A panel of experts from Ernst & Young have come together to discuss, on CNBC-TV18, the possibilities of growth, opportunities and the challenges on the road ahead for the BRICS nations.
You can call them emerging markets or rapid-growth markets, but the bottomline is that the BRICS nations have emerged as the islands of prosperity in a global economy that is collapsing. According to a growth forecast by Ernst & Young for 2013, analysts expect only a very modest recovery with the way emerging markets are moving.
For 2012, analysts estimate a significant decline for emerging markets and growth is expected to fall from 6.3% down to about 5.3%. China and Hong Kong expected to grow at about 8.2%. In terms of rapid-growth markets, the Ernst & Young survey identified Brazil, Chile, Kazakhstan, Qatar, India, China, Hong Kong and Vietnam.
A panel of experts from Ernst & Young comprising Ajen Sita, managing partner, Africa, Jorge Menegassi, managing partner, Brazil and South America, Albert NG, chairman and managing partner, Greater China and Karl Johansson, managing partner, CIS have come together to discuss, on CNBC-TV18, the possibilities of growth, opportunities and the challenges on the road ahead for the BRICS nations.
Below is an edited transcript of the panel discussion on CNBC-TV18.
Q: All eyes are on how well the Chinese economy is going to grow or slowdown. At this point in time estimates suggest China will not be able to post a growth rate of 8% as expected. What's your own sense?
Albert NG: I think when you look at the GDP growth for Q2, it’s the first time since the Q1 of 2009 that the growth is below 8%. I, personally, am still very optimistic about China achieving the 7.5% growth that the government has set for itself for this year.
People talk about hard lending, soft lending. I am sure that the economy will slowdown. China is connected to the rest of the world and cannot escape when the rest of the world is not doing well. It is important that China maintains sustainable growth.
Q: What are the big problems that everybody is talking about now? How real is the concern about China losing its competitiveness?
Albert NG: I think inflation is deep in the mind of the government. So, the government will not allow inflation to go too high. The Chinese government has more policies in its quiver as compared with other countries. So, I think that government having control is a very important measure.
I believe the increase in wages will continue to because government is trying very hard to improve the livelihood of the general public. So, including many of what I call the minimum wages policies, I believe that the domestic market in China is becoming more and more important in the minds of many companies operating in China.
Q: What would you be most worried about as far as China is concerned currently?
Albert NG: I am still very optimistic about China. I think China will continue to grow for the next 10-15 years.
Q: Even among the BRICS nations, the sentiment on China is bullish in comparison to other countries.
Albert NG: I am still very bullish. I am still very optimistic, personally.
Q: Is Brazil feeling as optimistic as China? There are concerns that Barzil’s growth rates do not compare to that of China or even India.
Menegassi: It’s a good statement. Brazil is not going to have a growth rate similar to that of China. But if you look Brazil in the last eight years, a very strong middle-class has emerged. Consumption is now growing at a rate of 4% so and has become a very important domestic market. I think that is what investors are looking for.
Q: From where do you expect investments to come from?
Menegassi: In 2011, Brazil was one of the top five nations for FDI. With a major part of the investment going towards oil and gas, I expect that by 2020, Brazil is going to be one of the world leaders in oil and gas.
Q: But there’s also the worry that if the commodity cycle peters out, the Brazilian story is going to look very uncertain and shaky?
Menegassi: Yes, but commodities are only a part of the economy. Though they are important, Brazil is not going to be dependent on commodity prices.
Q: As far as currency is concerned, how worried are you on Brazil losing out on its competitiveness?
Menegassi: The Real fell during the last six months after appreciating for years because of the poor investor sentiment worldwide. But I think this is good for Brazil, as an appreciating currency will reduce our competitiveness in the global markets.
Q: How concerned are you about Russia’s complicated relation with oil and the commodities sector? Will FDI largely continue to come into energy and utilities as far as Russia is concerned?
Johansson: Russia is making progress with FDI now flowing into other areas such as manufacturing and consumer goods. Russia will be the largest automotive consumer market in a relatively short period of time. Russia had the largest contraction of any of the BRIC countries during the crisis of 2008-09.
