RGMF Summer 2013 - V8.2 - LR

Growing Growing Beyond Beyond
Rapid-growthmarkets
EY Rapid-Growth Markets Forecast July 2013
Welcome
Published in collaboration with
Welcome to EYs latest Rapid-Growth Markets Forecast. Its a time of change for us with a refreshed brand and logo and so, too, for the worlds economy. Rajiv Memani Despite a period Country Managing of increasing Partner - India confidence in the prospects for the global economy, it seems that this era of turbulence and unpredictability is not yet behind us. Policy-makers in advanced economies are seeking to reduce spending and at the same time maintain public services to stimulate growth. The picture is a little brighter in rapid-growth markets (RGMs). Its not as if these economies are contracting far from it but many have seen their currencies weaken in recent weeks as investors baulk at what they see as higher risks and the knock-on effect of reduced quantitative easing in the US and elsewhere. Recent announcements by the Federal Open Market Committee (FOMC) and the consequent increase in bond yields have affected rapid-growth markets significantly, weakening their currencies, stock markets and the local investment climate. In an increasingly globalized world, the economic policies of both mature and rapid-growth markets need to be aligned to drive growth across all markets.
So what can we expect from RGMs over the next few months? Is the fragility and volatility set to continue or will stable and assured growth be restored? In the short term, we believe that growth prospects have been subdued by a variety of factors. Low investments in the major economies havent helped, nor has the disappointing recent performance of world trade. Similarly, low interest rates and strong credit growth are failing to deliver a significant boost to domestic demand in RGMs, and there are also concerns over investment returns and the pace of reform. As a result, we now expect a slower recovery in RGMs, with growth of 4.6% in 2013, similar to the expansion in 2012. There is better news to report for the medium term. The main drivers of strong growth in emerging markets ranging from an expanding middle class, particularly in Asia, to the further development of trade flows between RGMs such as Turkey and the Middle East remain intact. This means that RGMs will grow by close to 6% in 201516, much faster than the advanced economies. Another factor safeguarding the progress of RGMs is increased levels of foreign direct investment (FDI), which has the potential to transform economies and boost technology and skills. This is evident across areas such as Africa and Turkey. FDI flows also tend to be more stable than portfolio flows into equities or bonds. Furthermore, the likelihood of slower but more balanced growth in China will help to drive higher consumption rates across Asia, creating
opportunities for new businesses to expand. So its a mixed picture. Rapid-growth markets continue to prosper, that much is certain. But their path forward, in the short term, is far from easy. With some corrective measures like further liberalization and economic reforms, higher growth can be expected in the medium term. In addition to navigating the macro trends that will continue to shape and influence the global economy, much will depend on their own resolve to uphold their respective growth performance. For business, managing risk is essential, but so is understanding how to adapt to rapidly growing markets that are transforming themselves with help from investments and usage of information and communications technology. Here we see a range of interesting and innovative business models grow. EYs Rapid-Growth Markets Forecast offers timely analyses of emerging markets and the role they are playing in the global economy. I hope you find the data and insights in this report useful. By exploring how their progress affects the business landscape, we aim to help you identify opportunities in a world that is changing fast and, as our new brand value says, help to build a better working world. To learn more about rapid-growth markets, their business environments and to access local contacts, please visit ey.com/rapidgrowth.
Contents
Published on 11 July 2013
3 Highlights
4 Managing risk? Essential
12 Investment helping to diversify economies
26 Forecast for rapidly growing countries
54 Detailed tables
Highlights
Investors reassess risks as recovery in global trade and investment shows signs of faltering
Investors have been reassessing the risks in rapid-growth markets (RGMs) relative to prospects in the advanced economies. And many RGM currencies have weakened over the past few weeks. Investment order indicators in the major economies have been relatively soft in recent months and world trade growth has been subdued. Low interest rates and strong credit growth are providing less of a boost to domestic demand growth in RGMs, with some concerns over whether the returns to new investments are falling and the pace of reform is slowing. These stumbling blocks have dented near-term growth prospects in RGMs. As a result, we now expect a slower recovery in RGMs, with growth of 4.6% in 2013, similar to the expansion in 2012. The main drivers of strong growth in emerging markets, however, remain intact. And over the medium term, RGMs will grow by close to 6% in 201516, much faster than the advanced economies.
Strong medium-term prospects underpin investment flows to rapid-growth markets

