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Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012

Rapid-growthmarkets

Growing Beyond

2 Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012

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1Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 2012

Wl

Contents 03Highlights

04Relative attraction

10Infrastructure supporting continued growth

34Forecast for rapidly growing countries

62 Detailed tables

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

Shifting, evolving, contracting — the global economy has been less about rapid growth and more about rapid change in 2012. Still, everything is relative and in a global context the top 25 economies selected for our forecast have the long-term potential to generate strong business opportunities.

But even these 25 rapid-growth markets (RGMs) have not escaped unharmed from the uncertainty and fragility that have had such an impact on developed economies. In January, we predicted that the expansion of the RGMs would slow from 6.1% in 2011 to 5.3% this year, before accelerating to 6.7% in 2013. Now, we are expecting the RGMs to grow by 4.5% this year and 5.5% next year — a trend caused largely by the deterioration of the wider international outlook. The RGMs are adapting to slower growth, but theirs is certainly no economic crash. Given the ongoing fi nancial turbulence beyond their borders, how have they safeguarded their continued growth?

Firstly, it’s important to remember that the long-term fundamentals haven’t changed. Cost competitiveness in certain markets and soaring domestic demand in RGMs continue to offer businesses exciting new markets for goods and services. Consumer spending in these countries is surging and will continue to do so. Policy-makers in the RGMs have also reacted fl exibly to the problems in the wider economic environment. Decisions made to enact a fi scal stimulus in several RGMs, as well as the easing of monetary policy and credit conditions earlier this year, are now paying dividends.

Another crucial factor is infrastructure. Rapid urban expansion in many RGMs has highlighted the urgent need for new transport, housing, health care and energy networks. Addressing these problems will demand a huge construction program and a further boost to growth rates.

In this edition of the Rapid-Growth Markets Forecast, we also take a closer look at the banking and capital markets sector. This sector has always been highly important in today’s interconnected world, but the structural changes it is experiencing, together with the shift in power between markets globally, means that it warrants further analysis.

This is the fi fth edition of our forecast and, one year on from its launch, we have reviewed whether our selection of 25 RGMs is still valid. While we have opted to leave the group unchanged for now, analysis of key economic, social and demographic criteria shows that beyond China and India, Indonesia, Turkey and Vietnam stand out as particularly strong markets. Not only are all fi ve poised for growth of at least 5% per annum over the next 25 years but most of them also share common features, such as large domestic markets and rising household incomes. A far greater share of global GDP is likely to originate from these countries in the future.

As always, I hope you fi nd the information and insights in this report useful. Navigating the global economy remains a challenge, wherever you are located in the world. By offering timely analyses of rapidly growing economies and providing our view on how their development affects business, we aim to contribute to business planning in this 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 Autumn edition — October 2012Ernst & Young Rapid-Growth Markets Forecast Autumn edition — October 20122


Highlights

International backdrop has deteriorated

• The global backdrop has deteriorated since the start of the year, impacting on the outlook for RGMs’ exports and their ability to attract foreign direct investment “FDI.” We have revised down world growth in late 2012 and H1 2013 by around 1 percentage point (pp). As a result, we now expect world GDP growth of 2.2% in 2012 and 2.5% in 2013. These downward revisions refl ect a combination of tighter than anticipated monetary policy and a disappointing performance from the major advanced economies, which are now expected to grow by 1.5% in 2013, about a third slower than anticipated at the start of this year.

RGM slowdown is proving worse than anticipated but not dramatically so

• The RGMs will be partially shielded from the deterioration in the global outlook by resilient domestic economies, boosted by fi scal stimulus and by easing monetary policy and credit conditions earlier in the year. In the case of China, Brazil, Indonesia, Thailand and Malaysia, infrastructure spending is also expected to support the domestic economy, helping to offset the weak external environment. In January, we were forecasting that RGM growth would slow from 6.1% in 2011 to 5.3% this year, before accelerating to 6.7% in 2013. We are now expecting the RGMs to grow by 4.5% this year and 5.5% next year. So, while the slowdown has been worse than expected, the RGMs have policy tools to help support growth.

Further marked commodity and currency rises would threaten the RGM growth outlook

• We believe that the RGMs’ growth rates will accelerate over the next two years, as the European Central Bank succeeds in stabilizing the Eurozone economy, the US recovery gathers pace, the RGMs continue to gradually loosen monetary policy, and infrastructure spending is used to boost growth. For example, China’s growth rate is expected to accelerate from 2012’s 7.2% to 8.1% in 2013 and 9.1% in 2014.

• To stop what has been a fairly mild cyclical slowdown from becoming something worse, the RGMs, with a few exceptions, have scope to ease fi scal policy. However, their scope to ease monetary policy may be limited in the coming months by higher food prices.

• We are concerned that the US Federal Reserve’s new round of quantitative easing (QE) could create new infl ation pressures, curtailing the scope that RGMs have to use further rate cuts to boost their economies. In addition, QE may strengthen the currencies of the RGMs against the US dollar, dampening their export growth. As yet, neither the commodity price moves nor the currency moves are a major concern, but marked further rises would be a risk to the RGM growth outlook.

Several countries are being monitored for inclusion in the RGMs list

• One year on from launching the RGM report, we have reviewed whether our 25 RGMs still match up to the economic, social and demographic criteria that we used in selecting them. Because of the long-term nature of many of the criteria, we do not believe things have changed suffi ciently to warrant making any changes to the list. Nevertheless, Bangladesh, Pakistan and the Philippines stand out as non-RGMs that now meet many, though not all, the criteria for inclusion and, as a result, should be monitored closely.

Beyond China and India, three countries stand out as particularly rapidly growing markets: Indonesia, Turkey and Vietnam

• When we compare the RGMs to our criteria, Indonesia, Turkey and Vietnam stand out as high-potential economies alongside China and India. All fi ve countries are expected to grow by at least 5% p.a. over the next 25 years. All have large domestic markets, favorable demographic trends and rising household incomes. And all are expected to contribute a much greater share of global GDP over the next 25 years.


Relative attraction

In Latin America, Brazil has undergone a sharp slowdown, but is now showing signs of recovery. Mexico continues to benefi t from its emerging role as a regional manufacturing hub and especially from ongoing growth in the US, where many of its exports go.

But the Eurozone slowdown has put a brake on economies in Central and Eastern Europe that previously prospered as low-cost “offshore” locations for selling goods and services into Western Europe. Hungary and the Czech Republic feel the most pain; Poland, Turkey and the Baltic states remain on course for modest growth.

Further east, Russia too is slowing at last. The rise in the price of oil that benefi ted Russia and much of the Middle East and North Africa seems to have stalled, albeit at a high level. But the Middle Eastern and North African economies are still overshadowed by political instability and unrest as the Arab Spring fades into an Arab Autumn.

Businesses surveying this overall slowdown in growth should not despair. Rather they should study underlying trends and rethink the long term. The simple world in which companies sourced products from low-cost emerging markets to satisfy the needs of Western consumers is changing. As RGMs prospered, domestic demand grew, and businesses began to cater for local consumers too. Now, we are entering a third era: while consumers in developed markets often remain fundamental, their relative importance is declining. Business is therefore starting to develop regionally focused activities to cater for regional markets.

Bigger food bills bloat business costs

A surge in commodity prices made a signifi cant contribution to the recent slowdown in many RGMs. Droughts this year had a negative impact on the production of corn, wheat and soybeans in the Americas and Central Europe. In India, a late monsoon damaged rice crops.

Rising food commodity prices can be a particular concern in RGMs, where a larger proportion of family income is often spent on food. This has multiple consequences for businesses operating in these markets. Rising food prices rapidly push though into infl ation, creating upward pressure on food prices and demands for higher wages. They also increase the cost of inputs for food processors, eroding profi t margins.

The relative attractiveness of rapid-growth markets (RGMs)

for business is undiminished. Their growth has slowed a

little more than expected this year, hit mainly by weakness

in demand from developed economies. But RGMs look set for

a quick rebound, which will be spurred both by enhanced

infrastructure spending programs and rising demand from

their own consumers. As global rebalancing continues,

business must adapt nimbly to evolving and emerging

opportunities.

A disappointing performance in developed economies has led us to revise downward our forecast for global growth in late 2012 and the fi rst half of 2013 by around 1 percentage point (pp). We now expect world GDP growth of 2.2% in 2012 and 2.5% in 2013. This is the result of disappointing growth in the Eurozone, the UK and Japan, even though the US remains on track. So we now see the advanced economies expanding by just 1.5% in 2013, more slowly than we anticipated earlier in 2012.

Growth in RGMs has slowed too, though to a lesser extent. Overall, RGM economies are likely to expand by 4.5% this year and the pace of expansion will accelerate to 5.5% in 2013. The relative strength of growth in RGMs remains striking, even though we have pared our forecasts slightly for this year and next.

Regional variation

There are large variations in regional patterns. Weaker domestic demand and exports have slowed Chinese growth a little, though we expect it to recover to 8.1% next year. Other big regional exporters, notably Thailand, Malaysia and Indonesia, will sustain growth comfortably over 4%.

India has seen slightly slower growth, hampered by the central bank’s battle with infl ation, capacity constraints and a poor monsoon, but it should accelerate in 2013.


Food manufacturers, therefore, face diffi cult negotiations with wholesale and retail customers who will be reluctant to accept price increases from suppliers that end consumers will resist. There is, therefore, a risk of reduced profi tability throughout the food supply chain unless commodity prices fall or costs can be passed on.

Expensive energy adds to the pressure

High energy prices are also a challenge. A rise of 40% in oil prices during 2011 increased costs for many businesses. We expect the oil price to average around US$111 per barrel (pb) in 2012, remaining fl at relative to 2011, but still at a historically high level. This adds to pressure on profi t margins in energy-intensive businesses and those that use oil or gas as a feedstock, such as the chemical industry. Businesses will respond by raising prices where possible, but also with renewed efforts to enhance energy effi ciency, investing in energy-saving equipment where it is cost effective in the medium term.

Competition and excess capacity contain long-distance shipping prices

In the longer term, high energy costs push up the cost of transport and render long supply chains less attractive. But today, a sharp slowdown in global trade arising from weak demand in developed economies seems to have assuaged upward pressure on freight rates, helping RGM exporters and their customers overseas. The annual pace of world trade growth has halved from 6.4% in October 2011, to less than 3.0% a year later.

The slowdown is evident in the falling cost of shipping goods from China to Europe. Freight rates normally peak in the last months of the year as retailers stock up ahead of the annual year-end shopping spree. However, in September there were reports that the cost of shipping a container from Shanghai to Europe had fallen by more than a third since May. Volumes of containers were reported to be down 13.2% in July, compared with July 2011.1

The combination of weak trade and excess shipping capacity seems to be acting as a cushion on transport costs for many businesses. This is painful for shipping and freight companies, but cheap rates are unlikely to last indefi nitely. We expect international trade to grow by 4.6% in 2013 followed by 7.2% in 2014. In the future, rising long-distance shipping rates and surging labor costs in China may contribute to a global near-shoring trend.

Relaunching RGM growth through infrastructure investment

Exports are being displaced by domestic demand as the engine of growth in many of the RGMs we survey. As concerns about overheating recede, governments in some RGMs are taking steps to rekindle expansion. Alongside more relaxed monetary and fi scal policies, large infrastructure investment programs are looming in China, India, Brazil, Indonesia and Colombia, as we detail elsewhere in this report. In some countries, these programs may help increase trade, and make it easier to fi nd new markets for exports to replace slack demand in developed economies. Spending on roads and railways, ports and airports, can facilitate trade and reduce the costs of doing business for companies in both domestic and overseas markets.

Colombia’s ability to benefi t from the global commodity boom was restricted by poor infrastructure, for example. Now a four-lane highway is being built to the country’s main port, which will improve access to markets overseas, including to other RGMs. Indonesian exporters, too, are likely to see big benefi ts from improvements in infrastructure.

Designing, building and sometimes fi nancing such projects offers interesting opportunities, mainly for domestic contractors. International suppliers of technology equipment such as air traffi c control systems and railway signaling may be able to compete for contracts, but are likely to be best-placed for success when committed to local manufacture.

1 “Asia-Europe Box rates slide further,” Lloyd’s List, 14 September 2012, http://www.lloydslist.com/ll/sector/containers/article407393.ece, accessed 10 October 2012.


Opening markets to competition and foreign investment

Structural reforms are also back on the agenda in some RGMs. In India, the government of Prime Minister Manmohan Singh has relaunched reforms to promote economic growth. An overhaul of rules governing foreign direct investment (FDI) was unveiled in mid-September. Previously blocked, foreign supermarkets will at last be allowed to compete in India’s notoriously fragmented and ineffi cient retail sector. International fi rms can now own a stake of up to 51% in multi-brand retailers. Several international retailers have welcomed this step.

Under revised rules, foreign companies will also be able to buy stakes of up to 49% in Indian airlines, own up to 74% of Indian broadcasters, and invest in electricity trading.2

However, would-be investors will need to respect precise conditions. Under the revised retail sector FDI rules, foreign retailers will have to invest at least US$100m, source at least 30% from India, and will be restricted in the locations where they can open.3

Privatization efforts have also been revived. In simultaneous moves, India’s Ministry of Finance approved the sale of signifi cant stakes in four companies in the minerals sector.4

China also appears to be taking an accommodating attitude to FDI in sectors where foreign expertise can accelerate growth. In energy, for example, China is believed to have the world’s largest shale gas reserves, and is licensing national fi rms to exploit them. But extracting shale gas by hydraulic fracturing requires sophisticated technology. Several foreign companies that have gained in-depth experience of shale gas extraction in the US’s unconventional-gas boom have partnered with oilfi eld services groups in Mainland China or Hong Kong in deals that promise to benefi t both companies and China’s energy ambitions.

2 “India opens retail to global supermarkets,” BBC News, 14 September 2012, http://www.bbc.co.uk/news/world-asia-india-19596091, accessed 10 October 2012.

3 “India Allows Foreign Investment in Retail, Aviation and Broadcasting,” International Business Times, 15 September 2012, http://www.ibtimes.co.uk/articles/384632/20120915/india-fdi-retail-aviation-broadcasting.htm, accessed 10 October 2012.

4 “Divestment okayed in four PSUs – Hindustan Copper, Nalco, MMTC and Oil India,” The Economic Times, 15 September 2012, http://articles.economictimes.indiatimes.com/2012-09-15/news/33845811_1_disinvestment-ccea-nalco-share, accessed 10 October 2012.

The lesson from developments in India and China is that business must keep close tabs on market opening in RGMs, and seize opportunities presented as their governments seek to accelerate growth.

Spotting the growth sectors

Led by China, RGM economies are starting to increase their capacity to meet rising demand from domestic consumers, upgrade their infrastructure, and achieve greener growth. This complex modernization will have divergent impacts on the fortunes of individual sectors.

The drive up the value chain that accompanies growth in RGM economies will be reinforced. In China, a “cleaner growth” agenda will strengthen the demand for cutting-edge technology in nuclear power and electric cars, for example, and for the software that is integral to the development of more sophisticated products and services. Energy-intensive industries, such as aluminum production, may be relegated to a lesser role.

Meanwhile, the services sector will become larger and increasingly advanced. Expansion in health care services will be reinforced by strengthening social safety nets. Development of these sectors will be led by domestic companies keen to develop state-of-the-art technologies and business models. International rivals may be able to participate, particularly if willing to be junior partners or to share their expertise.