A lot of its debt has been restructured and is in denominations of the Rouble. So steering away from the dependence of high oil to implement reform, Russia is beginning to build a much more diversified economy.
Q: Investors have raised concerns regarding the predominance of state-owned enterprises in Russia, the lack of transparency and the lack of certainty. How real are those concerns? Do you see the situation getting better?
Johansson: No, I think marginally the situation in Russia is getting better. The investors who have been participating in Russia from the 1990s, this is probably the best market in the world in terms of margins and returns. Investors who haven’t been able to participate, have raised concerns regarding these so-called barriers.
Russia is aware of it and has initiated a process to improve the situation. In some areas we have made good progress like for example in the case if tax reforms. The ability to resolve disputes is also improving.
Q: What do you think would be a sustainable growth rate?
Johansson: I would say 4-5%. When you come from a contraction of 3-4%, getting back to 3.5-4% is good.
Q: What would be the biggest challenge that could pose a downside risk to the growth rate of 4-5%?
Johansson: Volatility in energy prices clearly affects Russia, even though it’s better prepared than before.
Q: Let's talk about Africa especially with China and India investing heavily and eyeing opportunities with great interest. Is it just hype?
Sita: Investors have estimated that, over the next three years, apart from emerging Asia, Africa will become the most attractive investment destination in the world. Seven out of the ten fastest growing economies in the world are in Africa.
There certainly are opportunities with added complexity because it is a continent with 54 countries and very diverse economies. But they are coming together in regional economic hubs and blocks to position themselves and attract foreign direct investment. The flow of FDI into Africa during 2011 alone has grown by about 30%.
Q: Of the 54 countries with markets that are growing rapidly, which one are you betting on?
Sita: There are a number of markets that are attractive right now. Nigeria is the second-largest economy in Africa in terms of GDP and the largest in terms of population. There are expectations that the government will try to steer the economy away from its dependence on the oil reserves. If the move is successful, over the next five years, Nigeria is likely to be the biggest economy in Africa. It’s already growing by about 8 or 9% right now
Mozambique has discovered gas reserves which may be one of the biggest gas reserves in the world. The economy is set to grow 8-9-10%. Ghana is pumping oil today and the official GDP is around 8 or 9%.
I am excited about Ethiopia which is really turning its infrastructure around in the agriculture sector. Kenya and Uganda have both found oil reserves which can be expected to come on-stream quite soon. Lastly, South Africa in itself is a large economy with a well-established infrastructure and excellently positioned as a gateway for investing into Africa.
Q: Apart from China, is under-investment in infrastructure likely to be the big theme in 2013 as far as foreign direct investment into countries like India, Brazil, Russia and the African continent is concerned?
Sita: I think it is going to be the big theme for the next ten years if not longer. There is no doubt that if I take Africa as a whole, the scenario of under-investment in infrastructure has existed for decades. According to estimates, Africa will need an investment of close to USD 95 billion over the next ten years to create the required infrastructure in terms of airports, roads and ports.
Q: Is China investing as much as it is investing in Africa, in Brazil and South America as well? It has dislodged the US as Latin America’s No.1 trading partner. So is the major portion of investment in infrastructure coming from China?
Menegassi: Yes, it’s starting to. China now is one of the most important trade partners for Brazil. And the signals towards increasing the partnership are continuing to emerge. The Brazilian economy is now much more tied to China than to Europe.
Q: Is everybody is tied to China now?
Menegassi: The Chinese are more connected to Europe. So, yes we are all connected.
Q: Investment in infrastructure, the oil and gas in Russia continues to attract large amount of foreign direct investment…
Johansson: In order for Russia to grow, it needs to increasingly spend on infrastructure and does not have strong connections with the Chinese as in the case of other countries. Infrastructure plans include construction of pipelines to energy sources. There is also better cooperation on trade in investment. If has Russia to succeed, it needs ports and railways.
Q: What do you think about the European economy and by when do you think stability will return?