Strong growth prospects and improved risk management have led to increased demand for investment into RGMs over the past decade. At the same time, quantitative easing in the US, UK and Japan has increased the supply of liquidity. These flows have helped to lower interest rates in RGMs and spurred domestic investment. A rising middle class, particularly in Asia, and the further development of trade flows between RGMs such as Turkey and the Middle East as domestic demand expands, will help to underpin medium-term growth in emerging markets.
The increasing use of mobile phones presents new business opportunities, allowing people even in remote locations to manage their finances electronically. In addition, the growth of private credit is enabling new businesses to expand.
Risks of a slump in productivity in some RGMs could have global repercussions

Managing the transition toward higher consumption, and a greater role for the financial and other service sectors in China, will not be easy. If China fails to reach its potential, growth could slow much more sharply. A weaker China has significant implications for other countries in Asia and worldwide including countries that are sensitive to commodity prices that Chinese demand has supported. In Brazil and India, there is a danger that the pace of structural reform could slow.
FDI flows are helping to diversify economies, allowing some RGMs to leapfrog technologies
Strong FDI flows, easier access to credit, and the growth of entrepreneurship is fuelling the development of new businesses and sectors within RGMs and helping to diversify economies. Africa, for example, is attracting more FDI, particularly from Asia, and not just to natural resources. The service industry is developing fast in the continent, with finance, real estate and insurance representing more than 20% of South Africas GDP.
Managing risk? Essential
Despite increased uncertainty, emerging markets remain attractive. Upsets of various kinds have overtaken many countries in recent months, including falling equity prices, currency instability and public unrest. Even as some fastgrowth economies mature, differentiation between countries is becoming more marked across our selection of 25 rapidgrowth markets (RGMs). Directors and executives seeking to assure the international future of their businesses must weigh, with increasing care, not only where they invest, but also when, and how. Perhaps the biggest surprise of the first half of 2013 has been the weaker-than-expected recovery in trade and investment, and its impact across our RGMs. Caution is the watchword. We now believe that growth across RGMs will average 4.6% this year, a fraction weaker than the 4.7% they achieved during 2012. That is a disappointment. In our April 2013 RapidGrowth Markets Forecast, we were looking for growth of 5.1% this year across our markets, rising to 6% next year. We now think the real uptick will be deferred until 2014. After a solid performance this year, we expect the average growth rate to surge to 5.7% in 2014 and 5.9% in 2015. Social uncertainty is real, but increasingly universal. Business must learn to live with surprises. Managing risk is more than ever a key skill for the RGM investor.
forever. The flood of developed-world cash seeking higher returns in emerging economies has slowed or reversed. Third, social unrest has sprung suddenly to life in some RGM stars. Few predicted street battles in Turkey, protests triggered by bus-fare increases in Brazil, nor rage in Indonesia as the Government pledged to reduce fuel subsidies. In the era of social media, discontent can burst out abruptly and be relayed rapidly around the world.
Understanding a changing world

Grasping the shifting shape of the global economy is fundamental for any corporate executive charting a future in the RGMs. Though the US is recovering, China fascinates as the new global locomotive. After three decades of turbo-charged expansion, growth in China slowed to 7.7% in Q1 2013 and we now forecast full-year growth of 7.5%, down from the 8.2% anticipated in our April edition. Founded upon export-led growth, subsequently sustained by infrastructure spending, Chinas economy is now being recast as a new leadership looks to internal demand and services to underpin future expansion. Chinas Premier, Li Keqiang, is putting his faith in deregulation and increased use of market mechanisms to strengthen the countrys economic vitality. A new Chinese model is being born, more efficient and mature. Weak demand expectations among Chinese corporate purchasing managers in May are shared by peers in Brazil and India. Brazil is in the doldrums, trapped by poor competitiveness and in need of structural reforms. After expansion of just 0.9% last year, 2.4% is possible in 2013, rising to 4.1% in 2014. Indias growth remains relatively subdued, at just 5.1% this year, we think, but accelerating to 6.4% next and 7.5% in 2015. Growth in Russia remains soft as resource prices stall. President Vladimir Putin has unveiled US$13.6b of additional infrastructure spending, including plans for a high-speed train link between Moscow and Kazan (the capital of Tartarstan), two of the planned venues for the 2018 FIFA World Cup. Infrastructure improvements remain a central opportunity in RGMs, but in-country design and management capacity is improving, while emerging champions increasingly compete with US and European stalwarts to supply high-tech engineering elements.
Fast, not faster