Seeking technology through mergers and acquisitions

An increasing focus on meeting fast-growing domestic demand is expected to sharpen the appetite of emerging multinationals from RGMs to acquire technology through mergers and acquisitions (M&A). We foresee acceleration in M&A activity in Europe by cash-rich national and regional champions, from Asia and elsewhere, keen to acquire knowledge and technologies that will improve their ability to compete with Western rivals.

This trend has already been seen in sectors including steel, computing, automotive and cleantech. Now we expect it to extend to sectors where domestic demand in RGMs is likely to grow especially quickly, such as pharmaceuticals. The Chinese Government is keen to promote outward investment by Chinese companies. While seeking to acquire Western technologies through M&A, some RGM champions will seek to extend their footprint in other fast-growth regions, deploying their low-cost business models and existing technologies in similar markets elsewhere.


Relative attraction

Sector in focus: banking and capital marketsFor an industry grappling with multiple challenges, theRGMs offer a more positive outlook for banking. This edition of the forecast focuses on Indonesia, Turkey and Vietnam. Although they are at different stages of development, all three offer real opportunities for both domestic and international banks. The story is not wholly optimistic, but the scales are tipped in favor of growth and investment.

Young people, more money

Indonesia, Turkey and Vietnam are markets that share three very promising characteristics: a young and growing population, rising levels of disposable income and signifi cant under-penetration in banking. As some people are looking to open their fi rst bank account (over 50% of the Vietnamese population), existing customers are looking for new credit and savings products (annual loan growth is over 20% in both Indonesia and Turkey). Smartphones are becoming increasingly popular and younger customers, in particular, are keen to embrace mobile banking.

Banks are expanding their branch networks, especially beyond the major cities, but they are also exploiting new technology to reach those without bank accounts in more rural areas, without the need for major infrastructure investment. As Ernst & Young’s Global Consumer Banking Survey 2012 showed, the technology-hungry younger generation is also more comfortable with a “self-serve” approach to simple banking transactions. As well as upgrading their internet-banking channel, several banks in Indonesia and Turkey are already rolling out networks of new ATMs that offer customers the opportunity to pay utility bills and transfer money.

Infrastructure to support business and retail customers

As mentioned earlier in this report, continued investment in infrastructure will be crucial for sustained growth. If this does happen, we’ll see further product evolution as banks offer more premium banking services, investment products and wealth-management solutions to an increasingly affl uent customer base.

Following fortunes in the rapid-growth league

But the bigger challenge for business is to respond effectively to the shifting fortunes of RGMs. Each of the 25 RGMs in our study is economically signifi cant, displays strong growth potential and most of them have attractive demographics. But relatively few companies can realistically aspire to a strong presence in every country — though some branded-goods companies do achieve remarkable global presence. Most businesses keen to benefi t from the attractive growth rates of RGMs will seek to focus limited sales, marketing or investment resources in countries that offer the best prospects for their particular activities.

Many policy-makers in RGMs are highly competent and achieve admirable levels of growth and stability. But in immature economies with lingering rigidities, missteps can occur, while export-oriented economies can fall victim to markets slowing elsewhere. Simultaneously, new contenders arise for inclusion in the rapid-growth league.

Signing up the rising stars

Slow growth in developed economies offers business a timely opportunity to develop strategies for RGMs with exceptional potential. Indonesia, Turkey and Vietnam, in particular, merit close study.

Indonesia is of growing interest to international companies thanks to a population approaching 250 million, a broadly positive policy environment and GDP running at 5.9% this year. Regulations can change at short notice, and the detail of applications can require protracted negotiation. That makes some small and medium enterprises from Europe wary of Indonesia, but it is attracting larger investors with the resources to stay the course, especially in the automotive, mining and utility industries.

Turkey, at the crossroads of Europe, Asia and the Middle East, sustains strong growth in a troubled neighborhood, providing a convenient platform for exporters combined with an internal market of 75 million. FDI infl ows have been strong in industries ranging from automotive to fi nance, but many Turkish companies seek out overseas markets and its construction companies are very active in Asia and the Middle East.

Vietnam, meanwhile, has a young and well-educated population of almost 88 million, modest labor costs, growth of 6% targeted next year and scope for further economic restructuring. Corruption scandals have drawn attention, but its long-term attractions for foreign investors are underpinned by improvements in the economic environment and expectations of sustained high growth.

Relative attraction


Sector in focus: banking and capital markets (continued)Opportunities in project fi nancing will be signifi cant as governments develop a more robust national infrastructure. Continued improvement of skills in the workforce will help the economies of all three markets focus on higher-value industry sectors that will fuel growth in domestic consumption as well as exports. As that happens, trade fi nance will become an increasingly important enabler for growth in these economies.

Investors remain concerned about corporate governance and the size of the “unoffi cial” economy in these countries but, as the situation improves and the capital markets develop, companies will increasingly look beyond vanilla loan fi nancing as they try to expand. Aside from fi nancing, companies are already becoming more sophisticated in their demand for additional products, including cash management and FX and interest rate hedges.

New new entrants

All three markets still have a signifi cant number of small sub-scale banks so the potential for consolidation is signifi cant. In the case of Vietnam, the central bank has been explicit in targeting a reduction from 38 to 15 banks to strengthen the sector and prepare it for new regulatory standards.

Combine this with the growth opportunities, and it is clear why all three markets are attractive destinations for new foreign banking entrants. To varying degrees, they are all open to foreign investment in the domestic banking sector as well as to the establishment of new branches and subsidiaries. However, the source of that investment has changed in the last few years — now it is more likely to be banks from the Middle East, Asia and Russia that are exploiting these opportunities.

Every silver lining

Although sustaining low benchmark interest rates and low infl ation is a key target for governments in both developed and emerging markets, this new environment does pose particular challenges for banks that are used to high net interest margins (NIMs) — over 4% in Turkey and Vietnam, over 5% in Indonesia. In Turkey, the banks are also no longer able to rely on high yields from domestic sovereign debt to deliver additional signifi cant profi ts.

NIMs are not going to drop to European and US levels overnight, but banks are increasingly examining steps to protect their returns on equity of 20% or more. These include new products and additional fees on the revenue side, and increasingly robust risk management and cost control on the expense side.

As demand for credit grows, increasing leverage to deliver volume growth will also help to protect margins, but banks are already seeing the cost of funds increase. There is greater competition for deposits and domestic wholesale funding markets are still evolving.

As business and household debt levels rise to fuel both consumption and investment, investors in all three economies need to be wary of potential shocks and bubbles. Given the precarious state of the global economic recovery, further uncertainty in Europe or a harder landing in China could destabilize all these economies.

The central banks in all three markets are monitoring this closely to protect their banking systems as well as contain infl ation. Following previous crises, they have a track record of intervention to ensure the growth of the banking sector is sustainable. Banks are also strengthening their approach to risk-based pricing. The broader availability of customers’ credit histories will also facilitate more accurate scoring and credit decisions, and help banks to minimize the level of non-performing loans.

Of the three markets, Vietnam is a longer-term investment opportunity for banks and, given the recent slowdown in exports, not without its risks. As businesses and individuals are impacted by the global economic slowdown, non-performing loans are on the rise and cash-strapped customers are looking for an increase to their credit limits. However, the potential upside is signifi cant for those banks prepared to invest.

ContactDirector, Global Banking & Capital Markets CenterSteven Lewis [email protected] UK + 44 20 7951 9471


Adjusting expectations and building hopes

Though hampered by the Eurozone slowdown, Poland and the Czech Republic look set to sustain economic expansion. But growth in Argentina looks likely to disappoint, while progress in Egypt has been hindered by ongoing political uncertainty.

Reshaping business to match shifting growth trends

Demand growth is shifting to new customers in new places. To make the most of the opportunities arising, companies need to review their own operations from top to bottom and align their ambitions and their structures to the present and future outlook. Corporate boards should consider the following questions:

GovernanceDoes the board have the right balance of skills and experience? Should new directors be appointed with expertise in (the right) RGMs? Should executives in RGMs be given more say in the strategic direction of the company, or more autonomy?

StrategyWhich markets should be targeted for future growth? How should resources best be allocated? Should these markets be developed through organic growth, or could M&A, or partnerships, accelerate market access and reinforce expertise and other capacities?

OperationsWhat is the optimal way to deliver goods or services to the selected RGMs? Will new facilities be needed to accommodate future growth? Where should they be located?

Supply chainAs demand patterns shift, how must the supply chain be recast to match present and future needs? Do some elements need to be right-sized or reshaped to create national or regional hubs, or better support operations in rapidly growing economies?

R&D and innovationHow can the business best ensure it develops the right products or services at the right price for markets that promise the most future growth? Are in-country research and development or innovation centers needed to tailor products or services to local customers? Is reverse innovation required to hit price points customers in less-developed markets can afford?

Marketing Is a different business model required in the RGMs that are to be prioritized? What brand positioning is appropriate there? What marketing channels will be most effective in these new locations? What sales and marketing resources, both human and fi nancial, will be needed in these markets to realize the company’s new ambitions?

Financing and taxationHow can this expansion best be fi nanced? Where should the funding be sourced? At what point should fi nancing be matched to country exposure? What are the potential tax pitfalls, and how can they best be avoided?

RiskWhat are the risks associated with any strategic shift envisaged? What risks arise as RGMs assume a growing place in the business portfolio, and how can they best be managed?

Seizing the market opportunity

Today, the RGMs account for about 60% of the world population, but only 30% of GDP. Fast-forward 25 years, and their share of GDP will exceed their share of the population. The more marked slowdown in developed economies today will accelerate the pace of this rebalancing.

Some businesses in developed economies will fi nd export opportunities in RGMs. Others will seek to build market share there through acquisitions or direct investment. In the meantime companies born in RGMs will expand internationally, deploying their expertise in other countries and regions with similar growth patterns.

Business skills and experience gleaned in rapidly growing economies will be at a premium. Though growth has slowed, the relative attractiveness of RGMs is stronger than ever.

Relative attractionRelative attraction


Further marked commodity price rises or dollar weakness would threaten the RGMs’ growth outlook

The international backdrop has deteriorated since the start of the year. Although the outlook for the US has altered little since then, in Europe de-leveraging looks set to curtail growth by more than previously expected.

The RGMs have slowed more rapidly than anticipated but not dramatically so. This partly refl ects the deteriorating international background, but it is also the product of the 2010–11 tightening cycle in the RGMs’ monetary policy, which had a larger than expected impact on their economies.

We believe that the RGMs’ growth rates will accelerate over the next two years as the ECB succeeds in stabilizing the Eurozone economy, the US recovery gathers pace, the RGMs continue to gradually loosen monetary policy, and infrastructure spending is used to boost growth.

To stop what has been a fairly mild cyclical slowdown becoming something worse, the RGMs, with a few exceptions, have scope to ease fi scal policy. However, their scope to ease monetary policy is starting to be constrained by rising commodity prices. We are concerned that the US Federal Reserve’s new round of quantitative easing (QE) could create new infl ationary pressures, restricting the RGMs’ scope to use additional rate cuts to boost their economies. In addition, QE may strengthen the currencies of the RGMs against the US dollar, dampening their export growth. As yet, neither the commodity price moves nor the currency moves are a major concern, but further increases would be a risk to the RGM growth outlook.

Global outlook worse since the start of the year

The global outlook has deteriorated since the start of the year, impacting on the outlook for RGMs’ exports and their ability to attract FDI. The slowdown in world trade has not been as marked as the one seen in the depths of the fi nancial crisis, when banks withdrew trade credit, causing the world economy to seize up. Nonetheless, the annual pace of world trade growth has halved from 6.4% this time last year to less than 3.0% now. Our world trade growth forecast for 2012 is just 2.3%, historically a very slow pace. International trade is expected to improve in 2013 and 2014, as interest rate cuts in the RGMs and bond-purchasing programs in the developed economies take effect, with growth of 4.6% and then 7.2% forecast.

Infrastructure supporting continued growth

Figure 1World: export market growth

-14

-10

-6

-2

2

6

10

14

18

22

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

% year

Asia

US

Forecast

Source: Oxford Economics.

Global growth forecast revised down since the start of the year

Our forecasts for world GDP growth are similarly subdued for 2012 and 2013, at 2.2% and 2.5% respectively. Moreover, our forecasts have been revised down noticeably since the start of the year, with growth in late 2012 and H1 2013 revised down by around 1pp. Primarily, this refl ects a disappointing performance in the major advanced economies, which are now expected to grow by only 1.5% in 2013 (more than a third slower than anticipated at the start of this year), rather than weakness in the RGMs themselves. We now expect growth of 0.2% in the Eurozone, 1.3% in the United Kingdom and 1.7% in Japan.


Figure 2GDP growth: changes since January

2010 2011 2012 2013 2014 2015 2016-2

-1

0

1

2

3

4

5% annual growth

Eurozone, January 2012

World, January 2012

Eurozone, September 2012

World, September 2012

Forecast


De-leveraging is curtailing growth in Japan, the Eurozone and the UK

In the case of Japan, this partly refl ects growth that was expected in 2013 being brought forward into 2012, as the economy rebuilds more quickly than anticipated following March 2011’s devastating tsunami.It also refl ects the impact of the slowdown in world trade growth on the outlook for Japanese exports. Indeed, the outlook for Japan has deteriorated suffi ciently for the Bank of Japan to launch another round of QE in September.

In the Eurozone and the UK, growth is being curtailed by the ongoing drag on the economy from de-leveraging and, in the case of the Eurozone, the inability of policy-makers to respond quickly and forcefully to the intertwined sovereign debt and banking crises. This has resulted in an environment of uncertainty, causing companies to put investment and hiring decisions on hold.

US outlook is little altered

Despite concerns over the looming fi scal cliff, the US economy has once again proven to be a relatively bright spot among the developed economies. Consequently, our 2012 and 2013 growth forecasts, of 2.2% and 2.1% respectively, have changed little since the start of the year and compare favorably with the growth rates anticipated for the Eurozone, the UK and Japan. This is a testament to the steps taken early in the fi nancial crisis to purge the US banking system of bad assets and then to recapitalize it, along with the aggressive expansion of the Federal Reserve’s balance sheet.

Although the pace of US growth compares well with that seen in the UK and the Eurozone, it is still weak by historical standards and insuffi cient to cause any major reduction in the US unemployment fi gures. Consequently, the Federal Reserve has announced that it will also implement another round of QE.

RGM slowdown is proving worse than anticipated, but not dramatically so …

To some extent, the RGMs will be shielded from the deterioration in the global outlook by resilient domestic economies and by their having eased monetary policy and credit conditions earlier this year. In the case of China, Brazil, Indonesia and Malaysia, infrastructure spending is also expected to support the domestic economy, helping to offset the weak external environment. Consequently, while our 2013 growth forecast for the advanced economies has fallen by about a third since the start of the year to 1.5%, our forecast for RGM growth is down by just a sixth in the same period. In January, we were forecasting that RGM growth would slow from 6.1% in 2011 to 5.3% this year, before reaccelerating to 6.7% in 2013. We are now expecting the RGMs to grow by 4.5% this year and 5.5% next year. In short, the slowdown has been worse than expected, but not dramatically so.

At the regional level, the cuts to the growth outlook for 2012 are most pronounced in the Middle East and Latin America. The Middle East revision is driven by a longer than expected period of civil war in Syria and the tightening of sanctions against Iran, which has hit oil exports hard. The downgrade for Latin America has been mainly driven by a deteriorating outlook for Brazil as the monetary policy tightening cycle of 2010 and 2011 has slowed the economy sharply. For 2013, the revisions are more evenly spread, but emerging Europe is particularly affected because of its links with the Eurozone, which we expect to hardly grow at all in 2013.


