real GDP growth of 2.9% on the year, an improvement on Q2, but still below trend. We believe that consumer spending is still driving growth, although retail sales data suggests a slightly diminished contribution compared with recent quarters. Looking ahead, we expect the recovery to be gradual, with growth picking up momentum slowly during the course of 2013 due to the falling oil price. While consumer spending will remain the main driver, there should also be a pickup in investment and an acceleration in stock accumulation as business confi dence improves.

Improving global backdrop to give Turkey a boost

In part due to its geographic location at the crossroads between Europe and Asia, Turkey is expected to do better in 2013 than the other emerging European RGMs. Growth is forecast to accelerate from 2.6% in 2012 to 4.3% in 2013, as growth broadens out and gains momentum through the year. The signifi cant easing in monetary conditions since mid-2012 will continue to feed through to lower lending rates for households and companies. In addition, lower infl ation (down from 10.6% in January to 6.2% in December) and a gradual improvement in the global outlook should help lift consumption and investment. Looking further ahead, provided that the still-large external defi cits remain comfortably fi nanced and domestic infl ation is kept under control, growth should exceed 5% p.a. in the medium term.


Despite a lower oil price, growth in the Middle Eastern RGMs is expected to remain robust

Growth in the three rapid-growth markets of the GCC, Saudi Arabia, the United Arab Emirates and Qatar, remains robust, although the pace began to slow in H2 2012 and is expected to continue in 2013 with oil prices remaining lower than earlier this year. But the region is benefi ting from expansionary fi scal policy, facilitated by healthy public fi nances, the high absolute level of oil prices and rising oil production. Monetary policy is also accommodative. External factors are favorable, too, because their trade is orientated toward faster-growing Asian markets rather than the Eurozone. Even so, these RGMs have not been immune to the Eurozone crisis or to weak US growth: capital infl ows have fallen, and longer-term bank lending is down.

Figure 10Middle East and the GCC: real GDP

% year

-3

0

3

6

9

12

15

1990 1993 1996 1999 2002 2005 2008 2011 2014

Middle East

GCC

Forecast

Middle Eastex Libya


The RGMs in the GCC face some longer-term problems. Non-oil fi scal defi cits are rising because of a surge in government spending, particularly on wages, other social benefi ts and subsidies following the Arab Spring. This leaves these countries vulnerable to a fall in global oil prices and energy demand. Our model suggests that even with an oil price of US$105.2pb in 2013, Saudi Arabia’s budget surplus will plummet to less than 4% of GDP, from almost 10% estimated in 2012. (But Saudi Arabia, like the UAE, has substantial

external assets which would cushion the economy from oil-price shocks.) A further challenge for the medium term is the need to generate jobs for a young and rapidly growing population, with rising expectations to match.

Qatar’s growth rate is expected to slow from 6.0% in 2012 to 5.5% in 2013 on lower oil and gas output, in part due to the moratorium on further liquefi ed natural gas (LNG) expansion. In the medium term, the economy is expected to grow in excess of 6%, driven by robust government spending and strong commodities exports, particularly to Asia. Saudi Arabia’s growth is also expected to slow, from 6.8% in 2012 to 4.1% in 2013, largely due to weaker oil prices.

In contrast, we expect the UAE to see growth picking up from 3.3% in 2012 to 3.7% in 2013 as the key crisis-hit property and fi nancial sectors continue to recover and global headwinds moderate.

Africa to maintain strong growth in 2013 despite lower oil prices

We expect both Ghana and Nigeria to grow by more than 6% in 2013, helped by stronger demand for commodities from emerging Asia. The authorities in Egypt have reached preliminary agreement with the IMF on a US$4.8b loan. The deal is likely to unlock other sources of international fi nance and to bolster confi dence. Egypt is gradually becoming more stable and we expect growth of more than 4% in 2014, unless there are further setbacks.

Africa can learn lessons from Botswana

Botswana was one of the poorest countries in Africa when it gained independence in 1966. But political stability and good management of the country’s sizable diamond endowment has underpinned steady growth since. The Government of Botswana has maintained a sound fi scal policy and foreign reserves are high. In 1985, Botswana had a per capita income of US$3,094. By 2011, this had increased to more than US$16,000. The small size of the country has probably helped to ensure social cohesion.



Ghana is already making good progress

Ghana has a population more than 10-times larger than Botswana and it is more ethnically diverse. Nevertheless, it has tripled its income per capita since 1992, when political reforms ended more than 30 years of uncertainty following independence. This stability has encouraged foreign investors: FDI rose from under US$0.1b a decade ago to more than US$3b last year. Economic reforms since the 1990s have enabled Ghana to meet the Millennium Development Goal of halving its 2000 levels of poverty and hunger. It is the fi rst African country to do so and well ahead of the 2015 target date. High capital investment in health, education and infrastructure is also important. Ghana is now self-suffi cient in staple foodstuffs and child malnutrition has fallen sharply.

Figure 11Corruptions perceptions score

0 2 4 6 8

Hong KongChile

BotswanaUruguay

South AfricaKorea

PolandBrazil

GhanaCzech Republic

ColombiaMexico

ChinaEgypt

TurkeyThailand

ArgentinaIndia

RussiaZambia 2012

2002

1–10 where 10 is least corrupt

Source: Transparency International.

Conclusion

The RGMs are expected to lead an improvement in global momentum over the coming two years. Encouraging signs have started to emerge that the more trade-orientated RGMs, particularly those in Asia, are regaining momentum due to a combination of an improvement in intra-RGM trade and the impact of steps taken earlier in 2012 to ease monetary and fi scal policy. As expected, China’s economy appears to have landed softly and this should boost other Asian RGMs. We forecast that the Asian RGMs will see their growth rate accelerate from 6.3% in 2012 to 7.8% in 2014. A strong pickup in the Latin American RGMs is also anticipated. We expect the pace of growth in the Latin American RGMs to accelerate from 2.6% in 2012 to 4.8% in 2014, as commodity exports to other RGMs grow and Mexico benefi ts from stronger US growth in 2013.

Due to their strong trading and fi nancial links with the relatively depressed Eurozone, the RGMs of emerging Europe are expected to lag behind their Latin American and Asian counterparts in 2013. Consequently, only a muted acceleration in the growth rate of emerging Europe, from 2.3% in 2012 to 2.9% in 2013, is forecast. Growth in the Middle Eastern RGMs is expected to slow a little in 2013 from 2012’s robust pace, due to slightly lower oil prices. But the region is benefi ting from expansionary fi scal policy, facilitated by healthy public fi nances, the high absolute level of oil prices and rising oil production.

In plotting a course for the future RGMs policy makers should focus on four key factors that have driven the development paths of the past: political stability and strong political leadership; stable and prudent macroeconomic policy; high capital investment; and following an open and well balanced trade policy and adapting it over time as the global marketplace changes.



China’s 12th fi ve-year plan (2011 to 2015) aims to shift economic growth toward consumption and away from low value-added manufacturing exports. If the plan is successful in achieving greater focus on R&D and high-end manufacturing and services, what will this mean for other economies in the region? Some commentators have suggested that they would be hit by falling demand for manufactured components for products currently assembled in China, but it is more likely that assembly would shift to lower-cost parts of the region (or indeed of China), and that they will benefi t from China’s gradual movement into the higher-value industries. Growing consumer demand in China should underpin strong growth in the rest of the region.

China’s economic structure is shifting

China has come a long way in 20 years. In 1991, GDP per capita (in PPP terms) was less than US$1,000 a year; last year it was US$9,024, roughly where Korea was in 1991 or Japan in 1980. With higher incomes and levels of development, China is now able to encourage higher-value industries. Figure 12 illustrates the changing structure of its economy. As the importance of agriculture has declined, consumer and intermediate goods have taken its place. And over the next 25 years we expect investment goods and services to become increasingly important, including fi nancial services. Social security, education, health care, tourism and wholesale and retail trade will also expand.