Surprises are increasingly commonplace and inevitable as development widens out to create a truly global, intertwined economy. The first noteworthy theme of our survey is slower-than-expected, but still very fast, growth in China, as the worlds second-biggest economy becomes progressively more focused on internal demand. Second is a series of corrections underway in stock markets around the world, especially those of emerging markets. Comments by Ben Bernanke, Chairman of the US Federal Reserve, that the Fed could begin tapering its program of quantitative easing this year, have reminded investors that ultra-low US interest rates will not last
The growth story in Asia remains compelling. Indonesia, Malaysia, Thailand and Vietnam are all forging ahead. The Middle East also has good momentum and growing scale and sophistication. Chile and Colombia are pacemakers among our Latin American leaders. Sub-Saharan Africa continues to catch up, with sterling progress from Nigeria and Ghana though there's a sad showing from South Africa. The mire is in Central and Eastern Europe, where the Czech Republic, Ukraine and Poland are stalled by the recession-hit Eurozone. But we expect them to accelerate next year, delivering on their promise in 2015. With every quarter that passes, these markets command a bigger share of the world economy. Their expanding middle classes consume more goods and services. In a more open global economy, mobility of people and money has opened a vast gamut of economic activity to business. As RGM economies develop, domestic producers and exporters from both developed and emerging markets fight a three-corner contest to satisfy new demand for goods and services.
Slower-than-expected growth has reined in surging demand for many commodities, from metals and ores to foodstuffs. Some mining company stocks have already weakened in anticipation of lower prices and earnings. Reduced export of natural resources may weaken the exchange rates of exporting countries. On the other hand, companies in sectors that are big users of commodities such as engineering and construction may benefit from more affordable inputs. Effective management of fluctuations in exchange rates is imperative. By mid-June, many emerging market currencies had experienced notable falls against the US dollar, including the South African rand, the Mexican peso, Brazils real, the Indian rupee and the Turkish lira. Such falls will be important for companies with subsidiaries in multiple countries, and those managing international supply chains. Manufacturers importing inputs into countries with falling exchange rates and those exporting products or services from these countries may see costs rise and revenues fall. Businesses in countries with strong currencies may obtain cheaper inputs and windfall export profits. But for truly multinational businesses, the consequences will be complex. If they endure, changing currency valuations will affect internal transfer prices, balance sheet valuations and reported profits. Businesses need to be on the alert. Companies contracting long-term projects, for example in the infrastructure arena, may need to take care over pricing policies and currencies, ensuring that contracts protect the profitability of agreements from sudden currency swings. Concerns over currencies and finances may also prove more acute in countries that rely upon footloose funds to finance current account deficits, such as Indonesia and Turkey. But short-term currency swings need to be set in the context of long-term rebalancing. Many RGM currencies have hardened in recent years and the Chinese renminbi has appreciated by 35% over the past decade.
Coping with financial fluctuations

Yet financial market instability is the enemy of the kind of long-term planning directors and executives must undertake to grasp emerging market opportunities. Wrestling with the unexpected, companies need to steady their nerves and continue to base decisions on long-term trends, while keeping events under review. Instability in stock and bond markets can make corporate fund-raising more difficult. Already, there are reports of corporate initial public offerings that have been deferred. Setting rates for corporate bond issues also becomes more challenging, especially in RGMs when international financial inflows are waning. Mergers and acquisitions are also trickier to accomplish when corporate valuations are fluctuating. On the other hand, if valuations of quoted companies in RGMs undergo a bout of sustained relative weakness, new deal-making trends may arise. For example, Western companies may seize opportunities to buy-in shares of subsidiaries quoted in RGMs, while the acquisitive appetite of BRIC companies may pall.
Box 1
Tailoring technology in rapid-growth markets
Technology is fundamentally changing both mature and emerging economies. In some emerging markets today, technology usage is growing substantially faster than in developed markets. This is especially true in the smartphone segment, but many RGMs are also enjoying a surge in the number of internet users. These areas are closely related, as rises in internet usage are partly a function of the way smartphones and tablets provide increased connectivity in emerging markets. In addition, traditional, PC-based internet connections are also on the rise in many RGMs. Whatever the device, internet user growth in RGMs is striking. The worldwide increase in 2012 was about 8% year on year.1 But within that, user growth in China was about 10%, with more than 50 million internet users added, and in India it was about 26%.2 Uptake in India is expected to continue to rise: there were 138 million internet users in 2012; this could grow to between 348 million and 600 million users in 2017.3 Meanwhile, mobile broadband subscriptions are growing especially fast in Africa, Asia-Pacific and the Middle East. According to the most recent International Telecommunications Union data, mobile broadband subscriptions grew 40% worldwide from 2010 to 2011, with developed markets growing 23% year on year, and RGMs growing 78%.4
Broadly speaking, two types of online technology business opportunities appear to be emerging in RGMs. Some are followers, which replicate the business models that first appeared in developed markets. Others are more novel, adapted to particular consumer or business needs in RGMs. Examples of the former occur in China and Russia, which have their own email, search engine and social networking champions, as well as e-commerce companies bred to meet local needs. But more original business models are also developing in emerging markets. A striking example is M-Pesa, a rapidly growing mobile phone-based money-transfer service in Africa that started in Kenya. M-Pesa allows users to make deposits and withdrawals, transfer funds, and pay bills. It offers flexible financial services in countries where banks and road infrastructure are still developing. Digital ID cards, like those being introduced in India to facilitate good government, might also enable an online industry to overcome many of the challenges otherwise associated with identifying customers. By enabling financial transactions, and the identification of parties to transactions, technology has the potential to increase business and market efficiency significantly across RGMs, where information infrastructure is often lacking. As internet access spreads in the emerging world, it becomes possible to launch businesses that can reach many millions of consumers, but do not have the high entry costs involved in brick-and-mortar shops. Low barriers to entry for online enterprises may also lead to increased competition. This has the potential to reduce profit margins and prices, but expand the number of potential customers. Its important to note that technology products and business models are moving in both directions between developed markets and RGMs. Leading technology companies from developed markets are looking for growth in RGMs, and many RGM leaders are seeking to expand beyond their own national boundaries. Some have found it hard to enter technology markets in mature economies, though a notable exception has been in communications equipment for
Mary Meeker, Internet Trends @Stanford Bases, Kleiner, Perkins, Caufield, Byers, 3 December 2012. 2 Ibid. 3 India will lead in internet protocol traffic growth, Business Today, 29 June 2013; http://businesstoday.intoday.in/story/india-will-lead-in-internet-protocoltraffic-growth/1/195587.html 4 Measuring the Information Society, International Telecommunications Union, 2012; http://www.itu.int/dms_pub/itu-d/opb/ind/D-IND-ICTOI-2012-SUMPDF-E.pdf?bcsi_scan_dc00907d16dca697=0&bcsi_scan_filename=D-INDICTOI-2012-SUM-PDF-E.pdf
Adapting to maturing growth