Figure 3GDP growth forecast for 2013: change since January 2012

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World US Eurozone RGMs,Total

RGMs, Americas

RGMs,EMEIA

RGMs, Asia

% annual growthOxford forecast in January 2012Oxford forecast in September 2012


Figure 4GDP growth forecast for 2013: changes since January 2012

Oxford forecast in January 2012Oxford forecast in September 2012

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RGMs China India Brazil Russia Korea Indonesia Turkey

% annual growth


Among individual countries, the downgrades for this year are particularly stark for Brazil and Korea. Because of prolonged weakness in its industrial sector, Brazil is expected to grow by just 1.4% in 2012 as a whole, down from 2.7% in 2011, although we expect growth to recover to 4.5% in 2013. The downgraded growth prediction for Korea refl ects weaker recent data and the expectation that the cyclical upturn will be delayed in line with China’s.


… with RGMs expected to reaccelerate later in 2013 and into 2014

We expect the global backdrop to improve in future months, thanks to bond buying by the ECB and further QE in the US and Japan. With fi scal, monetary and infrastructure stimulus boosting their domestic economies, we expect growth to reaccelerate in the RGMs in 2013 and 2014. Growth is forecast to increase from 4.5% in 2012 to 5.5% in 2013 and then 6.5% in 2014. If this expected acceleration fails to materialize, then the authorities have some scope to use fi scal and monetary policy to bolster demand. But if it does continue, the rise in food prices seen in recent months would limit their ability to act. In addition, rising food prices would act as a “tax” on RGM household incomes and hence dampen consumer-spending growth. This would happen because food accounts for a comparatively larger share of household expenditure in RGMs than in developed economies.

This year, droughts have hit wheat, soybean and corn production in the Americas and Central Europe. An estimated one-sixth of the US corn crop has been destroyed by drought. Slow-to-appear monsoons have damaged rice crops in India. As a result, with the exception of rice, the prices of the main traded agricultural foods have risen sharply over the past two months.

Droughts in the US and other parts of the world have caused wheat, soybean and corn prices to rise over the last months. In contrast to 2007–08, this is a supply-side shock rather than a demand-driven one. While upward pressure in commodity prices is an obvious risk to infl ation, for most RGMs the main risk is to consumer spending and therefore growth. Food prices have consistently risen faster than overall consumer price infl ation, particularly in the BRIC economies, refl ecting the changing tastes of a rapidly expanding middle class. Local factors still have a signifi cant impact on economies’ food prices, but further rises after several years of price hikes will squeeze consumers in an environment of slowing world growth. As a result, we do not expect a general tightening of monetary policy.

Figure 6World agricultural products

Grain and oilseed prices, US$ per bushel

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16

18

2004 2006 2008 2010 2012

Soybeans

Corn

Wheat

Source: Oxford Economics; Haver Analytics.

Will rising food prices harm RGM economies?

Box 1

Infrastructure supporting continued growthInfrastructure supporting continued growth


Will rising food prices harm RGM economies? (continued)

Box 1

Background to rising food prices

In the past fi ve years, there have been two large food price shocks and we may now be witnessing a third. World food prices rose 25% in 2008, driven in part by the rising price of oil, but also refl ecting changing patterns of food demand prompted by the rise of the middle classes in RGMs. More recently, poor weather in 2010–11 affected wheat production, resulting in lower harvests and higher prices (20% higher in 2011 than 2010), again exacerbated by rising oil prices. And this year, droughts have hit wheat, soybean and corn production in the Americas and Central Europe, with poor monsoons adversely affecting rice crops in India. Almost 80% of agricultural land in the US is affected by the current drought, resulting in widespread crop destruction. Unlike the situation in 2007–08, food shortages are not an issue: stocks are almost certainly higher, and demand growth, particularly from India and China, is not as rapid.

Figure 7RGMs: CPI and food price infl ation

% increase per year

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8

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12

14

16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Weighted CPI in ation

Weighted CPI foodprice in ation

Source: Haver Analytics.

Nevertheless, with the exception of rice, the prices of the main traded agricultural foods have risen sharply over the past three months. While upward pressure in commodity prices is an obvious risk to infl ation, in many economies the main risk is to consumer spending and therefore growth.

India

The situation in India is somewhat different, as it has been suffering from stubbornly high infl ation, with the food component of prices rising consistently faster than overall infl ation. The latter development refl ects the changing tastes of a rapidly expanding middle class, which is demanding a wider range of foods, especially meat. Structural constraints mean that suppliers are unable to keep pace with this demand. Food prices have risen by an average of 10.8% p.a. over the past three years, compared with consumer price rises of 8.2%. Further increases from an already high base will squeeze consumer spending at a time of slowing growth. Half of India’s workforce is still dependent on agriculture for its income. If the monsoon continues to disappoint, consumer spending would be hit by reduced incomes and further eroded purchasing power. And, with infl ation still high, the central bank has little scope to lower interest rates this year to support growth.

Figure 8India: infl ation

% increase per year

-5

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012

Food pricescomponent of WPI

Total WPI

Source: Haver Analytics; Oxford Economics.


East Asia

In China, too, a rapidly growing middle class has shifted tastes toward high-quality proteins, especially pork, and has also developed an increasing thirst for beer. Soya is a major feedstock for pigs, and beer is produced from wheat, so although China may aim to be self-suffi cient in rice production it is still exposed to world food prices. As in India, food price infl ation has been consistently higher than overall infl ation, as the economy adjusts to these changing tastes. Price rises may be slowing (CPI infl ation was 2% in August, with food prices up 3.4%), but any increase comes on top of an already high base: food prices were over 13% higher in August 2011 than the year before. Even small further increments to prices will affect consumer spending. Higher food prices squeeze both consumers and producers, constraining growth and making the necessary shift toward more consumption and less investment harder to achieve.

Figure 9China: CPI and food price infl ation

% increase per year

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3

6

9

12

15

18

21

24

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CPI in ation

CPI food pricein ation


Food prices across Asia are driven primarily by local factors affecting the supply of staple foods, and largely depend on local tastes, incomes and weather conditions. In Korea there is no evidence of particular price pressures, but most other East Asian economies have seen increases in the past few months. In Taiwan, for example, food price infl ation reached 8.7% in August compared with 3.3% in Q1. Surging vegetable prices have been responsible. But for richer economies like Taiwan, food represents a smaller proportion of overall consumer spending, so price changes have a lesser impact on overall consumption.

Figure 10Emerging Asia: CPI and food price infl ation

% increase per year

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012






Will rising food prices harm RGM economies? (continued)

Box 1

Central and Eastern Europe

The picture is mixed in Central and Eastern Europe. Parts of the region have experienced adverse weather conditions that have affected their staple crops, wheat and corn. Average food price infl ation was over 6% last month, higher than in the past few months but by no means as high as the 10%–11% annual increases seen after the poor grain harvests of 2010–11. In Russia, where there has been upward pressure on infl ation, food prices were up 6.5% year-on-year in August, contributing to a headline infl ation rate of 5.9%. Russian and Ukrainian grain harvests have been affected by drought, resulting in tighter supplies and higher prices. Consumer spending has remained fairly buoyant, however, and the central bank of Russia raised its key policy rate last week in an effort to contain infl ationary pressures. It mentioned in particular the infl uence that higher food prices had on its decision.

Figure 11Central and Eastern Europe: CPI and food price infl ation

% increase per year

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18

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012




Latin America

In Latin America, food prices tend to rise consistently faster than overall consumer prices. As the chart below shows, the effects of price controls (in Argentina) can disguise underlying trends for a time, but food prices are now starting to pick up as a result of the drought. Brazil’s commercial sector is set to benefi t from the high price of corn. Offi cial estimates suggest that corn output has increased by 27% this year, neatly plugging at least some of the gap left by US shortages. Higher export prices may feed into higher domestic prices, though, at a time when consumer confi dence and spending is already weak. Fuel prices may also rise because Brazil uses a high proportion of ethanol (produced from sugar cane or corn) for transport. For over a year, the Brazilian authorities have tried to kick-start growth with unprecedented levels of monetary loosening and fi scal measures. If infl ation rises — and with a tight labor market Brazil is more at risk of increases in prices feeding through into infl ationary expectations — the authorities would be in the uncomfortable position of having to choose between choking off incipient growth just as the fi rst signs of improvement are showing, or allowing prices to pick up.

Figure 12Latin America: consumer food prices

% increase per year

-5

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25

2004 2005 2006 2007 2008 2009 2010 2011 2012

Mexico

ChileArgentina

Brazil



How will the RGMs respond?

The last time there was a scare about rising food prices putting pressure on infl ation, RGMs had recovered from the global fi nancial crisis and were growing fairly strongly. Increases in interest rates seemed a far more reasonable response then than now, when the main consideration for most RGMs is to stimulate demand in response to slowing world growth. Rather than raise infl ationary expectations, general food price increases are more likely to erode purchasing power and squeeze consumer spending, thereby damaging business confi dence. Against this background, RGMs will not be obliged to tighten monetary policy.

Figure 13RGMs: policy interest rates

% (unweighted averages)

2

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11

2004 2005 2006 2007 2008 2009 2010 2011 2012

Latin America

Central and Eastern Europe

Asia

Source: Haver Analytics; Oxford Economics.


China’s resurgence has been delayed not canceled …

National accounts for the second quarter confi rmed indications from high-frequency data that China’s economy has slowed. GDP grew by 7.6% year-on-year in Q2, down from 8.1% in Q1. This was the weakest quarterly outcome since 2009. Chinese electricity consumption, which increased by over 12% last year, slowed to just 3.5% in August and, at an industry level, shipbuilders and steel producers have been reporting far fewer orders. In August, HSBC’s Manufacturing Purchasing Managers’ Index (PMI) fell to its lowest level since March 2009 and rose only very slightly in September, suggesting a continued slowdown. The fall was driven by weakness in orders, particularly foreign ones, as Chinese producers struggled against strong global headwinds.

The Chinese economy has decelerated more than expected over the course of this year. A combination of the continued slowdown in world manufacturing and a bigger than anticipated impact from last year’s tightening of monetary policy means that growth in China is unlikely to pick up this year. Exports to the beleaguered EU alone are worth around 5% of Chinese GDP — when Hong Kong GDP is included — and there is no sign yet of an improvement in European demand. We have cut our growth forecast for 2012 to 7.2%, from 7.5% three months ago, pushing back the cycle into early 2013, when we expect GDP to grow by around 8%.

Figure 14China: key economic indicators

2004 2005 2006 2007 2008 2009 2010 2011 2012-10

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Bank loans

Rail cargo

GDP

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% annual growth

Source: Oxford Economics; CEIC.



… domestic demand could start to recover before the end of the year

The near-term outlook for China is therefore relatively subdued. Slower investment prompted a 2.6% fall in imports in August, the fi rst drop since 2009 (with the exception of January 2012, which was hit by the timing of Chinese New Year). The uncertain external environment is also holding back exports. But domestic demand could start to recover before the end of the year in response to looser monetary policy, fi scal stimulus, and the authorities’ decision to allow the currency to depreciate slightly against the US dollar. With CPI infl ation down from 4.1% at the end of 2011 to just 2.0% in August, there is scope for further stimulus measures. If the monthly indicators remain weak, we expect the authorities to continue gradually easing policy. In short, we continue to expect the Chinese economy to land softly, because the authorities are taking action.

Step up in Chinese infrastructure spending refl ects the Government’s determination to deliver a soft landing

To help deliver a soft landing, the Chinese Government is stepping up spending on infrastructure projects and, in September, approved plans for Rmb1t (US$158b) of infrastructure spending. Although sizable, the stimulus package, at around 2% of GDP, is a quarter of the size of the one implemented during the fi nancial crisis. It will be rolled out over several years, because of fears of over-stimulating the economy, as happened in 2009. Given that many of the measures were already in the pipeline, the latest announcement should be seen as “a call to action” and, as a result, further announcements are likely.

The package of projects that has been approved includes 25 urban rail projects, 13 highway construction projects, 7 waterway projects and 9 waste-water treatment plants. The implementation of these projects will begin in the coming months, and should boost fi xed asset investment. The impact should start to be felt in GDP numbers in the fourth quarter of 2012.

China’s slowdown is having knock-on effects across the region, hitting Korea …

Weaker Chinese domestic demand and, in turn, weaker imports mean that slower Chinese growth has repercussions for several other economies in the region. Compared with three months ago, we have cut our GDP forecast for South Korea by 0.3% to 2.2% for this year and by 0.4% to 3.5% in 2013. This refl ects weaker recent data and the expectation that the cyclical upturn will be delayed in line with China’s. Final GDP fi gures for Q2 were revised down to 2.3%, and Korean industrial production fell by 1.6% on the month in July, having fallen by 0.2% on the quarter in Q2. With the industrial PMI for August in contraction territory for the eighth consecutive month, the weak trend is likely to continue. To counter this, the Central Bank cut its base rate by 25bp in July and October, and has further scope to stimulate the economy if growth remains subdued.

Figure 15Exports to China as a percentage of total exports

%0 10 20 30 40 50 60

Hong Kong

Korea

Chile

Brazil

Kazakhstan

Malaysia

Thailand

Indonesia

Vietnam20112000


We have also cut our forecasts for Hong Kong, Singapore and Taiwan in line with the more downbeat view on mainland China. These economies could also be hit by any further depreciation of the Chinese Yuan (CNY) against the US dollar. There has been a slight depreciation since May, which could be extended, if necessary, to boost Chinese competitiveness.


… but infrastructure spending will help Malaysia and Indonesia buck the trend

The outlook for other East Asian countries is better, with Thailand, Malaysia and Indonesia all expected to see GDP growth of comfortably more than 4% this year. We still expect growth of 5.9% in Indonesia this year and 6.3% in 2013. Despite the fragile global background, we believe that Indonesia’s strong domestic fundamentals will underpin robust GDP growth, helped in part by the fast-tracking of infrastructure projects. Consumer confi dence rose in August as consumers reported improving job prospects, indicating that private spending should maintain strong momentum in H2. In addition, fi xed investment rose at a double-digit pace in H1. We expect investment to grow by 9.5% in 2012 overall, up from 8.8% last year. Fixed investment should continue to grow strongly in 2013, helped by government spending on infrastructure.

The budget for 2013 allows for a 15% rise in capital spending, targeted at improving the road network and fi nancing 15 new airports. However, for this ambitious plan to be delivered, the reform agenda will need to continue. A combination of complex bureaucracy, nervousness about the involvement of the private sector and a lack of fi nancing has so far delayed Indonesia in building the infrastructure needed to sustain economic growth of more than 6% a year, but if reforms continue, these obstacles will gradually be overcome. Encouragingly, investors acknowledge that the Government is already taking steps to improve the transparency of the bidding process for infrastructure projects and to improve the land acquisition process.

Malaysia, too, has benefi ted from a 26% increase in investment in Q2, which prompted an upward revision of our 2012 growth forecast to 4.5% from 4.3% three months ago. These expansionary policies are part of a deliberate attempt by the authorities to maintain strong domestic demand in the face of a global downturn, although in the case of Malaysia the spending is also driven by the impending elections. Much of the spending is on infrastructure projects, which should also raise the country’s longer-term growth prospects.


