Frontier Markets Reloaded
Business Monitor Online recently published a report on Frontier Markets, which is also appearing in this week’s Emerging Markets Monitor magazine. The definition of ‘frontier markets’ varies greatly. For example, BMI’s definition (which would include Bangladesh, Ethiopia, and Uzbekistan) is considerably more ‘exotic’ than most investors’ definition (which might include Peru, Nigeria, and Vietnam).
Nonetheless, it is clearly the case that frontier markets are some of the fastest-growing economies in the world. Indeed, of the 20 economies BMI forecasts to grow fastest between 2011 and 2015, 18 can be classified ‘frontier’, characterised by low levels of institutional development and illiquid capital markets. (The full list appears in our online service and in EMM magazine.)Of these, three stand out as our favourites: Mongolia, Ghana, and Kazakhstan. Essentially, these countries combine stable political systems with favourable business environments (as measured by BMI’s own Business Environment Ratings and the World Bank’s Doing Business rankings), openness to foreign capital, extensive commodity resources, and opportunities for growth in private consumption, financial services development, and infrastructure. We also see scope for significant currency appreciation against the US dollar to the end of 2015 – by 25% for the Mongolian togrog, 18% for the Kazakh tenge, and 37% for the Ghanaian cedi.
Of course, these countries will remain vulnerable to exogenous shocks, mainly through the commodity price channel. Indeed, frontier markets were attracting investor interest in 2007, and BMI published a Special Report on them in late 2007. Alas, then came the meltdown of 2008, and investors rushed out of emerging markets, forgetting all about frontier markets. But now they may well be due a revisit.
Nonetheless, it is clearly the case that frontier markets are some of the fastest-growing economies in the world. Indeed, of the 20 economies BMI forecasts to grow fastest between 2011 and 2015, 18 can be classified ‘frontier’, characterised by low levels of institutional development and illiquid capital markets. (The full list appears in our online service and in EMM magazine.)Of these, three stand out as our favourites: Mongolia, Ghana, and Kazakhstan. Essentially, these countries combine stable political systems with favourable business environments (as measured by BMI’s own Business Environment Ratings and the World Bank’s Doing Business rankings), openness to foreign capital, extensive commodity resources, and opportunities for growth in private consumption, financial services development, and infrastructure. We also see scope for significant currency appreciation against the US dollar to the end of 2015 – by 25% for the Mongolian togrog, 18% for the Kazakh tenge, and 37% for the Ghanaian cedi.
Of course, these countries will remain vulnerable to exogenous shocks, mainly through the commodity price channel. Indeed, frontier markets were attracting investor interest in 2007, and BMI published a Special Report on them in late 2007. Alas, then came the meltdown of 2008, and investors rushed out of emerging markets, forgetting all about frontier markets. But now they may well be due a revisit.
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