Box 3

China’s rebalancing toward higher-value sectors will lead the RGMs to another decade of buoyant growth

Figure 12China: economic structure: share of GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1986 1992 1998 2004 2010 2016 2022 2028 2034

Agriculture

Intermediate goods

Investment goods

Services

Consumer goodsExtraction

Forecast


Our industry forecasts suggest that China’s share of the world pharmaceuticals market will grow from less than 10% now to more than 15% over the next 10 years and that its share of global mechanical engineering will rise to almost a third. And by 2022, a third of all electrical goods in the world will be produced in China. Moving away from agriculture into increasingly high-tech industries will enable China to upgrade its technical capacity and raise per capita GDP.

Creating opportunities for lower cost producers

As China makes these transitions, it will create opportunities for other RGMs, notably in Africa and Southeast Asia. The labor-intensive textile industry, for example, is dominated by countries with low labor costs. Wages have risen notably in China over the past 10 years (though not so much in some inland regions), so wages in the Philippines, Vietnam and Indonesia are now substantially lower than in China. Countries in Africa also have a good opportunity to build market share in the lower cost labor-intensive industries.



Box 3

Figure 13Average annual earnings, 2011

0

1,000

2,000

3,000

4,000

Thailand China Philippines Vietnam Indonesia

US$


We expect Indonesia, Thailand and Vietnam to increase their combined share of the world textile market from around 5% currently to more than 10% over the next 25 years.

Figure 14World share in textiles: Indonesia, Thailand and Vietnam

0

2

4

6

8

10

12

14

1990 1996 2002 2008 2014 2020 2026 2032 2038 2044

Forecast

%


But in another 10 years, Indonesia, Vietnam and the Philippines are likely to have a per capita income of around US$10,000, and will need to expand into higher-value industries themselves. Vietnam already has a strong foothold in the telecoms market. According to the World Bank, within the last few years mobile phones and accessories have risen to become the largest export item from Vietnam after garments, accounting for 10.5% of total exports. By 2013, the World Bank expects mobile phones to have overtaken clothing as Vietnam’s largest source of export revenue.

Figure 15Vietnam: exports of telecoms excluding TVs

US$m

0

200

400

600

800

1,000

1,200

1,400

1,600

1997 1998 2000 2002 2004 2006 20081999 2001 2003 2005 2007 2009


China’s rebalancing toward higher-value sectors will lead the RGMs to another decade of buoyant growth (continued)


Clear opportunities for the Asian tigers

The four original Asian tigers, Korea, Singapore, Taiwan and Hong Kong, all have a key role to play in this as mainland China needs to import the high-tech capital goods to build local technological skills and climb the value chain. Korea now has an 11.5% market share in global electronics. As the chart below shows, in 25 years, Korea’s share in global electronics will still be around 10%. Although it has already reached advanced-country status in terms of its per capita GDP, Korea is still expected to grow rapidly in the longer term, as it should remain competitive in terms of costs and it has many world-class consumer brands.

Figure 16Global market share: electronics

0

10

20

30

40

50

60

70

80

90

100

2005 2009 2013 2017 2021 2025 2029 2033

US

Japan

Korea

EU

Forecast

China

%

Source: Oxford Economics; Haver Analytics.

Our forecasts for bilateral trade over the next 10 years indicate that trade between the emerging Asian economies will continue to increase as demand rises for more sophisticated consumer products from the expanding middle classes across emerging Asia.

Figure 17The destination of emerging Asian trade fl ows*

Share of exports (%)

40

42

44

46

48

50

52

54

56

2010 2020

Within emerging Asia

Outside emerging Asia


Some commentators have suggested that China will struggle to move up the value chain because of cultural and structural impediments to innovation. A key element of the rebalancing strategy is to encourage more private investment, but the Government must also provide the right environment for skills and technology to be shared. Its success will determine how fast it is able to develop higher-value industries, and how this will affect the trade and development of the rest of the RGMs.

* Emerging Asia refers to mainland China, Hong Kong, Taiwan, Korea, Singapore, Indonesia, Thailand, Malaysia and Vietnam.



Forecast for rapidly growing countries

ArgentinaBrazilChileMainland China and Hong Kong special administrative region (SAR)ColombiaCzech RepublicEgyptGhana IndiaIndonesiaKazakhstanKoreaMalaysiaMexicoNigeriaPolandQatarRussiaSaudi ArabiaSouth Africa ThailandTurkey UkraineUnited Arab EmiratesVietnam



Brazil

Nigeria

Egypt

Poland

Turkey

UkraineKazakhstan

Russia

China

Ghana

CzechRepublic

South Africa

Saudi Arabia

QatarUAE India

Korea

Indonesia

Malaysia

ThailandVietnam

Argentina

Chile

Colombia

Mexico

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 fi nd out more, please visit www.ey.com/rapidgrowth


Argentina

-25

-20

-15

-10

-5

0

5

10

15

20

25

1990 1994 1998 2002 2006 2010 2014

Industrialproduction

GDP

Forecast

% increase per year

Figure 18GDP and industrial production


* Private estimates put the true rate of infl ation closer to 25%.

Source: Commodity Research Bureau; Haver Analytics.

20

40

60

80

100

120

140

160

180

200

2000 2002 2004 2006 2008 2010 2012

Oil

Commodity Research Bureau foodstuffs

Commodity Research Bureauraw industrial materials

2007 = 100 (rebased)

Figure 19World: commodity prices

Table 1Argentina

2011 2012 2013 2014 2015 2016

Real GDP growth (% per year) 8.9 1.7 3.1 4.5 4.2 3.8

Offi cial CPI infl ation (% per year)* 9.8 10.0 9.9 7.6 5.6 4.6

Current account balance (% of GDP) -0.1 0.3 -0.2 -0.1 -0.2 -0.2

External debt total (% of GDP) 31.1 30.6 31.4 29.3 28.4 27.6

Short-term interest rate (%) 10.7 12.0 13.3 11.3 9.0 8.4

Exchange rate per US$ (year average) 4.1 4.6 5.0 5.2 5.4 5.5

Government balance (% of GDP) -1.6 -1.2 -1.5 -1.2 -0.9 -0.6

Population (millions) 40.8 41.2 41.5 41.9 42.2 42.6

Nominal GDP (US$b) 444.7 468.1 479.4 520.7 555.1 585.1

GDP per capita (US$ current prices) 10,897.6 11,371.6 11,546.4 12,436.4 13,148.2 13,746.2

GDP growth shows signs of picking up

There were signs that the economy improved in H2 2012, with retail sales, car output and the seasonally adjusted indicator of economic activity all up. This suggests some resilience after a sharp slowdown in Q2. And seasonally-adjusted industrial production, which remained sluggish in Q3, picked up strongly in October to regain levels last seen at the end of 2011.

Both exports and imports rose in Q3 after two quarters of decline. The current account has benefi ted from tough trade and currency controls introduced in 2012 to contain the fl ight of capital out of the country.

The offi cial measure of consumer prices showed a slightly smaller monthly increase of 0.8% in October, although annual infl ation rose to 10.2%.

We have raised our 2012 GDP growth expectation to 1.7%, from the 1.4% envisioned in our October 2012 forecast, to refl ect these signs of slowly improving activity. But slow growth in neighboring Brazil continues to be a major drag on activity, as are the trade and currency controls. However, we still expect growth to pick up to 3% over the course of 2013 and to average around 4% in the medium term. Our forecast assumes a better outlook for world growth, and in particular that the very early signs of improvement in Brazil continue.



Brazil

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Forecast

GDP

Net exports

Domesticdemand

% increase per year

Figure 20Contributions to GDP

Source: Oxford Economics. Source: Oxford Economics.