Figure 16South East Asia: real GDP

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Indonesia

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% year




Infrastructure needs are great across the RGMs, but progress is being made

World Economic Forum: world ranking for infrastructure 2011–12

Hong Kong SAR 4 China 69

UAE 6 Kazakhstan 78

Korea 22 Poland 79

Saudi Arabia 23 Ghana 86

Qatar 26 India 87

Czech Rep 28 Egypt 88

Malaysia 29 Indonesia 92

Chile 31 Russia 101

Turkey 34 Brazil 107

Thailand 49 Colombia 108

Ukraine 56 Argentina 112

South Africa 58 Nigeria 117

Mexico 65 Vietnam 119

Source: World Economic Forum’s Global Competitiveness Report 2011–2012.

The table above shows the infrastructure score given by the World Economic Forum’s Global Competitiveness Report 2011–2012 for each of our 25 RGMs. Hong Kong and Korea are further ahead of the rest of emerging Asia in terms of development, and rank highly for infrastructure. The Middle East region has made good use of commodity revenues to fund infrastructure construction, and the UAE, Saudi Arabia and Qatar have jumped up the rankings in recent years. But Brazil, China, India and Russia rank some way off the top 50.

Political instability has been a key constraint on infrastructure spending over the last decade in India, Thailand, Colombia, Argentina and Nigeria. Colombia is a good example of a country that is now taking advantage of greater political stability to drive infrastructure projects forward. In India, the Government recently announced a broad set of reforms designed to tackle the rising budget defi cit and rectify some of the economy’s structural defi ciencies, but the economy has a history of underachievement when it comes to targets.

FDI is an important source of infrastructure fi nancing, and India has recently revised its plans and intends to allow greater foreign participation in the economy. It is essential that foreign investors work in harmony with domestic investors, harnessing local and sector-specifi c knowledge to forge successful public private partnerships.

In China, Indonesia, Malaysia and Thailand, governments are attempting to offset the global slowdown with higher public spending, much of it directed toward infrastructure. This is good news, but the spending must be sustained by subsequent political regimes in coming decades. While public spending on infrastructure is very high in China, the authorities need to fi nd ways to encourage more private investment. The Brazilian Government is keen to push infrastructure development forward, and the upcoming World Cup and Olympic Games will help this. However, the economy is ranked 107th in the world for infrastructure, so it has some way still to go. Governments must fi nd ways of making credit available at cheaper rates to encourage more private fi nancing.


The 25 countries that make the grade to be included as RGMs are not only economically signifi cant now, but also have strong growth potential. Consequently, they are strategically important for businesses.

Last year, almost two-thirds of the world’s population lived in one of the 25 RGMs, but only a third of world GDP in nominal terms was produced by these economies. Fast-forward 25 years to 2036 and, as the chart below shows, the RGMs will enjoy a bigger share of global GDP than of population, a neat illustration of the rapid-growth concept.

Figure 17RGMs: share of world growth

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2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040

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Forecast


Box 2

A review of the 25 RGMs one year on

Large, young, well-educated populations …

The demographic trends of the RGMs are very favorable. Indeed, in 10 years’ time, 15 of the RGMs will still have at least fi ve workers for every person over 65. And for 10 of them, this will still be the case in 25 years’ time. Among the RGMs, the Czech Republic, Poland, the Ukraine and Korea will age quickest.

Figure 18Number of workers to support each person over 65

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Japan

Germany

Czech Republic

Ukraine

Poland

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Turkey

Columbia

Vietnam

Egypt

India

Malaysia

South Africa

Number

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2021

2011


For countries with rapidly growing young populations, developing human capital is critical. The chart below illustrates that in Brazil in 1990, for example, only half of secondary-age children were still in education; in 2010, 100% attended school.



A review of the 25 RGMs one year on (continued) Box 2

Figure 19Percentage enrolment in secondary education

0 20 40 60 80 100

Brazil

Korea

Columbia

Tunisia

China

Turkey

Indonesia

Vietnam

Egypt

India

Ghana

Nigeria 2010

1990

1971

Source: World Bank.

… with fast-rising spending power

Nine RGM countries will see their per capita income increase by a multiple of at least fi ve over the next 25 years. In 10 years’ time China will be where Poland is now in terms of per capita income, and Poland will be where the UK and Japan are.

Favorable long-term growth prospects …

Examining our forecasts for GDP over the next 25 years illustrates the RGMs’ phenomenal growth prospects. Nine of our RGMs are forecast to grow by at least 5% p.a. for the next 25 years, in contrast to Japan and Germany, which will both grow by less than 1.5% p.a. Only three RGM countries are expected to grow by 3% or less p.a. over the next 25 years: Argentina, the Czech Republic and Poland. In the case of Poland and the Czech Republic, however, this is partly because they are at a later stage of development. Indeed, in the Ernst & Young M&A Maturity Index 2012, the Czech Republic ranks higher than the US and Canada for infrastructure.

Figure 20Households with an income greater than US$30,000

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China Brazil Russia Turkey India Indonesia

Number of households, millions

2010

2020


Figure 21GDP growth per annum from 2011–36

0 1 2 3 4 5 6 7 8

China

India

Vietnam

Indonesia

Nigeria

Thailand

Ghana

Qatar

Turkey

US

Germany

Japan

%



… will propel RGMs up the league table of economic winners

The table below suggests that in 25 years’ time, the BRICs — Brazil, Russia, India and China — will be among the six largest economies in the world. Indonesia will be one of the top 10 economies and South Africa and Nigeria will have joined the top 20. Turkey, Mexico, Korea and Saudi Arabia will also have moved up the rankings.

Top 20 economies in the world2011 2035

GDP, US$b Rank GDP, US$b RankChina 7,312 2 101,763 1United States 15,094 1 47,912 2India 1,840 10 15,999 3Japan 5,882 3 9,492 4Brazil 2,476 6 9,181 5Russia 1,856 9 9,032 6United Kingdom 2,431 7 7,207 7Germany 3,573 4 6,339 8Indonesia 845 16 5,649 9France 2,777 5 5,641 10Mexico 1,156 14 4,652 11South Korea 1,117 15 4,281 12Turkey 775 18 4,260 13Canada 1,740 11 4,205 14Italy 2,201 8 3,915 15Australia 1,486 13 3,902 16Saudi Arabia 577 20 3,188 17Spain 1,494 12 2,966 18South Africa 409 29 2,292 19Nigeria 228 44 1,922 20

Source: Oxford Economics. Nominal GDP fi gures.

Fiscal and monetary fi repower to spare

Most RGMs enjoy an enviable position in terms of government budget, particularly compared to Western Europe. Of course, for many of them this has been largely due to a favorable endowment of commodities. Even countries such as China and Korea, however, which are big net commodity importers, enjoy very healthy government accounts. And fi rm improvements have been made over the last decade. Government debt has fallen by around half as a percentage of GDP in Colombia, Chile, the Ukraine and Egypt. Over the last 10 years, government debt in Russia has fallen from 70% of GDP to just 9% of GDP.

Figure 22Government debt as a percentage of GDP

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Russia(left-hand side)

US(right-hand side)

Chile(left-hand side)

UK(right-hand side) Columbia

(left-hand side)




A review of the 25 RGMs one year on (continued) Box 2

Improving stability and macro-management

The Ernst & Young M&A Maturity Index 2012 (www.ey.com/transactions) assesses the maturity of 148 countries. It applies 23 factors from the following fi ve categories: regulatory and political, economic and fi nancial, technological, socioeconomic, and infrastructure and assets. It uses these factors to derive an overall M&A maturity score.

Many of the RGMs have made fi rm progress in macroeconomic management and political stability in recent years. Indeed, two RGMs — Korea and mainland China — made it into the top 10 of the index. Three more, Thailand, Malaysia and the UAE, are in the top 20. Egypt fell by eight places in the M&A rankings in 2012, but Malaysia and Brazil both gained two places in the rankings.

But several countries are at risk of removal from our list of RGMs ...

In addition to lower long-term trend growth, Poland and the Czech Republic enjoy less fi scal scope to stimulate than do Asia and Latin America. They will also age quicker. But in Poland, per capita income is expected to quadruple over the next 25 years and more than two-thirds of pupils now stay in education past the age of 18. Poland is expected to grow by 2.5% this year, one of few countries in Europe expected to achieve positive growth, due largely to strong domestic demand.

While the Czech Republic, whose economy is heavily dependent on exports to the Eurozone, might seem at risk, it has a number of factors still in its favor. In 25 years’ time, the Czech Republic will be where the US and Japan are now, and the economy already enjoys an M&A maturity score in line with the global average. The Czech Republic should be able to harness this maturity to attract investment and to diversify in coming years.

Across Latin America, Argentina is forecast to enjoy the slowest growth, the fastest aging and the slowest increase in per capita income. It has a lower M&A score than Brazil, Mexico, Chile and Colombia, and its ranking fell in 2012, so it is a country we must keep our eye on.

Egypt dropped down eight places in the M&A rankings in 2012, as its score for regulatory and political factors fell because of the ongoing political turmoil. To illustrate how this feeds through to our growth forecasts, our forecast for GDP growth per annum over the next 10 years has fallen from 5% before the Arab Spring to less than 4% now.

... while others are knocking on the door

On the basis of their projected growth rate, population size, demographic trends and wage competitiveness, Bangladesh and Pakistan appear to have what it takes to be RGMs. However, both have M&A maturity scores of less than 50, raising signifi cant concerns. The only RGMs with an M&A maturity score of less than 50 are Ghana and Nigeria, but both of these countries have a higher score for regulatory and political factors than Bangladesh and Pakistan.

The Philippines is forecast to grow by an average of 5% p.a. over the next 25 years and enjoys a large, young population. Its M&A maturity score is some way behind those of India and Indonesia, though. And, while in India and Indonesia the number of households earning more than US$30,000 will rise by at least eight times over the next 10 years, in the Philippines the gain over the next 10 years will be just 2.5 times. Nonetheless, the Philippines is defi nitely a country we should continue to monitor closely.


Persistently high infl ation means that, unlike China, India does not have scope to ease policy to counter slowing growth …

As expected, Indian annual GDP growth was weak in Q2 at 5.5%. In contrast to the GDP data, the manufacturing PMI held up well in Q2, averaging 54.9 (over 50 indicates expansion), although it has since fallen back to 52.8 in August. To make matters worse, power shortages are constraining production and causing a backlog of orders. A lack of external demand is also a problem, and the authorities have little room to stimulate domestic spending by cutting interest rates as infl ation remains high. Recent rises in global food prices, together with a poor monsoon, offer no short-term relief. We therefore expect relatively subdued growth (by India’s standards) of around 5.6% this year, rising to 6.6% in 2013 and above 7% in 2014 and 2015.

… and an inability to attract investment in infrastructure is preventing it from fulfi lling its longer-term growth potential

India is ranked 87th in the world by the World Economic Forum for its infrastructure, a constraint which limits India's longer-term growth prospects.

Over 80% of India’s electricity is thermal, much of it produced from burning coal, but despite having the fi fth-largest coal reserves in the world, India still imports coal. This imposes signifi cant costs on power generators, because imported coal costs roughly fi ve times more than domestic coal. The state monopoly supplier, Coal India, has been unable to increase output to match demand, and an inadequate transport and grid network hampers supply.

In the power sector, there has been a history of underinvestment, undershooting capacity targets, poor market structure and ineffective regulation. As a result, India cannot produce enough electricity to meet demand. Approximately 27% of electricity disappears through theft or transmission losses, according to the Central Electricity Authority, so some of the bank lending to power suppliers funds losses rather than new investments. Meanwhile, an expanding middle class means that electricity demand has been skyrocketing in recent years.

According to the Planning Commission’s 12th Five Year Plan, India aims to increase capacity by 88,425 megawatts by 2017. This is about 44% higher than current capacity and requires an average growth rate of nearly 7.5% p.a. About half of the additional capacity would come from private investment. But a note of caution comes from the evidence that the Government has missed every electricity expansion target it has set since 1951. And, despite these shortages, the Government continues to subsidize energy prices for consumers. Among the RGMs, India has one of the largest government budget defi cits, at 6.8% of GDP last year, and cannot afford to invest enough in structural improvements while it is paying these subsidies.

Attracting the private sector investment necessary to improve India’s infrastructure will require a less bureaucratic environment in which to do business. There are a number of political obstacles that prevent the changes needed to encourage suffi cient private sector spending on infrastructure. Unfortunately, the current coalition government, which is due to remain in power until 2014, seems to lack the will needed to overcome these obstacles. Until the Government addresses India’s fundamental structural problems, actual growth will not match potential.

Encouragingly, the Government has recently announced plans to open up the retail sector to foreign-owned supermarkets. The Indian retail sector needs to attract sizable investment and to encourage foreign participation in order to remove the current supply-chain bottlenecks.

In Latin America, Mexico is weathering the storm …

In Latin America, this year’s gulf between the relative economic performances of Mexico and Brazil may now be closing. Mexico is still weathering the economic storm. The manufacturing PMI is strong, standing at over 55 in August. Taken together with high levels of new orders, driven largely by the car industry, this indicates that the economy is still able to extract growth from the US. The combination of solid demand from the US for Mexican exports and fairly healthy consumer-spending trends has shielded the economy from the wider manufacturing slowdown and helped to keep unemployment in check. Nevertheless, our GDP forecast for 2013 has only come down from 5.0% in January to 3.5% now, and the risks are on the upside if exports to the US continue to expand.



… Brazil may at last be turning a corner …

Of the RGMs, Brazil is perhaps the country that has suffered most over the course of the year. Despite cutting interest rates from 11% in December 2011 to just 7.5% now, and implementing substantial fi scal stimulus, domestic activity remains very weak, particularly in the industrial sector. Industrial output has fallen on the quarter for the last fi ve quarters to Q2 2012 and further stimulus seems likely. Since the start of the year, our 2012 growth forecast for Brazil has been reduced from 3.1% to 1.4%.

Figure 23Latin America: manufacturing Purchasing Managers' Index (PMIs )

35

40

45

50

55

2005 2006 2007 2008 2009 2010 2011

Mexico

Brazil

Index


But, as the chart above shows, the Brazilian economy is at last showing some signs of recovery. Having recorded the largest monthly gain in 15 months in June, the Economic Activity Index rose again in July and the August PMI picked up to 49.3 from 48.7. Seasonally adjusted industrial production was also up on the month in July, by 0.3%. A further modest boost to growth should come from a new transport infrastructure investment program worth up to US$66b over the next 25 years.

Of the US$66b, 68% will be invested in the construction of 12 railways spanning 10km, and the remaining 32% in the construction or expansion of 9 roads spanning 7,500km. More than half of the investment is to take place within 5 years, the remainder over the following 20 years. The President also said that the Government would soon announce more investment aimed at airports, ports and transportation on waterways, as well as other areas in which serious defi ciencies have been noted.

Although they come too late to have much impact this year, we expect these policies to support activity further ahead: growth should rise to 4.5% in 2013 and 5.0% in 2014. But, unless the pickup is carefully managed, infl ation could become a risk, and there have been some early signs that it may be ticking up. This could be exacerbated by any further fall in the exchange rate, which has remained relatively stable since June.

Figure 24Brazil: ranking of GDP and infrastructure quality

6

100107

123

134 135

0

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120

140GDP Railways Overall

infrastructureRoads Air transport Ports

Rank out of 144 countries

Source: World Economics Forum; Oxford Economics.