The gradual appreciation of the Chinese currency is among a slew of trends that are driving many companies in the worlds biggest RGM (and second biggest economy) to rethink the way they operate. Rising wage and non-wage costs, and a gradual structural rebalancing to increase the proportion of domestic demand within the economy, are having a profound influence on many companies that do business in China. Chinas Government is pushing companies to improve productivity to avoid the so-called middle-income trap when growth starts to slow. Chinas progress in this endeavor will be closely watched by other RGMs facing a similar challenge. EYs Driving Profitable Growth: The Productivity Challenge in China, looked at progress by companies in China, and areas of focus needed to lift their productivity to the next level. It found that, while companies in China are largely still profitable, profit margins are coming under pressure, with almost half of companies surveyed reporting a fall over the past two years. Only a quarter had seen margin improvements. EYs analysis identified wide differences in profitability between sector leaders and laggards: the opportunity for improving productivity probably comes from upgrading the long tail of backmarkers. Second, domestic companies are rapidly catching up and even overtaking foreign-owned rivals though many domestic companies still have ample room for improvement. Top-performing companies had adopted a transformational approach to performance improvement, building expertise and better results in most of the activities needed to deliver their products or services. In particular, the top-performers have developed especially strong capabilities in five specific areas: long-range strategic planning, standardization of operating processes, robust internal controls, effective workforce planning and strong technology infrastructure. These improvements were not necessarily expensive: many revolved around business organization rather than capital investment. As they survey not just the pace of growth, but the increasing sophistication and maturity of the RGMs in which they operate, corporate leaders must adopt best practice and continuous improvement in these markets too. In many markets, rapid growth is also synonymous with rapid change and intensifying competition.
network operators. But emerging market technology champions, producing networking equipment, laptops or even smartphones, have been very successful in selling equipment in other emerging markets, where customer requirements or behavior may resemble those in their home markets. Online retailing has great potential in markets where shopping malls are scarce but connectivity is expanding apace. Its development has often been held back, however, by inadequate postal services, lack of infrastructure for financial transactions and cultural issues of trust in societies that are largely cashbased. Pioneering online retailers have reacted creatively, often setting up cash-on-delivery logistical systems. Business-to-business markets are also developing differently or at least at different speeds. In Latin America, 39% of leading companies are estimated to have switched to cloud computing, compared with 28% in Asia-Pacific, 19% in the US and just 12% in Europe.5 Cultural concerns in Europe and the US about privacy and security may contribute to slower adoption there. But developed market companies may also be held back by the cost and complexity of switching from legacy systems, while companies in RGMs are likely to have no such issues standing between them and the lower capital costs and increased flexibility of cloud computing. What are the implications of these developments for technology companies? Clearly, some innovations and business models travel well and can be extended to, or replicated in, RGMs. But local conditions may limit their relevance, or open opportunities for other innovations and business models that are better adapted to local conditions. In developing technology business models in RGMs, understanding local constraints and culture are a critical part of success.
Emerging markets lead the way in cloud application adoption, TCS News & Events: Press Release, 26 March 2012; http://www.tcs.com/news_events/press_ releases/Pages/Emerging_markets_lead_way_cloud_application_adoption.aspx
Sifting long-term trends