-5

0

5

10

15

20

25

30

35

40

45

1996 1999 2002 2005 2008 2011 2014

Consumer prices

Producerprices

% increase per year

Forecast

Figure 21Prices and earnings

Table 2Brazil

2011 2012 2013 2014 2015 2016


CPI infl ation (% per year) 6.6 5.4 5.9 5.1 4.5 4.5

Current account balance (% of GDP) -2.1 -2.0 -1.7 -1.7 -1.7 -1.7






Nominal GDP (US$b) 2,476.4 2,262.1 2,478.3 2,662.6 2,711.7 2,806.9


Brazil’s two-speed economy

A dichotomy appears to be emerging between the strength of consumer spending and subdued investment and production activity. The investment cycle has recently become more closely linked to shifts in the terms of trade. This is because demand for commodities has become an increasingly important driver of production capacity related to the export of these materials. But commodity prices are expected to be fairly soft next year and the overvalued exchange rate will continue to compress margins in the industrial sector. These factors may blunt the positive impact on production of lower interest rates.

We remain confi dent that a cyclical recovery in economic activity is unfolding in Brazil. But we have scaled back our expectations regarding the strength of the upturn following a disappointing GDP report for Q3 2012 (0.6% growth on the quarter). We now expect GDP growth of no more than 1% in 2012, a sharp fall from the 1.4% growth projected in our October 2012 forecast. We have also cut our expectations for 2013 to 3.9% from 4.5%.

But there are reasons for optimism. The authorities have announced an ambitious infrastructure program that is set to begin in 2013. A shift in the focus of policy to addressing the country’s structural bottlenecks is welcome. If implemented successfully, these policies could provide a boost to activity in late 2013 and raise the country’s longer-term growth potential.



Chile

0

2

4

6

8

10

12

14

16300

350

400

450

500

550

600

650

700

750

8001995 1997 1999 2001 2003 2005 2007 2009 2011

%Peso/US$

Nominalinterbank rate(right-hand side)

Peso/US$(left-hand side)

Figure 22Exchange and interest rates

Source: Banco Central de Chile; Haver Analytics. Source: Haver Analytics.

2008 = 100 (IMACEC, seasonally adjusted)

60

70

80

90

100

110

120

130

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 23Monthly indicator of economic activity

Table 3Chile

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) -1.3 -2.8 -2.3 -0.3 1.1 1.3




Government balance (% of GDP) 1.5 0.9 1.1 0.9 0.7 0.5


Nominal GDP (US$b) 248.7 265.6 290.5 311.4 334.8 358.1


Domestic activity drives growth

The latest national accounts data reveals that Chile’s economy expanded by a quarterly 1.4% in Q3 2012, driven by robust consumption and investment growth. Combined with data revisions to H1, we now expect GDP to increase by 5.7% in 2012.

Export volumes sharply contracted by 5.9% in the same period, refl ecting weak demand from China and the Eurozone. However, we expect improving foreign demand to foster export growth in 2013. This should help to maintain a trade balance surplus, although the current account as a whole is expected to remain in defi cit until 2014.

More recent data suggests some moderation in activity in Q4 2012 compared with earlier in the year. However, a pickup in export volumes and resilient domestic demand are still expected to underpin quarterly growth of around 0.8% in Q4. In the short term, we expect growth of around 4.5% in the year as a whole. This will be underpinned by a more balanced combination of exports and domestic demand.

With healthy GDP growth expected over the next year and CPI remaining within the central bank’s target range, we do not expect any change in the main policy rate in the near-term. However, we expect the central bank to remain vigilant against infl ation and begin to raise rates from Q3 2013. Medium-term growth should exceed 4%.



Mainland China and Hong Kong special administrative region

(SAR)

-8

-4

0

4

8

12

16

20

24

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Consumerprices

Manufacturingproducer prices

Food prices

% increase per year

Figure 24Mainland China: infl ation

Source: China Bureau of Statistics; Haver Analytics. Source: Hang Seng Index Services Limited; Haver Analytics.

8,000

12,000

16,000

20,000

24,000

28,000

32,000

1999 2001 2003 2005 2007 2009 2011

Hang Seng index

Figure 25Hong Kong: stock market

Table 4 Mainland China

2011 2012 2013 2014 2015 2016

Real GDP growth (%year) 9.3 7.7 8.3 9.0 8.5 8.0


Current account balance (% of GDP) 2.7 2.9 3.0 2.6 2.4 2.2




Government balance (% of GDP) 0.1 -1.9 -1.8 -1.1 -1.2 -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) 7,335.6 8,198.9 9,369.6 10,767.8 12,238.8 13,857.0


Leadership change agreed and activity picking up

The Chinese economy expanded by 7.4% year-on-year in Q3, implying a pickup in quarterly growth. So with industrial output, investment and retail sales all improving in recent months, China’s recent slowdown has reached a trough. But the moderate annual growth in import values is a reminder that while the economy is no longer slowing, the pace of recovery is likely to be modest.

Having picked up for three successive months to October, exports stuttered in November. But the overall trend of improvement refl ects stronger global demand. Most of the additional sales went to the US and ASEAN countries, but European demand remained weak. Infl ation remains low because food prices have fallen. This offers scope for fresh initiatives to support the recovery if required.

Xi Jinping, the newly appointed Communist party general secretary, will take offi ce in March. In his farewell address, outgoing President Hu Jintao stated that China would aim to double real GDP between 2010 and 2020, implying annual growth of 6.9% for the rest of the decade.

Growth of around 7% p.a. may become the new norm. A gradual rebalancing of the economy toward the consumer could slow productivity growth while maintaining low unemployment.



Colombia

0

5

10

15

20

25

30

35

40

45

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% increase per year

Forecast

Western hemisphere

Colombia

Figure 27Infl ation

Source: Oxford Economics; Haver Analytics.Source: Oxford Economics; World Bank.

% increase per year

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Colombia

Latin America and Caribbean

Forecast

Figure 26Real GDP growth

Table 5 Colombia

2011 2012 2013 2014 2015 2016






Exchange rate per US$ (year average) 1,848.1 1,796.2 1,850.2 1,952.8 2,089.6 2,195.0



Nominal GDP (US$b) 333.2 368.3 385.6 394.4 396.3 405.3


Boost from government spending

Colombia’s economy is still fairly robust, although activity slowed over the course of 2012, with GDP growth falling to 4.9% in H1 after reaching almost 6% in 2011. Industrial production picked up in Q3 2012 following a sluggish fi rst half, although retail sales grew much more slowly in 2012 than in the previous two years.

Most of Colombia’s recent economic growth has come from government spending — especially on housing and construction projects — and public expenditure will also underpin the economy in 2013. Spending on infrastructure in particular has been rising fast. Increased metals production and fi rm oil prices should continue to underpin economic activity as the world economy slowly improves.

Infl ation is well under control. The 2.4% recorded in December was toward the bottom of the central bank’s 2% to 4% target range. Therefore, the authorities have room to cut the key policy interest rate if required.

With higher government spending offsetting weaker global growth, we expect GDP to have been around 4.0% in 2012, and we think that growth will pick up slightly in 2013. The boost to the economy from investment in infrastructure, together with world demand for Colombia’s mining and oil output, should achieve annual growth over the medium term of around 4%.



Czech Republic

% increase per year

-20

-15

-10

-5

0

5

10

15

20

25

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Consumption

Investment

Forecast

Figure 28Consumption and investment


%

1

2

3

4

5

6

7

8

9

10

11

1996 1999 2002 2005 2008 2011 2014

Forecast

Figure 29Unemployment

Table 6Czech Republic

2011 2012 2013 2014 2015 2016

Real GDP growth (% per year) 1.9 -1.1 -0.5 1.9 2.7 3.0








Nominal GDP (US$b) 217.2 195.9 191.9 188.7 191.2 201.4


Short-term outlook deteriorates, with recovery expected in 2014

GDP dropped 0.3% on the quarter in Q3 2012, following a 0.4% decline in Q2 2012. As a result, in Q3 2012 GDP was down 1.3% on the same quarter in 2011 — and 2.3% on its peak in Q3 2008. The short-term outlook deteriorated, as exports growth fell to just 0.6% year-on-year in November, from 8.2% in August. Moreover, unemployment rose signifi cantly in late 2012, as industrial production remained on a downward trend. As a result, business and consumer confi dence worsened markedly and investment is now expected to decline for the third successive year in 2013. We expect GDP to drop 0.5% in 2013, after an estimated 1.1% decline in 2012.

