The New BRICS on the Block-debate

8/7/2019 The New BRICS on the Block-debate

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The NewBRICS on the

Block: WhichEmerging

Markets AreUp and

Coming?


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Published:January 19, 201

inKnowledge@W

ton
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Building on th

foundation ofthe well-know

BRIC countrie

-- Brazil,Russia, India


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and China -- anew set of up

and-comingemerging

markets isgaining

attention. The


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so-called"CIVETS"

countries --Colombia,

Indonesia,Vietnam, Egy

Turkey and


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South Africa -are now toute

as hot marketbecause they

have diverseeconomies,

fast-growing


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populations,relatively stab

politicalenvironments

and thepotential to

produce


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outsized returin the future.

Far-flunggeographically

and shaped bvastly differen

cultural,


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religious andpolitical

structures, thCIVETS show

the potential tdevelop rapid

and reward


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those willing ttake on

emergingmarket risk

beyond themore-

established


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economist JimO'Neill.

Goldman Sachnow predicts

that the BRICcombined GD

will surpass U


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GDP by 2018and that they

will account fohalf the globa

economy by2020. The

CIVETS owe


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their acronymto the

EconomistIntelligence U

(EIU), whichforecasts the

countries will


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grow at anannual rate of

4.5% during tnext 20 years

That's onlyslightly below

the 4.9%


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averagepredicted by t

EIUfor the BRnations, and f

above the ratof 1.8%

forecast for th


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world's riches-- or "G7" --

nations. (Forwhat it is wor

a civet is anocturnal, cat

like mammal


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found in at leatwo of the

CIVETScountries --

Indonesia andVietnam.)


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In a recentsurvey

conducted byKnowledge@

arton and theglobal

communicatio


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firm FleishmaHillard, a

majority ofcorporate

executives,investors and

business lead


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indicated thatthey would be

interested indoing busines

withmultinationals

in the CIVETS


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countries.Respondents

said they wermost attracte

to CIVETSbecause of lo

labor and


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production coand the

countries'growing

domesticmarkets. Whe

asked to


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identifyweaknesses, t

surveyparticipants

cited politicalinstability,

corruption, a


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lack oftransparency

andinfrastructure

and homegrocompanies

without much


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a reputation obrand

identification.According to

Whartonmanagement

professor Wito
http://www.wharton.upenn.edu/faculty/henisz.cfmhttp://www.wharton.upenn.edu/faculty/henisz.cfm


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Henisz, whilethere are a to

of 150 emergmarkets

worldwide, acatchy name

and new focus
http://www.wharton.upenn.edu/faculty/henisz.cfmhttp://www.wharton.upenn.edu/faculty/henisz.cfm


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may givemultinationals

and investorsmore incentiv

to look towardthese lesser-

known


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rapidly growinmarkets abroa

that managerneed to come

understand,"says.


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TheKnowledge@

arton/Fleishm-Hillard surve

of 153corporate and

business lead


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found a rangeenthusiasm fo

differentCIVETS. When

asked to saywhich of the s

countries


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offered a "gredeal of

opportunity" o"some

opportunity,"86% cited

Indonesia,


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followed bySouth Africa

(84%), Turke(82%), Vietna

(77%), Egypt(61%) and

Colombia


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(56%). Asignificant set

respondents(42%) predict

that by 2020,the CIVETS

countries wou


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be on a levelplaying field

with the BRICin the global

economy.When compar

to the BRICs,


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the CIVETS armuch smaller

Indonesia is, far, the larges

with 242.9million people

followed by


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China 1.3billion.

'FrontierMarkets'

Henisz says sis one reasonthe decision t


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invest in theCIVETS

countries is noas clear-cut a

it is with theBRICs. A

Western


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company migbe willing to

accept somemissteps in

China becausethe rewards

would be so


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great givenChina's size.

Entering aCIVETS count

however, is amore

complicated


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strategicdecision, he

notes, and wiprobably com

with addedpressure for

short-term


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results,compared to

larger countriwhere

companiesmight be willi

to stay the


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course. "Chinais so critical th

if you mess uthe first year,

you can stayaround. That'

not so clear


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about, say,Colombia -- it

not seen asmission critica

Whartonmanagement

professor Mau
http://www.wharton.upenn.edu/faculty/guillen.cfmhttp://www.wharton.upenn.edu/faculty/guillen.cfm


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Guillen pointsanother

importantdifference

between thetwo blocs.