As the leading RGM economies mature, their economies will gradually rebalance. Growth will moderate, and be driven increasingly by production and services targeting domestic consumers. The shift from export-led growth, of either natural resources or manufactured goods, is already discernible in China, Brazil and even Russia, where companies main focus today is already the Russian domestic market. Russias middle class is growing fast. By 2020, Russia is expected to have the fourth-largest consumer market in the world. Similar trends are seen in Saudi Arabia. An economy founded upon oil exports is gradually developing a manufacturing sector, with growing numbers of businesses targeting the needs of a rich population of 27 million consumers. In the medium term, we expect growth in our 25 RGMs to approach 6% in 2015 and 2016, more than twice the typical pace of expansion in advanced economies. This will be driven, then, by a rising middle class, and strengthening flows of both commodities and manufactured goods between RGMs. Though infrastructure investment will continue apace, foreign direct investment (FDI) flows and entrepreneurship will become the chief engines of economic expansion, not only in Asian and Latin American RGMs, but across the Middle East and Africa too. Foreign investors, whether based in developed economies or maturing RGMs, are already beginning to re-target. During 2012, for the first time, FDI into emerging economies exceeded flows into the rich world. FDI flows are building between southern countries. Sooner than battle for a share of slow-growth developed markets, investors of all types are competing for opportunities in the south. Their chief rivals are domestic entrepreneurs in RGMs, better educated and financed than ever before, as transport infrastructure, education and training, communications technology and financial institutions become increasingly sophisticated. Though bureaucratic and other obstacles remain, many frontier markets are now developing a business climate where entrepreneurship can flourish.
Direct investors in RGMs must be prepared to join the trend, ensuring their overseas subsidiaries participate in burgeoning south-south trade flows. That may require substantial revision of supply chains, and the development of regional business hubs. What brakes will apply to this process? Interest rates are already beginning to rise in many RGMs as markets anticipate the end of quantitative easing in the US. That will raise the cost of borrowing modestly in emerging economies and slow investment, but probably not by much. We may also see weaken demand for commodities, paring revenues in RGMs that are dependent upon energy and commodity exports. On the other hand, rebalancing may spur lower exchange rates in some RGMs, spurring their competitiveness. The long-term trend is clear. Today, our 25 RGMs account for perhaps a third of global GDP. By 2040, their share of global GDP may be two-thirds: an appetizing opportunity for RGM investors whether foreign or domestic.
Financing growth
The development of financial services is simultaneously both a critical growth enabler and a business opportunity in RGMs. EYs Banking in emerging markets: Seizing opportunities, overcoming challenges, studied 10 of our 25 RGMs and identified how financial market opportunities emerge in these markets. Its findings were revealing. As frontier RGMs, such as Nigeria and Vietnam, begin to monetize, small deposit and savings accounts and small loans begin to develop, but banks are usually focused on city dwellers. In transitional RGMs, such as Colombia, Egypt and Indonesia, people seek finance for consumption, housing and education, while businesses demand loans for investment, and capital market development, accelerates. Leasing companies and credit card companies vie with banks for business.
Box 2
Effective indirect tax management leads to success