The economy remains insulated from the debt problems in the Eurozone. Public debt was low in 2012, at just above 40% of GDP, and the spread of 10-year government bond yields with German Bunds fell below 100 basis points in August. However, the recovery of the key export sector and the improvement of credit conditions will depend on growth in the Eurozone, which is expected to remain weak in the next few years.

As a result, we expect a gradual recovery of the Czech economy in the medium term, with annual growth expected to average 2.5% in 2014-16 — around half of the pre-crisis average.



Egypt

Forecast

% increase per year

0

1

2

3

4

5

6

7

8

1991 1994 1997 2000 2003 2006 2009 2012 2015

Egypt

Middle East and North Africa


Source: Oxford Economics; World Bank. Source: Oxford Economics.

US$b % of GDP

-18

-15

-12

-9

-6

-3

0

-28

-24

-20

-16

-12

-8

-4

0

1991 1994 1997 2000 2003 2006 2009 2012 2015

% of GDP(right-hand side)

US$b(left-hand side)

Forecast

Figure 31Government budget balance

Table 7 Egypt

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 231.1 247.6 260.2 279.2 305.4 332.4


IMF deal should boost confi dence but growth prospects remain weak

Preliminary agreement on a US$4.8b IMF loan and the implementation of a national economic plan has been reached. The deal is likely to unlock other sources of international fi nance, bolster confi dence and the Egyptian pound, accelerate much-needed economic reforms and act as an anchor for prudent policies.

Fiscal austerity is likely to see substantial cuts in fuel subsidies and a hike in the sales tax. Such measures are designed to help cut the budget defi cit to around 10% of GDP in 2012-13 from an estimated 11% of GDP in 2011-12.

Growth prospects remain weak. We forecast GDP to be little changed from last year at 2.1% in 2012-13. Prospects are constrained by political uncertainty, the Eurozone crisis, the poor near-term outlook for tourism and FDI infl ows, and unfavorable base effects.

And there are substantial downside risks to our growth forecasts. These include renewed political instability, implementation of populist policies and fi scal slippage. In addition, there are geopolitical risks, deteriorating global economic conditions (specifi cally hitting Suez Canal traffi c) and the ongoing crisis in the Eurozone — Egypt’s major trading partner.



Ghana

% increase per year

0

10

20

30

40

50

60

1990 1993 1996 1999 2002 2005 2008 2011 2014

Africa

Ghana

Forecast

Figure 32Infl ation

Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.

% increase per year

-2

0

2

4

6

8

10

12

14

16

1990 1993 1996 1999 2002 2005 2008 2011 2014

Ghana

Sub-SaharanAfrica

Forecast


Table 8 Ghana

2011 2012 2013 2014 2015 2016





Short-term interest rate (%) — — — — — —




Nominal GDP (US$b) 39.2 38.4 41.4 45.4 50.0 54.5


Rising oil revenues fuel GDP growth

Ghana started producing oil in commercial quantities in 2011. This lifted GDP growth to over 14% in 2011, with the year-on-year rate peaking at above 20% in Q2 2011. The pace slowed modestly to about 16% in Q1 2012, but as the big boost to activity in 2011 started to drop out of the calculations, the year-on-year growth rate fell to just 2.5% in Q2 2012. However, we still expect growth of about 7% for 2012 overall, before a further, but more modest, slowdown in 2013 and some 5.5% annually thereafter.

Infl ation has been driven by the impact of high world oil prices and cuts in fuel subsidies. It rose from about 8.5% in mid-2011 to a little over 9% in November 2012. It could rise further amid concerns about

high state spending ahead of December 2012 elections, surging imports and a 17% slide in the Ghana Cedi in 2012. The Bank of Ghana raised interest rates by 250p in H1 2012, and an early cut in rates appears unlikely.

Although exports surged by 60%, a 46% jump in imports and rising net outfl ows of services and income meant that the current account defi cit widened to US$3.5b in 2011, over 9% of GDP. The defi cit then climbed to US$4b in Q1-Q3 2012 but, despite continued high import growth, it is forecast to start falling from 2013 onwards as oil revenues build.



India

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011 2012

50 = expansion/contraction break-even point

Figure 34HSBC manufacturing Purchasing Managers’ Index (PMI)

Source: Markit. Source: Oxford Economics.

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011 2012

Repo rate

Wholesale price index non-food

%

Figure 35Interest rate and wholesale price index infl ation

Table 9India

2011 2012 2013 2014 2015 2016


WPI infl ation (%) 9.5 7.6 5.3 4.4 4.3 4.2






Population (millions) 1,232.8 1,249.0 1,265.0 1,280.7 1,296.1 1,311.2

Nominal GDP (US$b) 1,840.5 1,816.3 2,061.9 2,388.5 2,691.8 2,993.1


Economy slows but growth expected to pick up in 2013

The pace of expansion slowed further in Q3 2012, with growth falling back to 5.3% year-on-year from 5.5% in Q2. Both external and domestic demand were held back by economic headwinds. Exports have continued to struggle against the uncertain global environment, while domestic demand is being weighed down by high infl ation and the diffi cult business environment.

The government has revised its defi cit target for 2012-13 to 5.3% (from 5.1%). But disappointing revenue growth, coupled with rising spending, means that this new target is also likely to be missed. However, the government is confi dent that it can reduce the defi cit to 3% by 2016-17.

Looking ahead, some of these headwinds are expected to ease in H2 2013. Infl ation is set to fall back, as the recent increase in diesel prices and the impact of the Indian Rupee’s depreciation in H1 2012 drop away. External demand is also forecast to pick up, driven by accelerating growth in the US and China. As a result, we expect growth to accelerate from 5.4% in 2012 to 6.0% in 2013. We anticipate growth accelerating to around 7.5% over the medium term. But India’s economy has the potential to register annual growth of over 8% in the long term if signifi cant reforms — such as the recently announced changes in the retail, airline and fi nance sectors — are implemented.



Indonesia

-10

-5

0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012 2014

Consumer prices

Producer prices

% increase per year

Forecast

Figure 36Infl ation

Source: Oxford Economics. Source: Bank Indonesia; Haver Analytics.

0

5

10

15

20

25

30

35

40

45

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% increase per year

Figure 37Bank lending growth

Table 10Indonesia

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 0.2 -2.2 -2.2 -2.3 -1.9 -1.9






Nominal GDP (US$b) 845.4 878.9 963.4 1,102.1 1,201.6 1,303.0


Domestic activity proves robust as consumers maintain confi dence

GDP growth in Q3 was steady at 6.2% year-on-year, as strong domestic demand offset subdued exports. The strength in domestic demand was broad based. Annual growth of fi xed investment rose at a double-digit pace for the fourth consecutive quarter in Q3, while that of private spending picked up to 5.7%, the fastest pace since Q1 2009. Consumer confi dence remains high, which bodes well for spending in 2013.

Exports fell for seven consecutive months from April to October, and as a result we expect the current account defi cit to exceed 2% of GDP this year — the largest defi cit since 1997. Concerns over the future of the Eurozone remain, but activity in China and the rest of emerging Asia has shown signs of picking up in H2 2012. Therefore, we expect trade fl ows to improve gradually in 2013.

Interest rates are on hold now, but infl ationary pressures mean that the central bank is likely to begin raising rates from H2 2013. With planned minimum wage increases in the provinces coming into effect, and electricity tariffs scheduled to rise by an average of 4.3% in each quarter this year, pressure will be put on prices.