Unlike China,
http://www.wharton.upenn.edu/faculty/guillen.cfmhttp://www.wharton.upenn.edu/faculty/guillen.cfm


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Brazil, India aother emergin

markets likeMexico, the

CIVETS lackestablished

multinational


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corporations tact as platfor

for furthereconomic

development,although that

could happen


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the future."What makes

the BRIC grouunique is that

not only arethey big, but

they have the


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own companiethat are

destined to bevery importan

outside theirown countries

says Guillen.


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TheEIUacknowled

s that theCIVETS do no

have theeconomic pow

to "reshape th


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global economorder" as muc

as the BRICsand their

combined GDwill only amou

to one-fifth th


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size of the G7nations'

combined GDby 2030.

Instead, theCIVETS are

second-tier


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emergingmarkets that

have relativelsophisticated

financialsystems and d

not face


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runawayinflation,

massivecurrent-accou

deficits or pubdebt, accordin


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to the researcfirm.

"With emerginmarkets there

always risk,"cautions

Guillen. "But


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whenever youhave risk, if y

are savvy youare going to

make a nicereturn. This is

difficult game


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but it is aninteresting

one."Romeo Dator,

portfoliomanager at

Texas-based


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U.S. GlobalInvestors, wh

specializes inemerging

markets andnatural

resources, say


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overallinvestment

returns of 57last year. The

others, Datornotes, are stil

too small for


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major fundinvestments

which needgreater liquid

The BRICs, headds, are still

far from


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mature, and tCIVETS "are

almost likefrontier

markets, a stebelow the

emerging


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markets interms of size.

When does acountry

graduate to"emerging"

status? Dator


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points to onesign: "Once y

start seeingETFs

[exchange-traded funds]

developed


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around them,that means

there's enouginterest and it

worth lookinginto."


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MichaelGeoghegan,

chief executivof HSBC, is a

CIVETSpromoter. In

speech to the


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AmericanChamber of

Commerce inHong Kong la

year, heremarked, "An

company with


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global ambitioneeds to act

now [with]regards to the

markets. Intoday's world,

you can't affo


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to wait forbusiness. You

have to gowhere the

business is."Each of the

CIVETS


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presentsopportunity a

risk, accordingto emerging

market analysand Wharton

faculty:


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Colombia: Fowing years of

high-profiledrug wars,

Colombiaremains a sm

market, but h


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always been adynamic

economy withsome key

industries,including fres


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flowers, oil ancoffee.

Indonesia: Tlargest of the

CIVETS,Indonesia has

huge, sprawli


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population anhas already

benefited frominvestment by

the U.S., Chinand Japan, bu

political and


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social stabilitynever certain.

Vietnam: Alow-cost

alternative toChina for

manufacturing


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Vietnam hasambitious pla

to grow itseconomy

despite aCommunist

government.


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Egypt: Althouh Egypt has a

well-educatedprosperous

population in Nile Valley

cities, much o


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the countryremains poor

and the counthas a high lev

of debt (80%GDP). The

political future


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beyond the ruof President

Hosni Mubareis cloudy, and

the countrycould face


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religiousturmoil.

Turkey: Not adestination fo

manufacturingbecause costs

are already


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high, Turkeyremains a

promisingregional cente

which hasbenefited from

relative stabil


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and ties to theWest in a

volatile part othe world.

Membership ithe European

Union would b


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a plus, expertnote, but

religious turmmight hurt its

economicprospects.


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SouthAfrica: Althou

h it facesproblems with

unemploymenand HIV/AIDS

South Africa h


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strongcompanies, a

well-developebusiness

infrastructureand can serve


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as a gatewaysouthern Afric

Henisz notesthat in additio

to their internstrengths,

Turkey,


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Indonesia andSouth Africa

have somecompanies tha

are strong intheir regions,

which might


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make thesecountries

especiallyinteresting for

companies orinvestors

looking to gai


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additionaltraction beyon

a singlecountry's

borders. "Thecould be a

platform for


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investment thway Ireland w

for Europe," hsays, adding

that thesecountries cou

also provide


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opportunitiesfor "reverse

learning" aboubusiness

approaches totheir regions (

opposed to th


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traditionalmodel of

applyingWestern

businessmethods to


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foreignmarkets).