A recent EY report, Managing indirect taxes in rapid-growth markets, investigates the indirect tax issues that multinational companies face in doing business in emerging and fast-growing economies. The report is based on interviews with clients and EY indirect tax professionals providing their experiences and conveying the leading practices they have developed. The emerging markets are not only attracting inward investment, they are also creating a new generation of global traders. Business models are also transforming, as advances in technology allow new goods and services to be designed, manufactured and delivered in new ways. In parallel, governments in RGMs do in general rely on indirect taxes, such as customs duties and local excise taxes, because they represent a much higher percentage of overall tax income than in many developed markets. To protect and increase tax revenues, tax authorities in RGMs are: Increasing enforcement of indirect tax compliance obligations. Exchanging more information between tax departments and with other countries. Using advanced technologies to improve revenue collection, collect information and audit companies activities. Learn more about how to take advantage of the opportunities afforded by the effective management of indirect taxes and how to avoid unnecessary costs and risks by downloading Managing indirect taxes in rapid-growth markets at: ey.com/indirecttaxrgm
In established RGMs for example, Malaysia or Turkey demand for consumer credit surges and companies seek longer-term, more complex financing and risk-management products. Domestic banks battle regional and international rivals. Banks keen to compete in these markets must pursue four essential strategies: Simultaneously develop simpler low-cost products to attract the unbanked, and more sophisticated products to serve an emerging middle-class and commercial customers. Build alliances with financial and telecoms companies, in order to access capital, expertise and technology to reach the unbanked via mobile phones. Strengthen their credit-risk management as they start to serve ill-documented customers. Invest in technology so that they can reach more customers, and offer a wider range of products. Though the solutions and strategies may be different in each country, many lessons are transferable.
Construction and materials: local by nature, the sectors expand rapidly with prosperity. Transport: vehicle maintenance increasingly requires software skills and scale. Air travel holds promise, but regulatory hurdles and lack of airport infrastructure are impediments. Education and health: no longer the preserve of states alone. Technology and novel business models promise more affordable private sector solutions to speed economic transition.
Thinking differently
RGMs are defined by the pace of their economic development. Yet rising prosperity is a single index. Often they are also undergoing substantial social, political and technological change. But, like economic expansion, inflation, exchange rates, and any other economic measure, change in these fields often proceeds in fits and starts. And it may be even harder to measure or anticipate. Today, that is true of many emerging and developed markets. Businesses that hope to prosper in emerging markets must understand the hopes and expectations of the consumers and societies that are their customers. Only then can they hope to contain the risks from bus-fare riots to currency valuations that are inherent in investing in a fast-changing world.
Building capacity
Financial flows in the form of loans, remittances or FDI can finance investment in production capacity, from small to large. FDI traditionally focused upon production for export of commodities or of manufactured goods made competitive by low-cost labor. But more balanced patterns of development are today creating entrepreneurial opportunities across a swathe of sectors. In frontier markets, opportunities arise especially in: Food production: commercial-scale production, food processing, packaging, distribution and retail. Successful companies are often obliged to pursue vertical integration from farm to fork, and can deploy their skills horizontally across adjacent products.
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Box 3
Key questions for business

Despite the weaker economic activity in the RGMS, these markets remain attractive for business and investors. However, there are some key questions that businesses should ask themselves: What does the slowdown and additional factors such as falling equity prices, currency instability and public unrest in some RGM countries mean for us? How should we respond to this? What does the RGMs claim for a bigger share of the world economy mean for our business and investment plans? How can we respond to new demand for goods and services in the RGMs? How does instability in stock and bond markets affect our business? How can we manage fluctuation in exchange rates effectively? How can we increase our productivity in order to meet increasing competition? Productivity is not only about cost cutting, but rather long-term strategic planning, standardized operating processes, robust internal controls, effective workforce planning and a strong technical infrastructure. What does the development of financial services in the RGMs mean for our business opportunities? Which sectors offer the best opportunities for entrepreneurs and investors?
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Investment helping to diversify economies

Recovery in world trade is subdued
Investment orders indicators in the major economies in recent months have been relatively soft and world trade growth has been subdued. While demand in some of the advanced economies has held up reasonably well, domestic demand in some of the key RGMs has faltered. Trade flows, particularly in Asia, have been weaker than expected in Q2 2013.
Figure 1 Figure 2
China: imports from Taiwan

US$b (seasonally adjusted) 18 Chinese (mainland) imports from Taiwan (left-hand side) US$b 12
15
10
12
World: cyclical indicators

% year 80 60 40 20 0 -20 -40 -60 -80 2000 2002 2004 2006 2008 2010 2012 US, Japan and Germany investment goods orders indicator (right-hand side) Japan, Korea and Taiwan exports to China (mainland) (left-hand side) % year 40
6 30 20 10 0 -10 -20 -30 -40 3 Taiwanese exports to China (mainland) (right-hand side)
0 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Haver Analytics; Oxford Economics.
GDP growth in China slowed to 7.7% in Q1 2013 and the HSBC manufacturing Purchasing Managers Index (PMI) for June dropped to a nine-month low. New orders fell, suggesting this weakness has persisted in Q2. Against this background, we have lowered our GDP growth forecast this year to 7.5%, from the 8.2% anticipated in our April Rapid-Growth Markets Forecast.
Source: Oxford Economics; Haver Analytics.
Slower but more balanced growth in China