In 25 years’ time, Indonesia is expected to be the ninth largest economy in the world. Looking a little less far ahead, we expect its strong domestic fundamentals to support medium-term growth of almost 6%.



Kazakhstan

-15

-10

-5

0

5

10

15

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Kazakhstan

Europe and Central Asia

% increase per year

Forecast


Source: Oxford Economics; World Bank. Source: Oxford Economics; World Bank.

0

5

10

15

20

25

30

35

40

45

50

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% increase per year

Europe and Central Asia

Kazakhstan

Forecast

Figure 39Infl ation

Table 11Kazakhstan

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 183.1 200.1 215.0 235.2 259.2 284.7


Infrastructure spending and commodities demand support strong recovery

GDP growth slowed to 5.2% in January-September from 5.6% in H1, implying Q3 growth of just 4.4%. The slowdown refl ects a combination of factors, including a worsening global environment, weaker metal prices and lower oil production.

Growth is forecast to accelerate to 6% in 2013. As well as continued high government spending, the economy will benefi t from slightly stronger growth in key export markets, a better grain harvest and higher commodity prices. Metal prices are forecast to rise 3% in 2013 after a 17% fall this year. In addition, oil production will get a boost next year from the giant Kashagan oil fi eld coming on stream.

The 2012 current account surplus was narrowed by less favorable movements in the price of main exports . A further deterioration, to about 3.0% of GDP, is expected in 2013. This primarily refl ects the projected 8.6% decline in the oil price, which will result in an expected rise in merchandise exports of only 1.7%.

Kazakhstan will benefi t from higher commodity prices in 2014 and 2015 and this, combined with strong infrastructure spending, should support a strong recovery. We expect a medium-term growth rate of 7%.



Korea

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020-20

-15

-10

-5

0

5

10

15% increase per year

GDP

Domestic demand

Net exports

Forecast



-20

-15

-10

-5

0

5

10

15

20

25

30

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

GDP

Industrialproduction

Forecast


Table 12 South Korea

2011 2012 2013 2014 2015 2016







Government balance (% of GDP) 1.5 0.4 -0.5 -0.1 0.1 0.1


Nominal GDP (US$b) 1,116.7 1,131.0 1,239.7 1,322.3 1,408.0 1,495.9


Export manufacturing shows signs of improvement

In Q3 2012, GDP rose by just 0.1% on the quarter, implying annual growth of only 1.5%. Although consumer spending grew at a steady pace and export volumes held up surprisingly well, overall GDP was held back by a sharp fall in machinery investment. Output was undermined by fi rms’ persistent worries about the global outlook — and a signifi cant reduction in stock building.

However, the data for Q4 2012 shows some improvement. The manufacturing PMI rose in the last three months of 2012, while the level of exports (in US$ terms) has picked up since July. Moreover, these trends should be bolstered by the recent, positive signs in the

Chinese economy and their likely impact on regional trade. But while the low point of the cycle may now have passed, the upturn is likely to be gradual. Once the global economy is in better health, business investment should pick up.

Meanwhile, consumer spending will remain fairly modest, with households held back by the overhang of high debts. However, the base rate reductions in H2 2012, and the likely modest easing of fi scal policy in H1 2013, should provide support. We are slightly more cautious about the pace of the upturn in 2013 than we were in our October 2012 forecast, and now expect annual growth of 3.3%.



Malaysia

-40

-30

-20

-10

0

10

20

30

40

50

1995 1997 1999 2001 2003 2005 2007 2009 2011

% increase per year

Exports(US$)

Imports(US$) Three-month moving average

Figure 42Exports and imports

Source: Department of Statistics. Source: Department of Statistics.

-20

-10

0

10

20

30

1995 1997 1999 2001 2003 2005 2007 2009 2011

% increase per year

Three-month moving average

Figure 43Industrial production

Table 13 Malaysia

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 288.1 304.1 329.7 355.9 383.0 413.0


Strong domestic demand offsets dismal external performance

GDP surprised on the upside in Q3 with growth of 5.2% on the year following a revised 5.6% in Q2. We expect growth to continue at a healthy pace into Q4 and envisage full-year growth of 5.1% in 2012, up from 4.5% expected in our October 2012 forecast.

Investment has been very robust, growing at over 20% in Q3 supported by strong government support for infrastructure projects. Private consumption also maintained strong growth in Q3, at 8.5%, and with favorable labor market conditions we expect strong earnings growth to continue. The external sector has been very weak, with export volumes declining in Q3. This has had a knock-on impact on imports.

Due to the weak external environment and low infl ation, loose monetary conditions are set to continue and the policy rate is forecast to remain on hold until Q3 2013.

In the face of a weak external sector, Malaysia has strong fi nancial resilience. International reserves fi nance 9.3 months of retained imports and more than 4 times the short-term external debt.

Looking ahead, we forecast exports to pick up in 2013. But investment will moderate after the high levels seen in 2012, leading GDP growth to slow to 4.3% in 2013. But strong commodities demand, combined with robust investment, will drive medium-term growth of around 4.5%.



Mexico

-30

-20

-10

0

10

20

30

40

50

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% increase per year

US goods’ imports

Mexican goods’ exports

Forecast

Figure 44Merchandise trade: US vs. Mexican growth


-40

-30

-20

-10

0

10

20

30

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% increase per year

Investment

Consumption

Forecast

Figure 45Consumption and investment

Table 14Mexico

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 1,160.3 1,180.5 1,287.1 1,382.1 1,479.2 1,581.3


Positive outlook for 2013

The economy performed well in 2012, driven mainly by strong manufacturing output. Mexico benefi ts from its proximity to the US, a competitive exchange rate and relatively cheap labor. This has enabled it to increase its exports — many of which are consumer goods sold in the US — by around 5.6% in 2012. And we expect exports to grow even faster in 2013, by about 6.5%.

We have increased our GDP growth expectation for 2012 to 3.9%, from 3.5% in our October 2012 forecast. This is mainly in response to an upward revision in the national accounts to growth in H1. But domestic demand expanded at a slower pace in H2, and we expect this to continue into early 2013. Remittances from Mexicans working

abroad were 7% lower in October than the previous year, refl ecting the modest pace of economic growth in the US and the fact that net migration from Mexico is now down to zero. We therefore forecast growth to slow a little to 3.7% in 2013. In the medium term, growth should pick up toward 5% as the US economy regains momentum.

Our medium-term outlook is also bolstered by the prospect of economic reform. Structural improvements to the labor and energy markets, and to taxation, could help raise the country’s growth potential by encouraging more investment and diversifi cation.



Nigeria

0

10

20

30

40

50

60

70

80

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Africa

Nigeria

Forecast

Figure 46Infl ation

Source: Oxford Economics; Haver Analytics. Source: Oxford Economics; World Bank.

-4

-2

0

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011 2014

Nigeria

Sub-SaharanAfrica

% increase per year

Forecast


Table 15Nigeria

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 226.8 264.6 306.8 350.0 391.3 432.9

GDP per capita (US$ current prices) 1394.2 1,584.4 1,791.6 1,994.1 2,176.6 2,344.8

GDP growth robust despite slower oil activity

GDP growth picked up slightly to 6.5% in Q3 2012 from a revised 6.4% in H1. However, it was down from over 7% in 2011. The non-oil sector remains buoyant, rising 7.6% on the year in Q3 2012. But the oil sector continues to restrain overall economic activity, even though oil output rose on the quarter.

Despite signs of slower growth, infl ation remains high, rising to 12.3% in November 2012. Core infl ation is still above 12%. Amid concern about food prices in the wake of recent fl ooding and the uncertain global picture, the central bank again kept interest rates on hold at its November 2012 policy meeting. Infl ation is forecast to average 10.5% in 2013.