ResistingGeneralizati

According to tsurvey resultsrespondents


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agree that themost importa

factorspositioning

CIVETScompanies to

compete in th


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global economare: the value

of their produand services

(75%); GDPgrowth in the

countries


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(74%); theirfinancial

position (53%innovativenes

of products orservices (45%

and recognitio


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of their brandoutside their

home countrie(28%).

Respondentsalso

characterized


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the strengthsand weakness

of CIVETS-based

multinationalsin the global

marketplace.


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leadingcompanies in

the UnitedStates and

Europe. Thatwas followed

67% of


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participants wagreed that

thesecompanies lac

appropriatetransparency

and corporate


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governancestandards to

competeinternationally

66% who feltthe companie

do not have t


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public policy opublic affairs

expertiseneeded to

compete; 64who said the

firms do not


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have themarketing and

brandingcapabilities to

succeed in theglobal

marketplace;


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52% who feltmultinationals

in CIVETSnations do no

have thecommunicatio

capabilities to


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succeed in theglobal

marketplace;and, finally,

51% who feltCIVETS

companies are


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limited in theiglobal thinkin

When askedwhat they loo

for indetermining

whether a


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CIVETS counthas the

potential to beon a level

playing fieldwith one or

more BRIC


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countries, therespondents'

topconsideration

was politicalstability.

According to


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Wharton finanprofessor Fran

in Allen, theCIVETS

countries aredifferent, it is

hard to
http://www.wharton.upenn.edu/faculty/allenf.cfmhttp://www.wharton.upenn.edu/faculty/allenf.cfmhttp://www.wharton.upenn.edu/faculty/allenf.cfmhttp://www.wharton.upenn.edu/faculty/allenf.cfm


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fundamentalisand regional

volatility asissues to watc

for whenevaluating

investments i


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these markets"You have to

look at thepolitics carefu

in each of thecountries."


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The era in whforeign

investors hadfear

nationalizationof assets has

largely faded,


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but foreigngovernments

can still add rto investment

projects,perhaps throu

heavy taxatio


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the means ofproduction.

That's why wedon't see

political risk atoo much of a

problem, but


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would besurprised if it

went away fogood," Allen

adds. "It maytake other

forms.


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Governmentdebt problems

may [result intaxation being

much higher -although we

have got a wa


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to go before Ithink that wou

happen."In 2005,

Goldman SachO'Neill came u

with a new


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concept for thnext generatio

of emergingmarkets -- the

"Next 11" or"N11," made

of four CIVETS


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and seven othcountries.

O'Neill, who isnow chairman

of GoldmanSachs Asset

Management,


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notes thatColombia and

South Africawere not

included in hisN11 because

their populatio


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size restrictstheir ability to

grow into largmarkets. "Our

N11 Groupwould also

include


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Bangladesh,Pakistan, the

Philippines,South Korea,

Iran, Nigeriaand Mexico, a

these 11 wou


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be a morediverse and

attractivegroup," O'Nei

says.The EIU, in

turn, narrowe


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that list downNigeria,

according to tresearch firm,

too dependenon commoditi

Iran's politics


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andinternational

relations are tunstable. The

Philippines --dubbed a

"perennial


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underperform" -- also suffe

from weak,unstable

politics,according to t

EIU. Political


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instability willhold back

Thailand aswell, and

Pakistan'ssecurity

problems are


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acute.Bangladesh,

meanwhile, istoo poor and

vulnerable tothe effects of

climate chang


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O'Neill plans trelease a pap

this monthelevating

Mexico, SouthKorea,

Indonesia and


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Turkey, alongwith the BRIC

to a new statuas "Growth

Markets." TheEIU left Mexic

and South


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Korea off its lbecause they

were alreadysuccessful and

were "old newto investors.


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Wharton facupoint out that

Russia, whichremains

dependent onnatural

resources and


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has facedpolitical ups a

downs, does nreally rank wi

the other morsuccessful

BRICs.


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However,Henisz notes

that Russiaillustrates the

gamble with aemerging

market


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strategy, andsuggests that

five or 10 yeafrom now, one

or more of theCIVETS may b

laggards. "I'm


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not laying oddon which ones

but one or twwill be outlier

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