News & analysis
UKTI research: Emerging markets in the global recession
- Published:
- 18 September, 2009
The worst of the current global recession may now be over. Overall, emerging markets have performed better than developed economies (which have suffered their worst economic downturn in over 60 years). But conditions vary widely and are far from rosy. Although China and India have continued to grow rapidly, albeit at a less relentless pace than previously, Latin America has performed as poorly as Western economies, while Eastern Europe has performed even worse.
Apart from the impact of the economic downturn, companies in emerging markets continue to face numerous (and in some cases worsening) operating challenges. Yet optimism about the long term prevails. Indeed, given the relatively poor performance of developed markets over the past two years, companies, arguably, may have more incentive to seek new markets in the emerging world.
The key findings of the report are highlighted below.
China and India keep emerging markets in the black
Emerging market economies have outperformed those of developed countries in 2009, but this is due largely to the continued high growth (and market size) of China and India. Without these two countries, emerging market economies would contract this year, although, with the exception of Eastern Europe, they would still fare less badly than developed economies.
The crisis has hurt business everywhere, but emerging markets remain attractive…
Almost 90 per cent of surveyed companies said that the global downturn has had an adverse impact on their business, but emerging markets seem to support global profitability. Among companies headquartered in developed countries that derive more than 5 per cent of their revenues from emerging markets, 40 per cent said that their financial performance was better than that of their peers. By contrast, of those reporting less than 5 per cent of their revenues from activities in emerging markets, only 24 per cent reported their financial performance as being better than that of their peers.
…even though foreign investment has started to decline.
Foreign direct investment (FDI) into emerging markets withstood the global economic downturn in 2008, but plummeted in the first quarter of 2009 by 37 per cent year on year. The sharpest decline was in Eastern Europe. But the collapse in FDI will have more of an impact on developed markets in 2009; inflows are forecast to dip (temporarily) below those to emerging markets.
The “decoupling” debate rages on.
The relatively strong performance of China and India might suggest a degree of independence from Western economic performance. However, the GDP growth gap in recent years between developed and emerging markets overall has remained at 5-6 percentage points, indicating continuing linkage. Companies themselves are also divided over the extent to which recovery in their emerging markets business depends on improving conditions in Western markets; just under half (47 per cent) said it was to “a limited extent”, and 42 per cent said to a “great extent”.
State intervention has helped some investors….
Actions taken by governments in emerging markets to counter the downturn have helped both local and foreign investors. This has been particularly the case where massive fiscal stimulus packages have involved major spending on infrastructure, and boosted purchasing power of poorer consumers.
…but political fears have increased and credit risks have risen.
Political risks and unclear bureaucratic regulations as well as poor infrastructure and talent shortages are perceived as the greatest obstacles to operations in emerging markets. Moreover, a significant proportion of survey respondents felt that macroeconomic instability and shortage of credit had worsened over the past two years.
Caution over the short term gives way to longer-term optimism.
Most survey respondents expressed caution about opportunities in emerging markets over the next two years. But almost three-fifths expected to derive more than 20 per cent of their total revenues in emerging markets in five years’ time—almost double the current proportion of 31 per cent. This is a more sober outlook than expressed by survey respondents in the UKTI’s 2008 report, Tomorrow’s Markets, but suggests that investors prepared to stay the course still believe that returns from emerging markets over the long term will be worth the investment.
Asia is the future investment region of choice.
China, India and other Asian markets are the preferred investment destinations over the next year and next five years. In comparison with a similar market ranking by UKTI in 2008, Asian markets now dominate the top-ten list of non-BRIC future investment destinations to the detriment of markets in Eastern Europe.