… and hosting the World Cup and the Olympics should boost the medium-term outlook

Brazil is due to host the World Cup in 2014 and the Summer Olympic Games in 2016. But the World Economic Forum ranks Brazil 107 out of 142 countries for its infrastructure, raising many concerns internationally about how successfully Brazil will be able to manage the infl ux of people. From 2011 to 2014, the Government is expected to spend US$80b p.a. (around 1% of GDP) as part of its ”Growth Acceleration Program,” and the Operations Director for the World Cup’s local organizing committee estimates that US$11b is being invested in infrastructure projects specially for the tournament. The authorities are planning to spend a total US$14b of public funds on the World Cup, and a further US$11.5b on the Olympics. The authorities in Rio de Janeiro are building four dedicated bus lanes, and a new underground line. The new bus lanes will cover a total of 150km across the city and will be inaccessible to cars, cutting journey times by at least 50%.

But concerns remain about poor infrastructure in other parts of the country, and a report by the government-backed Institute for Applied Economic Research said earlier this year that of the 13 airport terminals being upgraded, 10 are unlikely to be completed by June 2014. There are a number of obstacles that discourage private investment in Brazil. Long-term fi nancing in reals is very expensive and, although the Brazil National Development Bank offers loans at more affordable rates, this has the effect of crowding out other lenders. Acquiring environmental licenses in order to begin large projects is another obstacle. The process for obtaining these licenses is very drawn-out and this often causes delays to projects.

The economy is expected to grow by 4.0% p.a. from 2012 to 2016, and fi xed investment is expected to grow by 6.1% p.a. over the same period. If the structural reforms were to happen sooner than we expect, this would be likely to boost GDP growth in the medium to long term.

Argentina is in choppier waters after an expansionary decade

After a decade of relative stability and strong growth, Argentina’s home-grown economic model of state nationalism and social priorities may be starting to unravel. Growth slowed to 5.2% in H1 this year from 8.9% in 2011, with indicators suggesting the deceleration will continue. Currency controls to reduce capital fl ight from the country, together with import restrictions to halt a declining trade balance, have hit Argentina’s car industry, which was already suffering from falling Brazilian demand. Drought and an overvalued currency have added to the diffi culties, and recent political moves indicate a shift toward more state control. As a result, we expect growth of just 1.4% in 2012 and 3.1% in 2013.

Moreover, slower growth may be revealing some of the problems inherent in Argentina’s interventionist economic model, and political diffi culties are mounting too. In contrast to the rapid growth since the 2001 debt crisis, we expect growth over the next fi ve years to average only 3.6%.

Investment in mining should lead a strong recovery in Colombia

Colombia is a signifi cant producer of oil and coal, and high world energy prices and rising investment in the sector have helped drive robust growth in recent years. After rising 4.0% in 2010, GDP grew even faster in 2011, by 5.9% (and 6.1% in Q4 2011), led by mining and strong domestic demand and credit. Our 2012 GDP forecast is little changed at 4.4% from 4.5% three months ago, as we expect higher government spending to offset lower global demand. We expect growth to pick up to 4.5% in 2013, and to remain at around 4% in the medium term.

The three mountain chains that cut through the most densely populated areas of Colombia raise the cost of infrastructure. Partly as a result of this, infrastructure needs have been neglected over the past 20 years. Indeed, last year a leading politician in Colombia told the National Infrastructure Agency (ANI) that “guerrillas start when roads end,” highlighting the importance of good infrastructure in fostering development. But in recent years, FDI into Colombia has grown rapidly, totaling US$13.2b last year, up from just US$2b 10 years ago, and the country has gained investment grade credit ratings. With peace talks planned with rebels from the Revolutionary Armed Forces of Colombia (FARC), the energy and mining sector is attracting more attention from investors.



Figure 25Colombia: inward Foreign Direct Investment

0

2

4

6

8

10

12

14

1995 1997 1999 2001 2003 2005 2007 2009 2011

US$b


In September, the Government announced plans to auction off US$20b worth of road infrastructure, enabling 8,000km of roads to be built and travel times to be reduced by 30%–50%, mostly through public private partnerships with 20-year contracts. Concessions would include turning a section of the route from the capital, Bogota, to the Pacifi c port of Buenaventura into a four-lane road to boost trade with Asia. The head of the ANI has also proposed issuing up to US$22.7b in 25-year investment-grade bonds from mid-2013 to improve transport infrastructure further.

Some signs that Russia is no longer defying world momentum

Russia had at one time appeared to be defying world momentum, with growth driven largely by consumer spending and underpinned by a strong labor market. But the GDP estimate for Q2 indicated that growth had slowed to 4%, somewhat below our forecast. Although, on the face of it, this fi gure appears inconsistent with monthly indicators of activity, we have incorporated it into our forecast and now expect GDP growth of 3.4% in both 2012 and 2013. There are signs of weakness in the more externally exposed manufacturing sector, and we expect industrial activity to remain subdued in the near term. The main risk is of

sovereign default in parts of the Eurozone, which would trigger a sharp fall in oil prices, capital fl ight to safe havens and a steep contraction in external demand. Russia is particularly vulnerable to capital outfl ows, which have persisted since 2008.

Emerging European countries vulnerable to further Eurozone worries

Despite the increased stability exhibited by their currencies and stock markets since the ECB announced its intention to carry out more bond purchases, the emerging European countries remain vulnerable to changing market sentiment. However, most have the scope to cut interest rates, should another bout of the Eurozone debt crisis cast an extended shadow over their growth prospects. Aggressive reductions are unlikely, though, as global food prices are high and the authorities want currency stability. GDP in both Hungary and the Czech Republic is expected to contract this year, while Poland, Turkey and the Baltic states should achieve modest growth.

Figure 26Central and Eastern Europe: GDP

% increase per year

-12

-9

-6

-3

0

3

6

9

12

15

1998 2000 2002 2004 2006 2008 2010 2012

Poland

Russia

CzechRepublic



The weakness shown by the global economy in recent months has now spread to the Middle East and North Africa

Most of the Middle East and North Africa is now experiencing slower growth, albeit for a variety of reasons. The Arab uprisings are yet to succeed fully in delivering political change. They have also failed to result in visible macroeconomic improvements in Egypt, Morocco or Tunisia. Governmental scope for policy maneuver has narrowed, and FDI infl ows have been discouraged by both the political uncertainty and the global slowdown.

Figure 27Middle East and Gulf Cooperation Council (GCC)

% increase per year

-3

0

3

6

9

12

15

1990 1993 1996 1999 2002 2005 2008 2011 2014

Middle East

GCCForecast

Middle EastexcludingLibya


Political instability and geopolitical risk are also harming growth prospects in Syria, Lebanon, Yemen, Bahrain and Iran. A comparatively stable oil price has held back growth. Though prices have rallied recently, we expect the oil price to average around US$111pb in 2012, a drop of about 0.5% on 2011. Furthermore, movements in oil production have fl attened, with some countries experiencing small declines in recent months.

Gulf countries are becoming more cautious about government spending, as non-oil defi cits rise and the breakeven oil price increases. Recent food price rises have added to their concerns: because the increases are a result of supply problems, they are more likely to erode consumer purchasing power and to slow growth than to raise infl ationary expectations. Indeed, we do not expect countries to tighten monetary policy in response. Furthermore, a dramatic rise in food prices could induce further civil unrest throughout the region, particularly in North Africa.

Conclusion

The international backdrop has deteriorated since the start of the year, impacting on the outlook for the RGMs. We have revised world growth down in late 2012 and H1 2013 by around 1pp. These downward revisions refl ect a disappointing performance in the major advanced economies, which are now expected to grow by about a third less than had been anticipated at the start of the year.

The slowdown in RGMs is not dramatically worse than anticipated, because they are being partially shielded from the worsening global outlook by resilient domestic economies. Domestic demand has been boosted in the RGMs by fi scal stimulus and by the early setting of appropriate monetary policy and credit conditions. In the case of China, Brazil, Indonesia, Thailand and Malaysia, infrastructure spending is also expected to support the domestic economy, helping to offset the weak external environment. Consequently, while our 2013 growth forecast for the advanced economies has fallen by about a third since the start of the year, to 1.5%, our forecast for RGM growth is down by just a sixth in the same period. We now expect the RGMs to grow by 4.5% this year and by 5.5% in 2013.



Figure 28Indonesia: investment and debt as a percentage of GDP

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30

35

0

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20

30

40

50

60

70

80

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1990 1994 1998 2002 2006 2010

% of GDP

Government debt(left-hand side)

Investment(right-hand side)


In the 2009 parliamentary elections, the incumbent party won 25% of seats in Parliament, as opposed to 7.5% in 2004. This has facilitated a greater push toward reform in recent years.

The authorities are targeting average growth of 7% p.a. by 2014, and are gradually implementing reforms to ease the cost of doing business and to build infrastructure. In December 2011, the House of Representatives passed a compulsory land acquisition law, which will provide greater certainty for land acquisitions for public use. Indonesia’s logistics costs are about 14% of production costs, higher than Japan’s (around 5%). In March, the Government issued a blueprint for the development of a national logistics system.

Two of the three major ratings agencies, Moody’s and Fitch, upgraded the country to investment grade status earlier this year. This should boost investment sentiment and facilitate an increase in long-term fi nancing. Indonesian bonds can now be included in a wider range of funds, an important boost given the continuing repercussions of the

Indonesia, Turkey and Vietnam have strong long-term growth prospects

Box 3

When we compare the various RGMs according to our criteria, Indonesia, Turkey and Vietnam stand out as high-potential economies alongside China and India. All fi ve countries are expected to grow by at least 5% p.a. over the next 25 years. All have favorable demographic trends and rising household incomes. And all are expected to contribute a much greater share of global GDP over the next 25 years. In this section, we will look at Indonesia, Turkey and Vietnam in more detail.

Indonesia

In 25 years’ time, Indonesia will not just have the fourth-largest population in the world — it will also be the ninth-largest economy. Despite the uncertain global background, we expect Indonesia’s strong domestic fundamentals to support GDP growth of 5.9% this year, ahead of India and down only slightly from last year’s 6.5%.

Many of the emerging Asian economies are export-led, and exports account for less than a third of GDP in just three countries: China, India and Indonesia. And the demographic trends are very favorable: 25 years out, Indonesia will still have at least fi ve workers for every person over 65. In 1990, under half of secondary-age children went to school and now 80% do so. By 2020, Indonesia will have more households earning over US$30,000 than China does today.

Indonesia has made fi rm progress in macroeconomic management and political stability in recent years. As the chart below shows, government debt has fallen sharply to 25% of GDP in 2011. And, within 10 years of the Asian crisis, the share of investment in GDP in Indonesia had returned to pre-crisis levels. The quality of port infrastructure was rated at 3.6 out of 7 last year by the World Bank. While this is lower than the ratings for China (4.5) or Korea (5.5), it has risen from 2.6 in 2007, a bigger improvement than that of Korea or China.


Eurozone debt crisis. The authorities are particularly keen to encourage foreign investors to invest in longer-term assets, protecting Indonesia’s fi nancial markets from global turmoil.

Standard & Poor’s are holding back from upgrading Indonesia’s rating. This is due in part to the authorities’ last-minute backtracking over their decision to cut fuel subsidies, which slightly damaged their credibility. It also casts doubt on the speed at which the much-needed reforms will be implemented.

Turkey

Turkey is one of only two countries among the RGMs whose GDP growth forecast for this year has not been downgraded from a year ago. It is the 18th-largest country in the world, in terms of both population and GDP. Although we expect quite subdued growth this year, as the authorities try to curb infl ation and rein in the external defi cits, over the next 25 years we expect GDP growth of 5% p.a.

Over the past decade, macroeconomic policy has been much more stable, with the Government focusing on reducing both infl ation and the budget defi cit. Huge improvements have been made to bring infl ation under control and we have seen single-digit infl ation for the past three years, down from rates of more than 25% in the years to 2003. There is still more work to be done, however, to ensure infl ation comes down to the 5.5% target and stays there. Lower infl ation has facilitated a large increase in bank lending over the last 10 years, boosting domestic demand. And the Government has made good progress in reducing the budget defi cit, down to just 1.4% of GDP in 2011.

Figure 29Turkey: infl ation and budget defi cit

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60

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80

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1996 1998 2000 2002 2004 2006 2008 2010

% annual growth

In ation(left-hand side)

Budget de cit as a % of GDP(right-hand side)

% of GDP


Turkey has a massive domestic market, and in 10 years’ time there will be over 11 million households earning more than US$30,000, the same number as Canada has now. And the demographic trend is very favorable. In 25 years’ time there will still be fi ve workers for every elderly person in Turkey, while in Japan and Germany there will be less than two. The population is well-educated, with almost half of school-leavers going on to education beyond the age of 18, up from just 12% in 1990.

Turkey is also well-placed externally. Indeed, in 2011, almost half of Turkey’s exports went to the EU and just over half went to the Middle East, North Africa and Asia. There has been a notable increase in trade with the Middle East, North Africa and Central Asia over the last decade. This refl ects the superb geographic position Turkey enjoys, which allows the economy to trade easily with both Europe and Asia, sharing a sizable part of the working day with each.



Indonesia, Turkey and Vietnam have strong long-term growth prospects (continued)

Box 3

Throughout most of the second half of the 20th century, Turkey adopted a broadly pro-Western foreign policy, even having quite close links to Israel. However, in recent years its positioning has changed, adopting a more neutral stance with respect to the US and dropping its links with Israel. These moves, together with the strong performance of the Turkish economy, have spurred improving links with the Middle East. Accession talks and integration with the EU continue, while Turkey has also maintained its presence in NATO.

Last year, Turkey had the largest current account defi cit as a percentage of GDP of all the RGMs, but its strong global links should ensure that external fi nancing remains plentiful. Excluding 2009, goods imports have risen by at least 20% p.a. in every year since 2002. The defi cit does leave the economy vulnerable to movements in global fi nancial fl ows, but it is easily fi nanced at the moment.

Vietnam

Vietnam is expected to grow by almost 6% p.a. over the next 25 years, making it the third-fastest growing country among the RGMs. The authorities are targeting growth of more than 6% next year. Vietnam is the 13th most populous country in the world, and its population is young and increasingly well-educated. The number of children educated to secondary level is almost 80%, having more than doubled in the last 20 years. Per capita income is expected to grow by more than six times over the next 25 years, while the number of households earning over US$30,000 will rise from less than 6,000 last year to more than 60,000 in 10 years’ time.

Manufacturing wages are estimated at almost half those of China and Thailand, encouraging some manufacturers to move operations to Vietnam to diversify production and take advantage of lower costs. This has enabled Vietnam to attract more than US$6.5b in FDI in each of the last fi ve years. Since signing a bilateral trade agreement with the US in 2000, and joining the WTO in 2007, Vietnam has become the second-largest supplier of clothing and footwear to the US behind China.

Within the last few years, mobile phones and related accessories have become the second-largest export item from Vietnam (after garments), according to the World Bank, accounting for 10.5% of total exports. By 2013, the World Bank expects this category to have overtaken garments as Vietnam’s largest source of export revenue. Being able to attract and retain foreign fi rms in high-value manufacturing products such as electronics, computers and phones is a big plus point for Vietnam, as some of its neighbors have found it harder to move up the value chain.