High oil prices — which boost exports — have underpinned the current account, which posted a surplus of some US$9b in 2011. However, this was down slightly from 2010, due to rising imports and heavy income and services outfl ows. With world oil prices high and import growth slowing, the external surplus rose modestly in 2012. But it is expected to fall back again in 2013 on lower oil prices. Reserves have risen to almost US$46b, and the external position should remain solid, helping to support annual GDP growth of 5-6% over the medium term. We forecast GDP growth of about 6.5% for 2012, with a similar rate expected in 2013.



Poland

-6

-4

-2

0

2

4

6

8

10

12

1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

GDP

Net exports

Domestic demand

Forecast



30

40

50

60

70

80

1992 1995 1998 2001 2004 2007 2010 2013-12

-10

-8

-6

-4

-2

0

2% of GDP % of GDP

Government balance(left-hand side)

Government debt(right-hand side)

Forecast

Figure 49Government budget balance and debt

Table 16Poland

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 514.7 492.1 517.5 549.9 580.8 620.6


Sharp slowdown prompts rate cuts

Seasonally and working-day adjusted real GDP rose by 0.4% on the quarter in Q3 2012, slightly above our forecast. However, a downward revision to Q2 growth implied that the economy had expanded by 0.6% over the previous six months, in line with our initial view. The expenditure breakdown made grim reading, with both investment and private consumption contracting.

Since our October forecast, we have downgraded our expectation for 2013 real GDP growth from 2.5% to 1.6%. The move refl ects further downgrades to the Eurozone forecast and the recent weakness of the Polish labor market, which will subdue consumer spending next year.

Risks to the current forecast remain skewed to the downside, given the absence of a defi nitive resolution to the sovereign debt crisis in the Eurozone.

Monetary Policy Council members have reacted to the weakness of recent data by initiating an easing cycle. We expect rates to fall to 3.5% by H2 2013 — implying a cumulative 125bp rate cut — with risks skewed to additional easing.

Looking ahead to the medium-term, prospects remain solid, and we have marginally upgraded our forecast for real GDP growth in 2015–16, based on greater potential for cyclical recovery.



Qatar

% increase per year

-5

0

5

10

15

20

25

30

1991 1994 1997 2000 2003 2006 2009 2012 2015

Qatar


Forecast



-6

-3

0

3

6

9

12

15

18

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Forecast

Qatar


% increase per year

Figure 51Infl ation

Table 17Qatar

2011 2012 2013 2014 2015 2016





Short-term interest rate (%) − − − − − −




Nominal GDP (US$b) 173.5 191.2 205.6 223.4 242.7 261.9


Bright medium-term outlook

Qatar has endured slowing growth, a continuing reliance on oil and gas, and a worryingly sharp rise in bank dependence on external fi nancing. However, rating agency S&P has reaffi rmed the country’s sovereign credit rating of AA with a stable outlook. Qatar’s strong external and fi scal fi nances, its very high GDP per capita and relatively low political risk fully justify this rating.

Economic data for H1 2012 shows that the pace of GDP growth slowed to 6.5%. The data also showed lower oil output and an increasing reliance on government spending and the non-oil sector, following the completion of most of the planned expansion in the Liquefi ed Natural Gas sector. Growth is expected to slow to 5.5% in 2013 on lower oil and gas output.

We expect infl ation to rise from current levels to average 3.5% in 2013. Rentals will continue to rise as the housing over-supply diminishes (and the country gears up to host the 2022 FIFA World Cup) — and given that the measurement of rentals is skewed toward new contracts. Higher infl ation will also be driven by substantial pay rises (typically of 60%) and pension increases, other fi scal expansion, surging project activity, a rising population and low interest rates.

In the medium term, we expect the economy to grow in excess of 6%, driven by robust government spending and strong commodities exports, particularly to Asia.



Russia

-15

-10

-5

0

5

10

15

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

GDP

Net exports

Domestic demand

% increase per year

Forecast


Source: Oxford Economics. Source: Federal State Statistics Service; Haver Analytics.

-20

-10

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Consumer prices

Producer pricesWages

% increase per year

Figure 53Infl ation

Table 18 Russia

2011 2012 2013 2014 2015 2016


CPI infl ation (% change year-on-year) 8.4 5.1 6.5 5.7 5.7 5.4





Government balance (% of GDP) 2.1 -0.6 -0.7 -0.9 -0.8 -0.8


Nominal GDP (US$b) 1,856.1 1,954.7 2,124.4 2,306.7 2,470.5 2,656.8


Outlook unchanged with soft landing underway

The fi rst estimate indicates that growth quickened to 0.6% on the quarter in Q3 2012, although this remained below trend. An expenditure breakdown is not available, but we expect consumer spending to have remained the key driver of growth, albeit to a slightly lesser extent than in the previous year.

Risks to the forecast are skewed to the downside. With real wage growth set to slow in 2013, we expect consumption growth to suffer commensurately. We think that this can be compensated for by a pickup in investment, with plans having previously been delayed by a combination of heightened global macroeconomic uncertainty and

political risks associated with elections. Clearly, however, the easing of global uncertainty is far from guaranteed.

Compared with our October 2012 forecast, our real GDP growth expectation for 2013 remains little changed at 3.6%. Essentially, data released over the past quarter has largely accorded with our baseline view. PMI survey data for Q4 2012 indicates a modest increase in growth, a trend we expect to continue in 2013. This refl ects a gradual improvement in the external outlook. However, in the medium term we expect growth to be limited by the slow pace of institutional reform, and to average around 4% out to 2016.



Saudi Arabia

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011 2014

Saudi Arabia

Middle East andNorth Africa

% increase per year

Forecast


Source: Oxford Economics; World Bank. Source: Oxford Economics.

US$b % of GDP

-30

-15

0

15

30

45

60

75

90

-60

-30

0

30

60

90

120

150

180

210

1991 1994 1997 2000 2003 2006 2009 2012 2015



Forecast

Figure 55Current account balance

Table 19 Saudi Arabia

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 597.1 649.1 679.6 736.6 796.2 849.0


Set for steady medium-term growth in oil and non-oil sectors

With global food and beverage prices forecast to fall back in 2013 and rental infl ation appearing to be contained by more new housing stock coming on the market, infl ationary pressures are unlikely to take off in the foreseeable future. Furthermore, a moderately appreciating US$ (to which the Saudi Arabian Riyal is pegged) will also dampen any infl ationary pressures in the shorter term.

Our forecast for Saudi Arabia remains little changed from October 2012, with growth of 4.1% expected in 2013. The slowdown in growth in 2013 (we expect the Saudi economy to have expanded by around

6.8% in 2012) is largely due to weaker oil prices. However, we expect oil prices to resume their upward trend by mid-2013. Production should also hold up, as the Kingdom is currently producing below capacity and is expected to make up for some of the slack in Iranian production.

Alongside a healthy oil sector, non-oil growth will also remain robust, supported by loose fi scal and monetary policy. We expect government expenditure to grow by over 8% on average in the next four years, and the central bank rate to remain below 3% until 2015. Overall, we expect growth rates of around 4% on average in the three years to 2016.



South Africa

Retail sales(right-hand side)

Car sales(left-hand side)

Three-month moving average -12

-9

-6

-3

0

3

6

9

12

15

-40

-20

0

20

40

60

80

100

120

140

160

2000 2002 2004 2006 2008 2010 2012

% year% increase per year

Figure 56Retail and car sales

Source: Statistics South Africa; Haver Analytics. Source: Oxford Economics.

% increase per year

-20

-16

-12

-8

-4

0

4

8

12

1990 1993 1996 1999 2002 2005 2008 2011 2014

GDP

Industrial production

Forecast


Table 20South Africa

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 403.1 387.4 414.2 455.5 494.6 533.7


Domestic demand key to growth

Growth slowed in Q3 to 0.3% on the quarter after Q2’s robust 0.8% pace. Weak external demand held back growth in manufacturing, while labor unrest led to a sharp fall in mining output. Manufacturing is still struggling from low foreign demand and the lingering impact of strikes felt in mining. Agricultural strikes provide further risk.