Albert NG: Personally, I am still very concerned about Europe. I think it will take quite a long time as there some fundamental issues, which are more political and social than economic in nature, that need to be resolved.
From the Chinese companies' perspective, it provides the right environment to acquire European companies which have a lot of high-tech R&D abilities that China is lacking right now. There are a lot of Chinese companies looking at European companies in terms of jumpstarting or leapfrogging their R&D technology.
Q: So you are seeing a lot of M&A?
Albert NG: There is a lot of M&A activity.
Q: Outbound from China?
Albert NG: Yes.
Q: Besides infrastructure, there is a concern among foreign investors about the lack of transparency and uncertainty as far as the tax and the regulatory system is concerned. Is Russia doing anything serious doing this?
Johansson: There is increasing awareness that trade with other countries is important. And to attract the economy has to be competitive which further necessitates transparency. The Russian government has begun to acknowledge this fact and has initiated various modes of dialogue in this regard. E&Y has been working with the government for the last 15 years in improving different elements of investment. There is progress, but you have to understand that this entails changing an entire society over a period of time. However, we are positive.
Q: Is infrastructure a huge issue as far as Africa is concerned?
Sita: Yes. The global financial crisis has brought into sharp focus that if any government wants to grow, it needs to attract foreign direct investment. If you want FDI, you have got to be competitive. Being competitive means transparency, free flow of goods and services and frankly, dressing up for the sell. Across Africa, a number of countries are banding together in trading regional economic hubs like the East Africa community.
Individually these countries are about 20-30-40 million strong, but together they’re about 180 million people and growing at 6% GDP. The Chinese are attracted to these sort of markets because of the infrastructure requirement.
Indian companies are also being lured on large consumer market on offer. Consequently, governments have begun to realise that if they want to lift people out of poverty, they need to create infrastructure for which the right the investment climate to attract capital is required.
Q: One of the other problems that a lot of emerging markets are facing, with India in particular and perhaps even Brazil to a large extent, is that governments are writing cheques that they cannot afford to honour. How big is this challenge is that and are governments looking to move from fiscal profligacy towards fiscal consolidation?
Menegassi: I think the global crisis has created a kind of de-globalisation as witnessed in Brazil when the government begins to protect the internal market. That does not mean that the government does not like to attract foreign investments, but it’s important for the country to have industrial capacity to support the internal market. Otherwise, the economy is going to be very weak in dealing with the global crisis.
Q: The E&Y forecast shows that there is going to be a decline for all emerging markets in 2012. We expect only a very modest recovery in 2013. What would be the biggest challenge and opportunity for FY13?
Johansson: The challenge is access to capital. The opportunity is in the broadening of trade.
Q: So easy money is out of the window?
Johansson: It is. There is no question. Look at the stock markets. Look at the valuations. For access to capital, you need far more focus on value in longer-term investments. The opportunity is clearly in trade amongst emerging markets and the consumer base between them. While growth may not be high, the interaction will be significant.
Q: So over the next five years, you believe the rate of consumption would remain intact in China and growth could be between 6-8% you think?
Albert NG: I think China will need to maintain the current GDP growth rate. Domestic consumption will continue to attract investment, but it is not something that will be easy to change. I think the biggest challenge for China remains the problem of European sovereign debt.
Sita: Frankly, markets worldwide are heavily dependent on a solution in Europe. A third of Africa’s trade is with Europe. There is a rebalancing that’s taking place in India and China right now. Certainly, capital flows out of China and India are on the increase. So, in my opinion, a resolution to the European crisis alone has the power to unlock trade opportunities. Over the next few years, sub-Sahara Africa will grow at least at 5.5-6% if not more.
Q: A final word about Brazil?
Menegassi: Brazil is not going to be different. I think the recovery in Europe is very important. I think Brazil is going to be very rapid in terms of recovery. We expect that in 2013, Brazil will grow at a sustained 3.5-4% thanks to events like the World Cup in 2014 and the Olympic Games in 2016. So the country is really committed to deliver the infrastructure not only for those big events, but also to support the economy.