Figure 30Vietnam: exports of telecoms excluding TVs

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1997 1999 2001 2003 2005 2007 2009

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The authorities adopted a stabilization package in February 2011, in response to the increasing pressures on infl ation and the currency that took place in late 2010, and they tightened macroeconomic policies signifi cantly last year. These policies were very successful. Infl ation slowed from 23% August 2011 to 6.5% in September while the currency has also been more stable. This is refl ected in the World Economic Forum’s Global Competitiveness Report 2011–2012, which shows that Vietnam moved up 20 places for its macroeconomic environment. In June, Standard and Poor’s upgraded Vietnam’s outlook from negative to stable, but the agency stressed that price stability must continue to be prioritized. The Central Bank has already cut interest rates fi ve times this year to support activity, but it must be careful not to loosen policy too much.

Vietnam has also been very successful in recent years in improving its trade and current account balances, and the current account moved into surplus in 2011 from a defi cit of 12% of GDP in 2008. Stronger revenue growth and spending cuts meant the fi scal defi cit shrank last year. The World Bank expects that progress on reducing the fi scal defi cit will be slower this year, as the state is expected to incur more costs toward bank and enterprise restructuring, but the IMF will be happy that the macroeconomic reforms are continuing.



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

% increase per year

Industrial production

GDP

Forecast

Figure 31GDP and industrial production

Source: Oxford Economics. Source: Commodity Research Bureau; Haver Analytics.

-8

-4

0

4

8

12

16

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24

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

% increase per year

Consumerprices

Manufacturingproducer prices

Food prices

Figure 32World: commodity prices

Table 1Argentina

2011 2012 2013 2014 2015 2016

Real GDP growth (% per year) 8.9 1.4 3.1 4.7 4.2 3.9

CPI infl ation (% per year) 9.8 10.0 9.7 7.7 5.7 4.3

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

External debt total (% of GDP) 30.3 30.4 29.4 27.0 25.3 24.1

Short-term interest rate (%) 10.7 11.8 12.9 11.2 9.0 8.4

Exchange rate per US$ (year average) 4.1 4.5 4.9 5.1 5.3 5.4

Government balance (% of GDP) -1.6 -1.6 -1.5 -1.2 -0.9 -0.7

Population (millions) 40.8 41.2 41.5 41.9 42.2 42.6

Nominal GDP (US$b) 447.8 462.2 479.4 521.7 556.3 584.1

GDP per capita (US$ current prices) 10,972.4 11,228.1 11,545.5 12,458.1 13,175.8 13,723.1

GDP growth slows to 1.4% in 2012

The economy slowed sharply in Q2 as a result of sluggish world growth, waning Brazilian demand for manufactured goods, and distortions created by trade and currency controls. The seasonally adjusted economic activity indicator (EAI) fell to 0.9% on the year in Q2 from 4.5% in Q1, and Q2 industrial production was 3.3% down on a year earlier, with lower car production acting as the most signifi cant drag.

Tough currency controls have been introduced to contain the fl ight of capital out of the country. Stricter controls on imported goods and foreign currency purchases have also bolstered the trade surplus in recent months. Exports in Q2 were down 7.8% on a year earlier, while imports fell 10.2% over the same period.

According to offi cial data, consumer price infl ation remained just under 10% in August. We expect the offi cial infl ation rate to average 10% this year, although unoffi cial estimates put the “true” rate closer to 25%.

We have reduced our 2012 GDP growth forecast to 1.4%, from 3.3% in the Rapid-Growth Markets Forecast — Summer edition — July 2012, with the factors dampening activity in Q2 expected to persist into the second half of the year. We still expect growth to pick up to 3.1% next year, however, and to average 4% in the medium term.



Brazil

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8

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% increase per year

GDP

Net exports

Domesticdemand

Forecast

Figure 33Contributions to GDP growth

Source: Oxford Economics. Source: Oxford Economics.

-5

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10

15

20

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30

35

40

45

1996 1999 2002 2005 2008 2011 2014

% increase per year

Consumerprices

Producer prices

Forecast

Figure 34Prices and earnings

Table 2Brazil

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) -2.1 -2.3 -2.2 -2.2 -2.3 -2.3






Nominal GDP (US$b) 2,476.4 2,314.8 2,628.3 2,700.5 2,729.9 2,812.9


Signs of recovery on the horizon

Latest National Accounts data reveals that activity in the Brazilian economy continued to slow in the second quarter of 2012, with GDP growth slowing to just 0.5% compared with a year earlier. But the effects of earlier monetary and fi scal stimulus now appear to be having an impact. More recent data, such as the monthly economic activity indicator and retail sales, suggests that the Brazilian slowdown has reached a trough. Activity should therefore begin to regain momentum in the second half of 2012, ensuring GDP growth recovers to 4.5% in 2013 and 5.0% in 2014.

As expected, the Central Bank cut rates to a record-low 7.5% at its August meeting and we expect one more cut of 25 basis points in

October. This will bring rates to 7.25%, which we think will represent the fl oor for rates in the current cycle.

The President recently announced a new infrastructure investment program worth US$66b and has indicated that a port and waterway package is forthcoming. Private concessions will be granted to build new roads and railways, funded by state-subsidized loans. A number of doubts about the program remain, including how many of the projects are actually new and whether excessive bureaucracy will act as an impediment, as it has done in the past. Nevertheless, the program marks a clear and welcome shift toward long-term investment that should help to ease infrastructure bottlenecks.



Chile

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8001995 1997 1999 2001 2003 2005 2007 2009 2011

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2

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6

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10

12

14

16%Peso/US$

Nominalinterbank rate(right-hand side)

Peso/US$(left-hand side)

Figure 35Exchange and interest rates

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

2008 = 100 (IMACEC, seasonally adjusted)

70

80

90

100

110

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 36Monthly indicator of economic activity

Table 3Chile

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) -1.3 -3.1 -0.8 1.1 1.8 2.0




Government balance (% of GDP) 1.5 1.1 0.6 0.2 0.0 0.0


Nominal GDP (US$b) 248.7 259.7 274.4 295.0 316.8 339.0


Domestic activity holding up well

Latest national accounts data reveal the economy expanded by 1.7% in Q2 2012, underpinned by resilient domestic demand. Some of this demand leaked into imports, however, which were up a robust 5.7%.

The IMACEC indicator of economic activity rose 0.4% on the month in July, suggesting continuing expansion. Although we expect the pace of growth to slow in H2, we have raised our forecast for the year to 5.2% to take into account the strong fi rst half. We expect growth in 2013 to pick up slightly from H2 this year, resulting in an expansion of 4.5%.

As the global economy begins to gather speed in 2013, we expect employment in Chile to rise, with infl ation picking up a little as consumer spending increases. The Central Bank is likely to tighten monetary policy from Q3 2013, raising rates to 6% from 2014 onward. Infl ation is expected to remain within the Central Bank’s target range, averaging 2.6% in 2013.

The policy interest rate has been held at 5% so far this year, and we expect this to continue into early 2013. However, there is a risk that continued import growth, together with a strong currency, could result in rising infl ation. This, combined with buoyant domestic demand, would result in tighter monetary policy sooner rather than later.



Mainland China and Hong Kong special administrative region

(SAR)

-8

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24

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

% increase per year

Consumerprices

Manufacturingproducer prices

Food prices

Figure 37Mainland 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 Sengindex

Figure 38Hong Kong: stock market

Table 4 Mainland China

2011 2012 2013 2014 2015 2016

Real GDP growth (%year) 9.3 7.2 8.1 9.1 8.7 8.1


Current account balance (% of GDP) 2.7 2.6 2.7 2.5 2.1 1.9




Government balance (% of GDP) 0.1 -1.5 -1.8 -1.3 -1.4 -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) 7,332.4 8,071.0 9,141.5 10,579.6 12,049.2 13,645.8


Supportive policy likely to boost subdued activity

The Chinese economy is weakening further in Q3 as the impact of the ongoing crisis in the Eurozone is compounded by a synchronized slowdown in global manufacturing. Export growth (in US$ terms) was just 1% in July and 2.7% in August as exports to the EU dropped sharply. Exports to the EU (including those from Hong Kong) account for around 20% of Chinese exports, equal to over 5% of GDP, so the crisis in Europe is acting as a signifi cant drag on activity.

In addition, the aftereffects on the domestic economy of pricking the property bubble continue to be felt, but policy has not yet been successful in stabilizing growth.

As a consequence, we have lowered our forecast of Mainland China’s GDP growth to 7.2% this year. However, the shape of the cycle has not changed — it has just been pushed back a quarter — and we continue to expect that the authorities will manage to ensure a soft landing. We expect a strong recovery, with growth of around 8% and 9% in 2013 and 2014 respectively.

There are signs that infrastructure projects are being stepped up to support growth, including affordable housing, 25 urban rail lines, 13 highways, seven waterways and nine waste-water treatment plants. The central government has also announced investments in energy conservation and emission-reduction measures.



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

Westernhemisphere

Colombia

Figure 40Infl ation

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

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

% increase per year

Colombia

Latin Americaand Caribbean

Forecast

-6

-4

-2

0

2

4

6

8

Figure 39Real GDP growth

Table 5 Colombia

2011 2012 2013 2014 2015 2016






Exchange rate per US$ (year average) 1,848.1 1,830.0 1,950.2 2,052.8 2,159.6 2,245.0



Nominal GDP (US$b) 333.2 362.9 368.3 377.7 386.1 399.0


Commodities prices affect growth

Colombia’s economy is slowing, with GDP growth falling to 4.7% in Q1 from 5.9% in 2011. Since then, industrial output growth has slunk into negative territory, down 0.1% on the year in Q2. Retail sales volumes have also slowed, up just 0.7% on the year in Q2 after an increase of 6.1% in Q1.

Exports were up only 2% on the year in Q2 as coal and oil prices eased, but imports rose more than 9%. This resulted in a small trade defi cit, and we expect the current account defi cit to rise to 4.1% of GDP this year and 3.9% in 2013 before easing back in 2014 as oil prices rise again.

Infl ation was 3.1% in August, the midpoint in the central bank’s 2% to 4% target range. This gave the authorities room to cut the key policy interest rate by 25 basis points to 5% last month, in a bid to stimulate demand. There may be scope for further rate cuts in the next few months, if infl ation does not pick up much further.

Our 2012 GDP forecast of 4.4% is little changed from 4.5% in the Rapid-Growth Markets Forecast — Summer edition — July 2012. Higher government spending will offset weaker global demand this year. We expect growth to pick up again in 2013, to 4.5%, and to remain at around 4% in the medium term, led by mining.



Czech Republic

-20

-15

-10

-5

0

5

10

15

20

25

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% increase per year

Consumption

Investment

Forecast

Figure 41Consumption and investment


1

2

3

4

5

6

7

8

9

10

11

1996 1999 2002 2005 2008 2011 2014

%

Forecast

Figure 42Unemployment

Table 6Czech Republic

2011 2012 2013 2014 2015 2016

Real GDP growth (% per year) 1.7 -1.1 0.8 2.4 2.5 2.7








Nominal GDP (US$b) 215.4 193.9 189.7 185.8 185.9 196.3

GDP per capita (US$ current prices) 20,435.7 18,386.4 17,980.3 17,597.0 17,607.7 18589.4

A milder recession, but medium-term growth revised down

Czech GDP dropped by 0.2% on the quarter in Q2 2012, following a 0.8% contraction in Q1. Although the decline of GDP in Q2 was less pronounced than we envisaged, the domestic economic conditions have deteriorated in the last few months. In particular, consumer spending fell by 3.3% on the year in Q2, having fallen by 2.4% in Q1, while investment growth was very subdued.

Net-export contribution to GDP growth declined to 2.5 percentage points (pps) in Q2, from 3.6pps in Q2. Moreover, the external outlook remains characterized by extreme uncertainty, and foreign demand growth is likely to remain subdued in the short term. As a result, we

expect economic activity to continue to shrink in H2 2012 and forecast GDP will fall 1.1% in 2012 as a whole (up from -1.4% in the Rapid-Growth Markets Forecast — Summer edition — July 2012) reaching a trough in Q3 2012. In 2013, growth is expected to return into positive territory but to stay below 1%, supported by a rebound of domestic demand.

Growth in the Eurozone is expected to remain weak in the medium term as a result of signifi cant de-leveraging by both the private and public sectors. Weak external demand will weigh on Czech exports and we forecast GDP growth will average 2.5% in 2014–16, down from a previous forecast of 3.3% — and well below the pre-crisis average of 4.5% in 2000–08.



Egypt

0

1

2

3

4

5

6

7

8

1991 1994 1997 2000 2003 2006 2009 2012 2015

% increase per year

EgyptForecast

Middle East andNorth Africa


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

-18

-15

-12

-9

-6

-3

0

-28

-24

-20

-16

-12

-8

-4

0

1991 1994 1997 2000 2003 2006 2009 2012 2015

US$b(left-hand side)

% of GDP(right-hand side)

US$b % of GDP

Forecast

Figure 44Government budget balance

Table 7 Egypt

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 231.2 246.7 254.2 274.0 298.4 323.2


Political situation beginning to stabilize but growth remains weak

Progress toward civilian and democratic rule appears to have been made during August, with the newly-elected President reorganizing his staff. Going forward, the President will need to continue to show he is committed to both constitutional government and respecting human rights.

Hopes are rising of an imminent IMF deal, which would boost policy credibility and raise capital infl ows and foreign reserves, the latter down to just US$15.1b in August.

But there remains a serious threat of a balance of payments crisis. The current account recorded a defi cit of US$2.3b in Q1 this year, probably the largest ever and up 11.5% from a year ago. And while unchanged oil prices may dampen import growth, we still expect the current account defi cit to widen to US$7.5b in 2012 from US$6.5b in 2011.

The economy remains very weak, with activity likely to have fallen in the last two quarters. After rising by around 1.8% in 2011–12, we expect similarly poor growth of 1.9% in 2012–13, as the economy is hit by continuing political uncertainty, the Eurozone crisis and less favorable base effects. But in the longer term, once the situation is more stable, growth will exceed 5%.



Ghana

0

10

20

30

40

50

60

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Africa

Ghana

Forecast

Figure 45Infl ation

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

-2

0

2

4

6

8

10

12

14

16

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Ghana

Forecast

Sub-SaharanAfrica


Table 8 Ghana

2011 2012 2013 2014 2015 2016





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




Nominal GDP (US$b) 39.2 38.9 42.1 46.0 50.4 54.7


Medium-term prospects boosted by oil despite infl ation fears

The start of oil production lifted GDP growth to just over 14% in 2011, almost double the pace of 2010. The year-on-year growth rate peaked at over 20% in Q2 last year, but has slowed since then to 8.7% in Q1 2012. Growth will remain quite robust this year as oil output rises gradually; our forecast remains at just over 8% for the full year, before slowing to about 7% in 2013. While Ghana will only be a small oil producer, its production has boosted medium-term growth prospects — we expect the economy to grow by some 5% p.a. over the medium term. Oil revenues are expected to bolster the public fi nances and the balance of payments, despite higher government spending.

In spite of rising domestic fuel prices, infl ation was 8.7% in 2011, the fi rst single-digit full-year result in 40 years. But heavy state spending and further rises in fuel prices have pushed infl ation higher again, to 9.5% in August 2012, and the key interest rate was raised by 250 basis points in H1 this year, to 15%.

Exports climbed 60% last year on the back of oil exports and high commodity prices. However, a 46% jump in imports and rising net outfl ows of services and income meant that the current account defi cit widened sharply to US$3.7b in 2011, equal to 9.4% of GDP. But despite high import growth, the defi cit is forecast to start to fall in the next few years as oil revenues build.