But the overall pattern of growth is more balanced, with consumption contributing over half of the overall economic growth in China in Q1 2013. The Government also appears more committed to rebalancing the economy toward higher consumption, stimulating the economy less and thus accepting a slower rate of growth. As a result of these factors, we now expect growth to accelerate only mildly in H2 2013, with GDP growth of 8% next year. Over the medium term, growth in China should moderate to just over 6.5% by 2020, as its economy shifts more toward the service sector and its population ages. But the number of households in China with a disposable income of US$30,000 is expected to increase to over 30 million by 2020. For this reason, stronger domestic demand should help to expand trade links with other RGMs.
Trade growth in China slowed significantly in May, with exports expanding by only 0.6% year on year. This followed several months in which trade data from Chinas partners was increasingly out of line with Chinas reported data, as Figure 2 highlights. It seems likely that Chinese export and import data for the previous months were somehow overstated and underlying demand thus overstated.
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Managing the transition toward higher consumption, and a greater role for the financial and other service sectors in China, will not be easy. An aging population will start to place strains on Chinas growth from 2017 and the rapid pace of urbanization could lead to more growth-limiting environmental pressures. If China fails to reach its potential, growth could slow much more sharply. As Box 4 shows, a weaker China has significant implications for other countries in Asia and worldwide including countries sensitive to commodity prices that Chinese demand has supported. In Brazil and India, where the need to increase spending on infrastructure is pressing, there is a danger that the pace of structural reform could also slow.
In Poland, as Figure 3 shows, the economy held up well relative to the Czech Republic in 2011 and H1 2012. The Government cut spending in H2 2012 in order to reduce public debt as a share of GDP below 56%. The Polish economy has slowed very sharply since and the central bank cut interest rates for the seventh time in this cycle in June. We now expect GDP growth of less than 1% this year. However, this should mark the bottom of the current cycle and growth of 2.5% is forecast for 2014, helped by monetary stimulus. Czech fiscal spending fell between 2010 and 2012 as the Government was very prompt at introducing austerity measures to reduce the budget deficit to below 3% of GDP. But while we still expect GDP in the Czech Republic to fall by around 1% this year, there were promising signs in the Q1 national accounts that consumer spending and investment are beginning to improve and consumer confidence is now on a clear upward trend. According to Ernst & Youngs European attractiveness survey 2013, Poland overtook Russia as the leading destination in Central and Eastern Europe for FDI in 2012. The report also identified the Czech Republic as a popular FDI destination. Wages in Poland and the Czech Republic are still substantially lower than the more developed Western European countries, while their infrastructure and business environments have improved markedly in recent years. Much of this FDI has gone into labor-intensive sectors, such as heavy industry, and this should support solid employment growth over the medium term, partially offsetting lower public sector employment. Loose monetary conditions and good access to credit should support growth in most RGMs as the year progresses. But with business and consumer confidence still relatively weak, the recovery in RGMs will be more gradual.
Low interest rates providing less of a boost to investment

Low interest rates and strong credit growth are providing less of a boost to domestic demand in RGMs, with some concerns over whether the returns to new investments are falling and the pace of reform is slowing. Investment growth in emerging Europe, for instance, has been subdued over the past few quarters. We now expect Russia to grow by less than 3% this year, due to heightened concerns about the recovery of investment spending. But we remain confident that consumer spending growth will rebound sharply during the remainder of this year given the continued strength of the labor market helping to lift growth in Russia to 3.4% next year.
Figure 3
Central and Eastern Europe: investment

% year 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 2000 2002 2004 2006 2008 2010 2012 Poland Czech Republic Russia
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Box 4
Slower growth in China would be felt across RGMs

Investment and urbanization have driven Chinas impressive growth record
Growth in China has averaged more than 10% a year over the past decade. This has been driven by high levels of investment, particularly in infrastructure, and a rapid pace of urbanization. Investment has been an important part of Chinas economic transformation, allowing the country to improve its infrastructure, adopt new technologies and boost productivity. Investment in China as a proportion of GDP is close to 45%, much higher than some other BRICs. Investment was close to 30% of GDP in India and 18% in Brazil in 2012. At the same time, large-scale migration from rural to urban areas has increased productivity in China, as workers have moved from farming to more productive manufacturing jobs.
Figure 4
but investment-driven growth will wane as productivity slows