The external defi cit has also left South Africa reliant on infl ows of portfolio fi nance, increasing vulnerability to investor sentiment. This lies behind the sharp depreciation in late 2012 and the subsequent spike in infl ation, which is likely to last thru early 2013. By eroding real incomes and preventing further monetary easing, this poses a potential threat to domestic demand.

Growth in 2012 was supported by robust domestic demand, with rapid growth in retail sales and credit. This domestic spending has been underpinned by resilient earnings growth and prompt monetary easing by the central bank. Rating agency Fitch downgraded the sovereign rating in January 2013 and this may weigh on investment prospects.

However, this combination of weak external and strong domestic demand caused the current account defi cit to widen in 2012. Despite a forecast pickup in exports, continuing strong import growth means the defi cit will only narrow slowly. This will act as a medium-term drag on growth. We forecast 3% for 2013 and around 4.5% for 2014-16 — which is somewhat below potential.



Thailand

% increase per year

-45

-30

-15

0

15

30

45

60

75

1995 1997 1999 2001 2003 2005 2007 2009 2011

Imports

Exports

Three-month moving average (US$)

Figure 58Exports and imports

Source: Customs Department; Haver Analytics. Source: Bank of Thailand; Haver Analytics.

2,000 = 100 (seasonally adjusted)

80

100

120

140

160

180

200

220

240

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 59Private investment indicator

Table 21Thailand

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 346.1 366.5 403.1 419.3 443.0 464.2


External weakness remains but strong investment drives growth

Annual GDP growth was 3% in Q3 2012. This was stronger than had been expected as robust investment and private consumption continued to drive the economy. Investment was particularly buoyant, refl ecting considerable spending on new machinery and utilities infrastructure as well as improved fl ood defenses and rebuilding.

The weak external sector continues to hold back growth as exports declined by 2.8% on the year in Q3 2012. This has stemmed from weak demand from the EU but is further exacerbated by the sharp

downturn in demand from the ASEAN and Chinese economies. Improvements are expected as the Chinese economy shows positive signs of improvement, prompting a pickup in regional trade.

After the improvement in Q3 2012, we now anticipate GDP growth of 6.0%, compared with the 5.4% forecast in October 2012. However, investment is expected to moderate in 2013 as factories fi nish repairs and stop replacing equipment. We expect GDP growth to slow to 5.3% in 2013, then accelerate to 5.4% in 2014 as exports improve.



Turkey

US$m (seasonally adjusted)

-11,000

-10,000

-9,000

-8,000

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1997 1999 2001 2003 2005 2007 2009 2011

Figure 60Monthly trade balance

Source: Turkish Statistical Institute; Haver Analytics. Source: Oxford Economics; Central Bank of Turkey; Haver Analytics.

%

4

6

8

10

12

14

16

18

20

22

24

2006 2007 2008 2009 2010 2011 2012

Policy rate (instrument changed in May 2010)

Average bank lending rate

Figure 61Interest rates

Table 22Turkey

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 777.3 795.0 867.0 912.4 960.2 1,040.6


Growth patchy, but infl ation down and markets rallying

The latest information has been quite mixed, although overall it points to a modestly expanding economy. Industrial output surged in September but then fell back in October, while unemployment has started to rise and the deepening Eurozone recession may exert a larger drag on exports. However, there are signs that consumer spending is picking up, helped by solid lending growth. Overall, GDP rose 0.2% on the quarter in Q3 2012 after a 1.7% rise in Q2.

In November, Fitch became the fi rst of the leading rating agencies to raise Turkey’s sovereign status to investment-grade. This reinforced the optimism shown by 2012’s sharp equity market rally and the drop in government bond yields.

Growth is expected to broaden out and gain momentum through 2013. The signifi cant easing in monetary conditions since mid-2012 will continue to feed through to lower lending rates for households and companies. In addition, lower infl ation (down to 6.2% in December) and a gradual improvement in the global outlook should help lift consumption and investment. Overall, GDP growth should move back above 4% in 2013 after an expected 2.6% in 2012. Looking further ahead, provided that the global background remains reasonable and domestic infl ation is kept under control, annual growth should exceed 5% in the medium term.



Ukraine



% of GDPUS$b

-14

-12

-10

-8

-6

-4

-2

0

2

-14

-12

-10

-8

-6

-4

-2

0

2

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Forecast


Source: Oxford Economics. Source: Oxford Economics; World Bank.

% increase per year

0

5

10

15

20

25

30

35

40

45

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Europe andCentral Asia

Ukraine

Forecast

Figure 63Infl ation

Table 23 Ukraine

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 165.2 164.6 172.5 187.7 204.2 222.0


Modest recovery set to presage stronger exports

Weak exports led to a faster industrial output decline and a 1.3% GDP contraction in Q3 2012. Receding hopes for Q4 have seen our full-year 2012 growth forecast cut to just 0.6%. Pressure for faster currency depreciation, which is being resisted to keep down the costs of heavy debt repayments before March 2013, has ruled out any monetary relaxation to boost domestic investment — and inward investment slowed sharply ahead of last October’s elections.

Although a post-election eurobond has allayed immediate fi nancing concerns, the rundown of reserves to support the currency will be hard to sustain ahead of the export pickup hoped for during 2013. Hard currency is already being rationed as demand rises. Talks with

the IMF may have to re-open before investor confi dence returns, but pre-election fi scal slippage will need to be reversed before standby funds can resume.

Even if larger currency depreciation is avoided, infl ation is set to return as fuel and food prices rise, ending a year of consumer price stability. The falling real exchange rate has boosted trade competitiveness, but weakness in the Eurozone means anemic GDP growth until mid-2013, with solid recovery postponed to 2014-15.



United Arab Emirates

% increase per year

-6

-3

0

3

6

9

12

15

18

21

1990 1993 1996 1999 2002 2005 2008 2011 2014

United Arab Emirates

Middle East andNorth Africa

Forecast



US$b % of GDP



-20

-10

0

10

20

30

1990 1993 1996 1999 2002 2005 2008 2011 2014-40

-30

-20

-10

0

10

20

30

40

50

60 Forecast


Table 24United Arab Emirates

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 338.7 369.2 382.3 408.6 435.8 462.9


Oil and non-oil growth both set to pick up next year

Economic indicators continue to point to the resilience of the UAE’s economy, which we estimate to have grown by 3.3% in 2012. As a result of tentative hiring growth in key sectors, we forecast employment growing more sluggishly than output over the next three years, and do not expect a return to pre-crisis unemployment rates of under 3.5% until 2015.

A key development to monitor over the next year will be the outcome of much-awaited revisions to the UAE’s Company Law, which currently caps foreign ownership outside of designated “free zones” at 49%. The key benefi t from opening up the possibilities for foreign ownership

would be increased investment, especially if institutional reforms are signifi cant enough to allow the UAE to secure the prized emerging market status in the Morgan Stanley Capital International (MSCI) grading system. This would aid the UAE’s diversifi cation efforts. However, so far the timeline for the passage of reforms and their precise content remains uncertain.

We expect growth to pick up to 3.7% in 2013, as the key crisis-hit property and fi nancial sectors continue to recover and global headwinds moderate. Looser fi scal policy will also help, but the extent of the pickup in growth will be limited by a weaker oil price. In the medium term to 2016, we expect the UAE to grow by almost 4.0% on average.