India

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011 2012

50 = expansion/contraction breakeven point

Figure 47HSBC 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

%

Repo rate

Wholesale price index non-food

Figure 48Interest rate and wholesale price index infl ation

Table 9India

2011 2012 2013 2014 2015 2016


WPI infl ation (%) 9.5 7.6 5.8 4.4 4.3 4.1






Population (millions) 1,232.8 1,249.0 1,265.0 1,280.7 1,296.1 1,311.3

Nominal GDP (US$b) 1,840.5 1,854.2 2,157.2 2,424.9 2,712.7 3,023.1


Growth moderates but no room to cut interest rates

GDP growth remained subdued in Q2, with the economy expanding 5.5% year-on-year after a 5.3% increase in Q1. Looking ahead, we expect the growth rate to remain below trend this year and next, as the challenging global conditions and subdued domestic demand weigh heavily on the economy. We now forecast that GDP will grow on average by 5.6% in 2012 and 6.6% next year, compared with 5.7% and 7.5% in the Rapid-Growth Markets Forecast — Summer edition — July 2012.

Despite acknowledging the gloomier outlook, the Reserve Bank has little room to ease monetary policy. Wholesale price infl ation picked up to 7.6% and the deregulation of diesel prices and the recent declaration of drought conditions in some parts of the country will put upward pressure on commodity prices. We now expect wholesale prices to average 7.6% this year.


GDP growth will continue to be held back in the medium term by insuffi cient infrastructure. While telecom and oil and gas investments have been on target, India has under-achieved on investments in several other areas of infrastructure, during the Government’s 11th Five Year Plan (2007–12). GDP growth will also be held back over the medium term due to persistent infl ation and slowdown in investment fl ows. The Government recently announced several bold measures, however, such as allowing FDI in retail, aviation and broadcasting and these should boost investor sentiment. GDP growth will continue to be held back over the medium term due to persistent infl ation and slowdown in investment fl ows. However, the medium- to long-term picture is extremely positive with growth expected to average 7.2% out to 2016.


Indonesia

-10

-5

0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012 2014

% increase per year

Consumer prices

Producer prices Forecast

Figure 49Infl ation

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

0

5

10

15

20

25

30

35

40

45% increase per year

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 50Bank lending growth

Table 10Indonesia

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 0.2 -2.0 -1.7 -0.9 -0.6 -0.6






Nominal GDP (US$b) 845.4 884.3 990.1 1,111.6 1,209.6 1,311.7


Domestic activity is very robust

Despite the fragile global background, we still expect that Indonesia’s strong domestic fundamentals will underpin robust GDP growth of 5.9% this year, rising to 6.3% in 2013. The Government is forecasting growth of 6.3%–6.5% this year, but we are slightly more cautious given the external risks. Policy-makers have some room for maneuver, however, if the global economy deteriorates sharply.

Domestic activity remains fi rm. Consumer confi dence rose in August on reports of improving job prospects while car sales grew by 15.1% in July, the fourth straight month of 10%+ growth. Fixed investment grew at a double-digit pace in H1 2012, helped by government support.

In June, the Deputy Finance Minister stated that US$2.6b of its 2012 infrastructure budget could be used for stimulus spending if the weak global economy hits domestic activity more than we expect. The budget for 2013 allows a 15% rise in capital expenditure, which will be targeted at the road network and building 15 new airports.

Global headwinds remain strong, as concerns about fi nancial contagion within the Eurozone are still high and activity in China is subdued. Against this background, Indonesia’s exports are unlikely to make much headway in H2 2012. But with domestic activity strong and infl ation moderate, we expect rates to remain on hold into next year.



Kazakhstan

-15

-10

-5

0

5

10

15

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% increase per year

KazakhstanForecast

Europe andCentral Asia


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

Forecast

Europe and Central Asia

Kazakhstan

Figure 52Infl ation

Table 11Kazakhstan

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 7.7 5.9 2.0 0.6 0.0 -0.3






Nominal GDP (US$b) 183.1 199.9 215.0 235.2 259.2 283.3


Activity has slowed this year but recovery should be strong

Growth continued to weaken in Q2, with the short-term economic indicator slowing to an implied 3% growth after 4.6% in Q1. Falling oil production and weak growth in metals output has seen industrial production grow just 1.6% in H1. Agriculture was down 6.3% after a much poorer grain harvest, and construction output has stayed broadly fl at.

Consumer prices have slowed this year, refl ecting favorable global factors, administrative measures and the trade-weighted Kazakhstani Tenge’s continued appreciation. But we believe that infl ation is close to bottoming out and anticipate that it will rise only modestly, averaging 5.0% in 2012 and 6.4% in 2013.

The current account surplus was unchanged at US$7.6b in H1, compared with a year ago. But, with oil prices in H2 likely to be lower than in 2011, we expect the annual surplus this year to narrow to US$11.7b or 5.9% of GDP from just over US$14b or 7.7% of GDP in 2011. Merchandise exports are forecast to rise by 3.6%.

GDP is forecast to grow by just 4.8% in 2012, refl ecting both weaker growth in key export markets and falls in metal and oil prices. However, growth is being supported by government spending and private consumption. We expect GDP growth to pick up to 6.4% in 2013 on the back of a rise in both global growth and commodity prices and to exceed 7% in 2014.



Korea

-20

-15

-10

-5

0

5

10

15% increase per year

Domesticdemand

Net exports

Forecast

GDP

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020



-20

-15

-10

-5

0

5

10

15

20

25

30

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

GDP


Forecast


Table 12 South Korea

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 1,116.7 1,126.4 1,222.9 1,337.3 1,429.0 1,521.1


Sluggish global trade and subdued domestic demand dampen growth

Despite its continuing competitiveness, Korean manufacturing has been hit by the weakening trends in the US, Eurozone and China in recent months. While we still expect that the easing in Chinese policy will lead to a pickup in domestic demand there, and a boost to regional trade, this process is taking longer to materialize than we had expected. Moreover, the external risks remain fi rmly on the downside, not just from the uncertainty about China but also the still notable danger from developments in the Eurozone.

At the same time, while the domestic side of the economy is still growing, it is only doing so at a modest pace, with consumer spending subdued despite a healthy labor market and lower infl ation. Against this background, the Bank of Korea reduced the base rate by 25 basis points in both July and October. And there is room for further monetary and fi scal boosts if the global situation worsens signifi cantly.

Refl ecting these factors, we have cut forecasts for Korean GDP growth to 2.2% in 2012 and 3.5% in 2013, down from the Rapid-Growth Markets Forecast — Summer edition — July 2012’s estimates of 2.6% and 4.1% respectively. But we expect growth to pick up to around 5% in 2014 and 2015.



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 55Exports 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 56Industrial production

Table 13 Malaysia

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 288.1 301.7 326.9 356.4 385.3 414.4


Fiscal stimulus is boosting activity but external risks remain high

The economy maintained solid momentum in Q2 this year, thanks to very strong domestic demand. Private spending grew by more than 6% for the ninth quarter in a row while annual growth in investment picked up to 26.1%, the fastest pace in more than 10 years. Government spending has picked up very strongly in the last 12 months. We now forecast growth of 4.5% in 2012, up from 4.3% in the Rapid-Growth Markets Forecast — Summer edition — July 2012, after the stronger than expected performance in Q2, with growth little changed at 4.3% in 2013.

But while this investment strength underpinned strong annual growth in import volumes, up 8.1% on the year, export volumes struggled, with growth easing to just 2.1% on the year in Q2. July data suggests that activity has continued to soften in Q3 with exports in US$ terms falling by 7.3% on the year, the biggest fall since 2009, and annual growth in industrial output slowing to 1.5% on the year.

Despite gloomy prospects for external demand, the Central Bank has left the policy interest rate on hold at the last seven meetings, as strong domestic activity has supported robust growth. We expect rates to remain unchanged in the coming months but with infl ation of little concern (1.4% in August), the bank has the scope to cut rates if the global outlook were to deteriorate further.



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 57Merchandise trade: US vs. Mexican growth


per US$

Forecast

0

10

20

30

40

50

60

70

0

2

4

6

8

10

12

14

16%

Exchange rate(left-hand side)

Short-term interest rates(right-hand side)

1990 1993 1996 1999 2002 2005 2008 2011 2014

Figure 58Consumption and investment

Table 14Mexico

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 1,156.0 1,175.8 1,285.0 1,377.7 1,467.3 1,561.1


Solid 2012 growth continues

GDP grew by a seasonally adjusted 0.9% on the quarter in Q2 this year after a 1.2% rise in Q1 last year, with year-on-year growth slowing to 4.1%, from 4.6%. Retail sales volumes rose a healthy 1.5% on the quarter in Q2, and the evidence so far available for Q3 indicates that the pace of activity is holding up. Seasonally adjusted exports of manufactured goods rose on the month in July, driven by car exports, most of which go to the US. The unemployment rate has been little changed at 4.9% in recent months.

Our GDP growth forecast for this year is 3.5%, slightly lower than our expectation of 3.8% in the Rapid-Growth Markets Forecast — Summer edition — July 2012, refl ecting subdued US growth. But the economy

could pick up faster than we expect if exports continue to show solid growth. Domestic demand should remain supportive, with continued scope for improvement after the sizeable fall seen in 2009. We expect GDP growth to pick up slightly to 3.7% in 2013, before accelerating to just under 5% in 2014 as the US economy rebounds more strongly.

Higher food prices and a weaker exchange rate meant consumer price infl ation rose to 4.8% in September. We expect infl ation to exceed 4% this year but to remain in the 3.5%–4% range in 2013. The Central Bank has kept interest rates on hold at 4.5% since 2009, and we do not expect any changes to the policy rate this year.



Nigeria

0

10

20

30

40

50

60

70

80

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Forecast

Africa

Nigeria

Figure 59Infl 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

% increase per year

Nigeria

Forecast

Sub-SaharanAfrica


Table 15Nigeria

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 228.4 264.5 305.4 346.8 387.7 428.9


GDP growth slowing slightly, but still strong in non-oil sector

GDP growth slowed to a little over 6% in H1 this year from 7.5% in 2011 overall. The main drag continues to come from the oil sector, which fell 0.2% on the year in Q2, while non-oil sector growth remains buoyant, albeit slowing slightly to 7.5%. We now forecast GDP growth of about 6.5% this year, with a similar pace seen in 2013. The rebasing of the national accounts, expected soon, may see a 40% rise in the level of GDP and a cut in some key ratios such as debt to GDP.

The strong pace of growth and loose fi scal policy have kept infl ation high, averaging 10.8% in 2011 and 10.3% at the year-end. The partial

removal of fuel subsidies in January 2012 led to infl ation rising to almost 13% in April and it has remained close to this level since (underlying infl ation is even higher at 15%). We expect infl ation to average 12% this year, before easing to 10% in 2013.

Oil prices are expected to remain high in the next few years: after the 40% surge in 2011, Brent crude will average some US$108 (pb) this year and US$101pb in 2013. High oil prices probably lifted the 2011 current account surplus to US$15b–US$20b, but we expect the surplus to shrink this year and next as oil exports dip slightly and imports continue to climb. But the external position should remain solid, underpinning GDP growth of 5%–6% p.a. over the medium term.



Poland

-6

-4

-2

0

2

4

6

8

10

12

1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Forecast

GDP

Net exports

Domestic demand



30

40

50

60

70

80

1992 1995 1998 2001 2004 2007 2010 2013-12

-10

-8

-6

-4

-2

0

2% of GDP

Forecast

% of GDP

Government balance(left-hand side)

Government debt(right-hand side)

Figure 62Government budget balance and debt

Table 16Poland

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 515.2 492.4 524.8 546.4 562.4 601.1


Growth slowing and external headwinds intensify

Seasonally and working day adjusted real GDP rose by 0.4% on the quarter in Q2 2012, roughly in line with our forecast. Household consumption growth remained fairly muted, refl ecting the recent deterioration in labor market conditions, while fi xed investment dynamics fell in both Q1 and Q2 this year, with business confi dence sapped by heightened global uncertainty.

Since the Rapid-Growth Markets Forecast — Summer edition — July 2012, we have marginally downgraded our real GDP forecast for 2012 to 2.5%, largely due to historical revisions that created weaker base effects. We expect growth to remain fairly subdued in 2013 before gradually gaining momentum in 2014–15 as external conditions improve.

Risks to the current forecast are skewed to the downside. Although net exports contributed positively to Q2 GDP, supported by a relatively weak PLN, this could sharply reverse in the case of a disorderly sovereign default in the Eurozone, which would trigger a much deeper recession in Poland’s key trading partner. Recent comments by senior offi cials suggest that the pace of fi scal tightening may be eased should growth prospects continue to deteriorate. However, scope for a signifi cant policy stimulus is limited by the proximity of government debt to the 55% threshold, which would trigger automatic tightening measures.



Qatar

-5

0

5

10

15

20

25

30

1991 1994 1997 2000 2003 2006 2009 2012 2015

% increase per year

Qatar

Forecast




-6

-3

0

3

6

9

12

15

18

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

% increase per year

Forecast


Qatar

Figure 64Infl ation

Table 17Qatar

2011 2012 2013 2014 2015 2016





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




Nominal GDP (US$b) 127.3 173.5 204.0 221.2 246.4 269.0


Fiscal spending driving growth

The fi scal surplus in the fi scal year to end March 2012 was revised signifi cantly higher to some 8.6% of GDP. This was achieved thanks to the surge in hydrocarbon revenues and despite a 16% jump in government spending. We expect a further 11% rise in government spending this year, focused on infrastructure spending related to the megaprojects for the 2022 football World Cup. The budget will remain in large surplus.

Infl ation jumped for a second successive month to 2.2% in July. A number of largely domestic factors were responsible. External developments are likely to continue to restrain infl ation during the rest of 2012 and in 2013, but policy loosening will probably push infl ation higher, averaging 2% this year and 3.9% in 2013.

As we anticipated, the 2011 current account surplus has been revised up sharply to US$52b, equal to 30% of GDP. For 2012, we expect a small fall in the surplus to about US$50b. Merchandise exports are projected to rise by 6% while imports are seen growing by 15%.

GDP growth is set to slow to 6.2% this year from 14.1% last year, mainly refl ecting the self-imposed moratorium on Liquefi ed Natural Gas (LNG) expansion and less favorable oil developments. Growth will therefore become more heavily dependent on government spending.



Russia

-15

-10

0

5

10

15

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

% increase per year

GDP

Net exports

Domesticdemand

Forecast

-5


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

% increase per year

Consumer prices

Producer pricesWages

Figure 66Infl ation

Table 18 Russia

2011 2012 2013 2014 2015 2016


CPI infl ation (% change year-on-year) 8.5 5.1 6.5 5.7 5.7 5.4





Government balance (% of GDP) 2.1 -0.4 -0.7 -0.9 -0.8 -0.8


Nominal GDP (US$b) 1,856.1 1,944.5 2,144.2 2,313.8 2,457.9 2,611.3


Slowdown intensifi es but we expect soft landing

The fi rst estimates indicate that growth slowed sharply to 0.1% on the quarter in Q2 2012, slightly below our forecast. An expenditure breakdown is not available, but we expect net trade and investment to have primarily driven the slowdown, with retail sales data indicating that household spending remained fairly robust.

We have reduced our forecast for real GDP growth in 2012 to 3.4%, compared with 4% expected in the Rapid-Growth Markets Forecast — Summer edition — July 2012. This is largely due to a downward revision to Q1 growth and the small negative surprise in Q2.

Risks to the forecast are probably skewed to the downside, with the potential for the European sovereign debt crisis to trigger a much deeper contraction in economic activity. This would quickly transmit to Russia through lower commodity prices and a surge in capital fl ight. Over the medium term, growth is set to remain fairly steady at 3.5%–4%.

Infl ation has risen sharply in recent months, largely due to the implementation of regulated utility price hikes, which were delayed from their traditional January timing. With medium-term infl ationary risks building, we expect some modest monetary tightening to commence this year.



Saudi Arabia

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

Saudi Arabia

Forecast



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

-30

-15

0

15

30

45

60

75

90

-60

-30

0

30

60

90

120

150

210

180

1991 1994 1997 2000 2003 2006 2009 2012 2015

US$b



% of GDP

Forecast

Figure 68Current account balance

Table 19 Saudi Arabia

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 597.1 636.1 646.8 704.6 765.4 822.2


Steady private sector growth despite slowdown in fi scal spending

Private sector activity continues to be strong, with recent Purchasing Managers’ Index (PMI) data consistently in robust expansion territory. Banking data also point to buoyant consumer spending, with point-of-sale transactions and credit growth accelerating according to the most recent data for June.

Oil production is also expected to hold up well this year and next, with growth seen at 5.1% and 2.4% respectively. The Kingdom is expected to contribute to offsetting the fall in supply from sanctioned Iran in this period. Despite robust production, the current account surplus is

forecast to narrow from 27% of GDP in 2012 to around 18% of GDP in 2013, owing to expectations of declining oil prices and a continuing, steady growth in imports.

With both the oil and non-oil sectors looking healthy, growth in 2012 is seen at around 4.8%. Nevertheless, this represents a slowdown compared with the 7% growth registered in 2011. Government spending is expected to slow this year as there are growing concerns about the dependence on oil revenues. Having surged by 23% last year, we indeed expect government spending to slow in coming years, at an average of 6.5% p.a. over 2012–13.



South Africa

-12

-9

-6

-3

0

3

6

9

12

15

-40

-20

0

20

40

60

80

100

120

140

160

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

% increase per year

Retail sales(right-hand side)

Three-month moving average

% year

Car sales(left-hand side)

Figure 69Retail and car sales

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

-20

-16

-12

-8

-4

0

4

8

12

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

GDP


Forecast


Table 20South Africa

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 409.5 395.1 418.0 456.1 497.2 536.9


Growth still robust despite global downturn

Supported by domestic demand, South Africa’s economy has continued to grow steadily, with GDP increasing by 0.8% quarter-on-quarter in Q2 after a 0.7% expansion in Q1. Despite the positive start to 2012, the global slowdown will put a drag on the economy and we expect GDP to expand by around 2.4% overall. As conditions improve, this is set to accelerate to around 3.0% in 2013. In the medium term, growth will pick up to around 5% in 2014 and 2015.

Robust growth in domestic demand has been the driver of the economy, with retail sales volumes growing by 2.1% on the quarter in Q2. Looking ahead, consumption will be supported by the improving labor market,

increasing real incomes and the recent cut in interest rates. A cautionary note should be given on status of current outcomes of labor negotiations.

Infl ation has continued on its recent downward trend, falling back to 4.9% in July from 5.5% in June. Driving this was a smaller than expected rise in the electricity tariff and moderating food price infl ation. With both food and oil prices on the rise, we expect infl ation to bounce back over the rest of this year, and average 5.6% over 2012.

In the last few months the country has seen a widening of its trade defi cit as import growth has outpaced export growth. We expect the current account defi cit to widen this year.



Thailand

-45

-30

-15

0

15

30

45

60

75

1995 1997 1999 2001 2003 2005 2007 2009 2011

% increase per year

Imports

Exports

Three-month moving average (US$)

Figure 71Exports and imports

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

80

100

120

140

160

180

200

220

240

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

2,000 = 100 (seasonally adjusted)

Figure 72Private investment indicator

Table 21Thailand

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 1.7 -1.5 -1.2 -0.5 -0.7 -1.0






Nominal GDP (US$b) 346.1 362.4 372.3 380.3 391.3 415.5


Domestic activity has fi rm momentum but exports are weak

Exports fell from a year earlier in July and August. The slowdown in global demand has reduced intra-Asian trade, hurting Thai exports. Exports to China fell in July and August while shipments to the rest of Southeast Asia fell in July for the fi rst time since 2009.

The Bank of Thailand left rates on hold again this month, confi dent that the positive trend in consumption and investment is likely to continue. The chance of a rate reduction later this year has increased, however, and the Bank is ready to take action if global or domestic activity weakens. At the interest meeting in September 2012, two of fi ve committee members voted to cut rates.

Consumer spending rose by a seasonally adjusted 1.2% on the quarter in Q2 and increased again in July. Consumer confi dence rose in August, helped by the minimum wage increase and the easing of political tension. These factors should help spending maintain strong momentum into 2013. Strong reconstruction efforts underpinned fi rm investment in H1, but seasonally adjusted industrial output fell in June and July, suggesting that the weak external situation might be slightly undermining domestic momentum.

Seasonally adjusted GDP expanded by 3.3% on the quarter in Q2, driven by robust domestic demand. We now expect GDP growth of 5.4% in 2012 and 4.9% in 2013.



Turkey

-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

US$m (seasonally adjusted)

Figure 73Monthly 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

%

Policy rate(instrument changed in May 2010)

Average bank lending rate

Figure 74Interest rates

Table 22Turkey

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 777.3 798.8 851.4 884.5 921.7 1,003.9


Exports drive growth in Q2 while global fears spur policy relaxation

Growth was higher in Q2 than in many other RGMs, with seasonally adjusted real GDP increasing by 1.8% on the quarter (3.2% on the year). However, this surge was overwhelmingly driven by soaring export volumes while imports were fl at, refl ecting subdued consumer spending and investment. Moreover, a large part of the rise in exports was driven by a big increase in gold sales to Iran, which will presumably be temporary.

Sizeable capital infl ows have comfortably fi nanced the large current account defi cit this year (albeit the latter is still a key vulnerability if global fi nancial tensions really were to soar). The Central Bank has

loosened monetary conditions quite signifi cantly since mid-June, despite the fact that core infl ation is still rather high, at over 7%. The Bank’s action appears to have been prompted by worries about attracting too much money — and thereby reversing the gains in competitiveness achieved in late 2010 and H1 2011 — together with concerns about the negative impact of an increasingly fragile global economy. However, the more relaxed policy stance will result in a slower fall in infl ation over the next few years than we had previously forecast.

We expect that GDP growth will be about 2.7% this year, and should speed up in 2013 and 2014 as easier policy feeds through and the world economy picks up.



Ukraine

-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

% of GDP


US$b



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

0

5

10

15

20

25

30

35

40

45

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% increase per year

Forecast

Europe and Central Asia

Ukraine

Figure 76Infl ation

Table 23 Ukraine

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 165.2 168.0 178.4 196.7 212.7 231.8


Growth slowing in 2012, but pick-up expected on stronger exports

With growth below target at just 2% in January–July and elections due in October, the Government has promised more public investment and support to offset the industrial export slowdown. But this will add to an already rising budget defi cit and, with the current account gap also rising, adds to risks of depreciation of the Ukraine Hryvnia. We have lowered our 2012 growth forecast to 1.7%.

Slower growth has helped to bring down infl ation more than expected, with consumer prices in January–August up 0.9% on the year. Infl ation in 2012 will be well below the 7.9% projected in the budget but, with energy prices set to rise in Q4 after the elections, we expect the rate to

pick up heading into 2013. Slow growth and rising state spending are also pushing up the fi scal defi cit this year, adding to the need for more borrowing.

An IMF deal and an EU association agreement, both of which would boost capital infl ows, remain on hold until after the elections, complicated by retention of energy subsidies that are linked to high gas prices still charged by Russia.

Despite the downside risks, reviving exports to the EU may see growth pick up to about 4% in 2013, with over 5% p.a. seen in 2014–16, as the outlook for gas exports improves and a stronger recovery in the EU boosts exports and capital fl ows.



United Arab Emirates

-6

-3

0

3

6

9

12

15

18

21

1990 1993 1996 1999 2002 2005 2008 2011 2014

% increase per year

United Arab Emirates

Forecast

Middle East and North Africa



-20

-10

0

10

20

30

-20

-10

0

10

20

30

40

1990 1993 1996 1999 2002 2005 2008 2011 2014

Forecast

% of GDP

% of GDP (right-hand side)

US$b

US$b (left-hand side)


Table 24United Arab Emirates

2011 2012 2013 2014 2015 2016









Nominal GDP (US$b) 338.7 367.3 370.7 394.2 423.0 452.1


Oil and non-oil growth both seen picking up next year

We expect GDP growth of 3.0% in 2012. Lower oil prices, a weak global backdrop and relatively tighter fi scal policy account for the slowdown compared with 2011. However, the continuing recovery in the non-oil private sector, combined with higher oil production to offset some of the presumed fall in Iranian output, lead us to expect growth to pick up to 3.9% next year and to average 4.5% in the medium term.

Price pressures remained weak throughout 2012, and we expect CPI infl ation to have averaged 0.9% by the year-end. We expect this to pick up to 2.3% next year, as food price caps end and house prices (the main source of defl ationary pressure) begin to bottom out and gradually

recover. There is evidence of a patchy recovery in the housing sector, in Dubai in particular, but the picture in Abu Dhabi is considerably weaker, and the overall outlook is uncertain.

There are a number of risks to our forecast. A deterioration in the Eurozone would impact Dubai, mostly through fi nancial channels, as the Emirate continues to repair its balance sheets over the medium term. Dubai is also likely to be impacted by sanctions on trade partner Iran, though a lack of timely data makes this effect diffi cult to quantify.



Vietnam

0

2

4

6

8

10

12

14

1991 1994 1997 2000 2003 2006 2009 2012 2015

% increase per year

Vietnam

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 80Infl ation

Table 25 Vietnam

2011 2012 2013 2014 2015 2016



Current account balance (% of GDP) 0.2 3.8 0.0 -0.9 -0.9 -0.5






Nominal GDP (US$b) 123.6 139.5 155.4 172.6 189.0 206.8


Policy will support strong recovery

Following this year’s fi fth reduction in main interest rates (with the refi nancing rate cut to 10% in July), the Central Bank has ordered commercial banks to lower their lending rates. This will restart domestic credit growth, which stalled during H1 as businesses scaled down investment plans.

The Central Bank is increasingly confi dent that lower interest rates will not weaken the Vietnamese Dong (VND) or revive infl ation, which dropped to 5.0% in August, the lowest since 2009. With gradual VND depreciation supporting markets for price-sensitive exports, the current account will remain close to balance, despite stronger growth next year lifting imports, as higher-value exports start to expand.

But EU recession, sluggish US growth and the banks’ rising bad debts are downside risks to short-term growth. Progress on reducing the fi scal defi cit will be slower this year than last.

Annual GDP growth picked up to 4.7% in Q2, from 4.0% in Q1. The Government has announced stimulus measures, however, aimed at lifting the rate toward the full-year target of 6%, though it admits that 2012 growth is likely to be 5.6%–5.8% at most. We expect growth of 4.8%, as stock levels remain high and the EU recession and the sluggish US economy are constraining export growth. The Government’s aim is to offset this with stronger domestic investment and so reach the 6.0%–6.5% offi cial 2013 growth target.



Detailed tables


Real GDP growth

2011 2012 2013 2014 2015 2016

Americas 4.2 2.6 4.1 4.9 4.6 4.2

Argentina 8.9 1.4 3.1 4.7 4.2 3.9

Brazil 2.7 1.4 4.5 5.0 4.8 4.3

Chile 5.9 5.2 4.5 4.5 4.4 3.9

Colombia 5.9 4.4 4.5 4.4 4.1 4.0

Mexico 3.9 3.5 3.7 4.9 4.6 4.4

EMEIA 6.1 3.8 4.5 5.5 5.6 5.5

Czech Republic 1.7 -1.1 0.8 2.4 2.5 2.7

Egypt 1.8 1.8 1.9 4.5 5.9 5.9

Ghana 14.4 8.2 6.9 5.6 5.0 4.6

India 7.5 5.6 6.6 7.7 8.0 8.0

Kazakhstan 7.5 4.8 6.4 7.5 7.1 6.7

Nigeria 7.5 6.5 6.5 6.1 5.5 5.1

Poland 4.3 2.5 2.5 3.4 3.6 3.7

Qatar 14.1 6.2 4.5 6.4 6.4 6.0

Russia 4.3 3.4 3.4 4.2 4.1 4.1

Saudi Arabia 7.1 4.8 4.4 4.4 4.2 4.1

South Africa 3.1 2.4 3.0 4.8 5.0 4.7

Turkey 8.5 2.7 4.2 5.5 5.3 5.3

Ukraine 5.1 1.7 3.8 5.9 5.9 5.4

United Arab Emirates 4.2 3.0 3.9 4.5 4.5 4.2

Asia 7.5 5.9 6.9 7.9 7.6 7.1

China and Hong Kong 9.1 6.9 7.9 8.9 8.5 7.9

Indonesia 6.5 5.9 6.3 6.0 5.4 5.5

Korea 3.6 2.2 3.5 5.0 4.8 4.4

Malaysia 5.1 4.5 4.3 5.3 4.8 4.2

Thailand 0.1 5.4 4.9 6.3 5.6 4.9

Vietnam 5.9 4.8 6.1 7.2 6.9 6.6

Total 6.3 4.5 5.5 6.5 6.3 6.0

Cross-country tables


CPI infl ation

2010 2011 2012 2013 2014 2015

Americas 5.4 5.1 5.2 4.5 3.7 3.6

Argentina 9.8 10.0 9.7 7.7 5.7 4.3

Brazil 6.6 5.3 5.8 5.1 4.1 4.1

Chile 3.3 3.0 2.6 3.0 3.0 3.0

Colombia 3.4 3.3 3.5 3.4 3.3 3.3

Mexico 3.4 4.2 3.9 3.5 3.0 3.0

EMEIA 7.1 6.1 5.6 4.7 4.6 4.4

Czech Republic 1.9 3.3 2.2 1.8 1.8 2.0

Egypt 10.1 7.4 7.3 6.7 5.7 5.0

Ghana 8.7 9.4 8.3 6.7 5.6 5.0

India (WPI infl ation (%)) 9.5 7.6 5.8 4.4 4.3 4.1

Kazakhstan 8.3 5.0 6.4 6.2 6.0 5.5

Nigeria 10.8 12.0 10.0 8.5 8.0 8.0

Poland 4.2 4.0 3.2 2.8 2.5 2.5

Qatar 1.9 1.9 3.9 4.0 4.0 4.0

Russia (% change year-on-year) 8.5 5.1 6.5 5.7 5.7 5.4

Saudi Arabia 5.0 4.5 4.4 3.5 3.5 3.5

South Africa 5.0 5.6 5.4 5.3 4.9 4.8

Turkey 6.4 8.9 5.9 5.4 5.0 4.6

Ukraine 8.0 2.0 7.0 6.0 5.5 5.5

United Arab Emirates 0.9 0.9 2.3 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 2.8 2.6 3.4 3.5 3.1

Indonesia 5.4 4.4 5.1 4.9 4.9 4.8

Korea 4.0 2.3 2.5 2.7 2.6 2.6

Malaysia 3.1 1.8 2.5 2.9 3.0 3.0

Thailand 3.8 2.9 2.7 2.3 2.3 2.5

Vietnam 18.7 9.6 7.8 6.4 4.8 4.5

Total 5.9 4.4 4.2 4.1 3.9 3.7

Cross-country tables


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