Vietnam

0

2

4

6

8

10

12

14

1991 1994 1997 2000 2003 2006 2009 2012 2015

Vietnam

% increase per year

Forecast



-10

0

10

20

30

40

50

60

70

1991 1994 1997 2000 2003 2006 2009 2012 2015

% increase per year

Forecast

Vietnam

Figure 67Infl ation

Table 25 Vietnam

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 0.2 4.4 0.1 -1.2 -1.0 -0.4






Nominal GDP (US$b) 123.6 139.5 154.6 171.1 187.7 205.3


Activity still subdued but set to pick up in 2013 and 2014

Lower infl ation has allowed interest rate cuts and some recovery of household expenditure. However, GDP growth slowed from 6.0% in 2011 to 5.0% last year, as weak export markets curbed industrial investment and bad debts stalled credit growth. Banks’ recapitalization needs could be diffi cult to meet without external assistance, despite the expansion of offi cial reserves as economic slowdown has improved the trade balance.

Inward investment stayed stable in 2012 and the external surplus improved as exports recovered ahead of imports. But slow US growth

remains a downside risk to expansion. GDP growth will remain quite modest next year, with the government targeting growth of 5.5%.

The weakness of recovery toward the offi cial 7.5% medium-term growth target has been exacerbated by banking reforms. Although the reforms will strengthen the system in the long term, they are currently a restraint on lending growth.

A near-7% growth trend can be regained by 2014, as export markets recover, if banks are successfully stabilized and planned FDI rule changes enacted. Import substitution will continue to contain the trade defi cit, despite consumption picking up as infl ation subsides. But competition from other low-cost locations is a downside growth risk.



Detailed tables


Real GDP growth

2011 2012 2013 2014 2015 2016

Americas 4.2 2.6 3.8 4.8 4.5 4.2

Argentina 8.9 1.7 3.1 4.5 4.2 3.8

Brazil 2.7 1.0 3.9 4.9 4.8 4.3

Chile 5.9 5.7 4.5 4.5 4.1 3.9

Colombia 5.9 4.0 4.2 4.4 4.1 4.0

Mexico 3.9 3.9 3.7 4.9 4.5 4.3

EMEIA 6.2 4.0 4.2 5.3 5.5 5.4

Czech Republic 1.9 -1.1 -0.5 1.9 2.7 3.0

Egypt 1.8 2.2 2.1 4.0 5.9 5.9

Ghana 14.4 7.1 6.9 5.9 5.5 5.0

India 7.5 5.4 6.0 7.5 7.9 7.8

Kazakhstan 7.5 4.9 6.0 7.5 7.1 6.7

Nigeria 7.3 6.5 6.5 6.1 5.5 5.1

Poland 4.3 2.2 1.6 3.1 3.8 4.2

Qatar 13.0 6.0 5.5 5.9 6.1 6.0

Russia 4.3 3.6 3.6 4.1 4.0 3.9

Saudi Arabia 8.5 6.8 4.1 4.3 4.2 3.8

South Africa 3.5 2.5 3.0 4.2 4.4 4.7

Turkey 8.5 2.6 4.3 5.6 5.3 5.3

Ukraine 5.2 0.6 2.4 4.6 4.1 3.9

United Arab Emirates 4.2 3.3 3.7 3.9 4.1 3.8

Asia 7.5 6.3 7.0 7.8 7.4 7.1

China and Hong Kong 9.1 7.4 8.1 8.8 8.3 7.9

Indonesia 6.5 6.1 6.2 6.0 5.4 5.5

Korea 3.6 2.1 3.3 5.0 4.8 4.4

Malaysia 5.1 5.1 4.3 4.7 4.3 4.4

Thailand 0.1 6.0 5.3 5.4 5.5 5.0

Vietnam 6.0 5.0 5.5 6.9 7.1 6.6

Total 6.4 4.7 5.4 6.4 6.2 6.0

Cross-country tables


CPI infl ation

2011 2012 2013 2014 2015 2016

Americas 5.4 5.1 5.2 4.6 4.0 3.9

Argentina 9.8 10.0 9.9 7.6 5.6 4.6

Brazil 6.6 5.4 5.9 5.1 4.5 4.5

Chile 3.3 3.0 2.7 3.1 3.0 3.0

Colombia 3.4 3.3 3.5 3.4 3.3 3.3

Mexico 3.4 4.2 3.9 3.6 3.3 3.2

EMEIA 7.1 6.0 5.4 4.8 4.6 4.5

Czech Republic 1.9 3.3 3.2 1.9 2.0 2.0

Egypt 10.1 7.1 7.5 6.7 6.2 5.5

Ghana 8.7 9.2 8.5 7.0 6.0 5.2

India (WPI infl ation (%)) 9.5 7.6 5.3 4.4 4.3 4.2

Kazakhstan 8.3 5.1 6.6 6.2 6.0 6.0

Nigeria 10.8 12.2 10.5 9.0 8.0 8.0

Poland 4.2 3.8 2.4 2.6 2.5 2.5

Qatar 1.9 1.9 3.5 4.0 4.0 4.0

Russia (% change year-on-year) 8.4 5.1 6.5 5.7 5.7 5.4

Saudi Arabia 5.0 4.5 4.4 4.0 3.8 3.8

South Africa 5.0 5.6 5.6 5.3 4.9 4.8

Turkey 6.5 8.9 5.9 5.4 5.0 4.6

Ukraine 8.0 1.0 7.0 6.0 5.5 5.5

United Arab Emirates 0.9 0.7 2.0 2.7 3.0 3.0

Asia 5.2 2.8 2.8 3.4 3.4 3.1

China and Hong Kong 5.4 2.7 2.6 3.4 3.5 3.1

Indonesia 5.4 4.3 4.8 4.9 4.9 4.8

Korea 4.0 2.2 2.3 2.7 2.6 2.6

Malaysia 3.2 1.7 2.6 2.9 3.0 3.0

Thailand 3.8 3.0 3.0 2.3 2.3 2.5

Vietnam 18.7 9.3 7.8 6.4 4.8 4.5

Total 5.9 4.4 4.1 4.1 3.9 3.7

Cross-country tables


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The Emerging Markets Center is Ernst & Young’s “Center of Excellence” that quickly and effectively connects you to the world’s fastest-growing economies. Our continuous investment in them allows us to share the breadth of our knowledge through a wide range of initiatives, tools and applications, thus offering businesses, in both mature and emerging markets, an in-depth and cross-border approach, supported by our leading and highly globally integrated structure.

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The views of third parties set out in this publication are not necessarily the views of the global Ernst & Young organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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About Oxford Economics

Oxford Economics was founded in 1981 to provide independent forecasting and analysis tailored to the needs of economists and planners in government and business. It is now one of the world’s leading providers of economic analysis, advice and models, with over 500 clients including international organizations, government departments and central banks around the world, and a large number of multinational blue-chip companies across the whole industrial spectrum.

Oxford Economics commands a high degree of professional and technical expertise, both in its own staff of over 70 professionals based in Oxford, London, Belfast, Paris, the UAE, Singapore, New York and Philadelphia, and through its close links with Oxford University and a range of partner institutions in Europe and the US. Oxford Economics’ services include forecasting for 190 countries, 85 sectors, and over 2,500 cities sub-regions in Europe and Asia; economic impact assessments; policy analysis; and work on the economics of energy and sustainability.

The forecasts presented in this report are based on information obtained from public sources that we consider to be reliable but we assume no liability for their completeness or accuracy. The analysis presented in this report is for information purposes only and Oxford Economics does not warrant that its forecasts, projections, advice and/or recommendations will be accurate or achievable. Oxford Economics will not be liable for the contents of any of the foregoing or for the reliance by readers on any of the foregoing.

Growing Beyond

In these challenging economic times, opportunities still exist for growth. In Growing Beyond, we’re exploring how companies can best exploit these opportunities — by expanding into new markets, fi nding new ways to innovate and taking new approaches to talent. You’ll gain practical insights into what you need to do to grow. Join the debate at www.ey.com/growingbeyond.

Rapid Growth Markets Forecast Winter edition 2013

Business

Transcript of Rapid Growth Markets Forecast Winter edition 2013