Chinas future growth potential comes from its labor and capital resources, and from the rate of technological progress or total factor productivity. In the past 10 years, capital growth has accounted for over three-quarters of potential growth in the non-agricultural economy. But this is set to slow, as China seeks to rebalance its economy away from investment and toward higher consumption. We also expect the fast pace of innovation to slacken as Chinas economy matures. There are indications that new investment in China is not as productive as it was, with the boost to growth from a given increase in capital starting to fall off. Nevertheless, a growing middle class and improving infrastructure will help China to outpace the advanced economies and also many emerging markets. There is still plenty of scope for China to catch up with the developed world by improving its human capital, adopting newer technologies and moving up the value-added chain, as well as developing its service sector. As a result, we expect a moderate slowing in growth in China to just over 6.5% over the next decade.
Fixed investment 2012

% GDP 50 45 40 35 30 25 20 15 10 5 0
Links with other RGMs, particularly in Africa, have grown recently

Chinas links with other RGMs, and particularly those in Africa, have increased rapidly in the past few years. For example, Chinas imports from South Africa tripled in size from US$11.4b in 2010 to US$44.6b in 2012. While Chinas overall trade with Ghana is much smaller, it has also expanded quickly, nearly doubling over the course of last year to US$640m. And China is not just a source of demand for Africas manufactured goods it also provides a flow of FDI to many African countries. The moderate slowing in Chinas growth will be felt across RGMs, but rising consumption as a share of GDP in China will help to support demand for consumer products. As Figure 5 shows, exports from sub-Saharan Africa to China will continue to expand rapidly.
US
Germany
Brazil
Russia
India
China
Source: Oxford Economics.
14
Figure 5
Exports from sub-Saharan Africa

US$b 800 700 600 500 400 300 200 100 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 Other Rest of emerging Asia China Europe Sub-Saharan Africa Forecast
Managing financial sector reform is difficult

In addition, managing the reform of the financial sector to provide a greater range of savings instruments for households and to ease the rapid growth in credit of recent years is difficult. Local government debt levels in China have risen in recent years and the shadow banking sector has grown rapidly, possibly obscuring a higher level of non-performing loans. Interbank rates rose sharply in mid-June, as Government efforts to reduce banks off-balancesheet lending led to lower liquidity in money markets. The current level of Chinas general government debt is low, however, giving it scope to adopt responsibility for the debts of various public institutions. Nevertheless, managing the situation is a challenge. A sharp rise in non-performing loans could lead to a need to recapitalize the banking sector and put pressure on local government finances.
Although our central forecast is for a smooth transition, there is a risk that Chinas potential growth could slow quite sharply. Pollution, water shortages and other environmental pressures could force a slowdown in the pace of urbanization and cause a fall in effective labor participation rates.
15
Box 4
Slower growth in China would be felt across RGMs (continued)

Sharp slowing in Chinas growth would be felt across the RGMs
Given these risk factors, we have used Oxford Economics Global Economic Model to estimate the effects of Chinese growth falling to 5% over the medium term. In this scenario, lower investment rates would lead to a much smaller contribution from capital. The overall level of innovation would fall, leading to even slower growth. Lower domestic demand in China and the rest of Asia would feed through to lower demand for exports from the advanced economies, and weaker growth in China would slow its consumption of oil and other commodities. In this scenario, oil prices in 2015 would be more than US$20 lower than in our baseline forecast. Countries that have forged close links with China through trade and FDI flows would be vulnerable. Large commodity exporters such as South Africa and Ghana would be hit particularly badly both by lower demand for commodities from China and the rest of Asia, as well as lower world prices for these commodities.
Figure 6
As the table below shows, if growth in China slowed to 5% by 2014, this would have serious repercussions for the other RGMs. Slow growth would likely hamper some of the efforts to improve infrastructure and investment in Brazil and, as a result, growth in Brazil could slow to just over 1% by 2014. South Africa would be particularly affected not only by weaker demand from China, but also by lower prices for its commodity exports, such as copper. As a result, growth could slow to 2% next year. With a large domestic market and relatively few commodities exports, India would be somewhat less affected. But nonetheless, the recovery would be more subdued.
Table 1
Alternative GDP growth forecasts

2012 RGM Forecast China Brazil Russia India South Africa China slowdown China Brazil Russia India South Africa Source: Oxford Economics. 7.8 1.9 3.4 5.1 2.5 7.8 1.9 3.4 5.1 2.5 2013 7.5 2.7 2.7 5.1 2.0 6.1 2.3 2.3 4.9 1.7 2014 8.0 3.6 3.4 6.4 3.6 5.1 1.2 1.1 5.3 2.1 2015 7.9 4.6 4.1 7.5 4.0 5.5 2.7 2.3 6.4 2.5
World: oil price

Brent crude spot, US$ per barrel 120 Forecast
100
Baseline Productivity slump
80
60
40
20
0 2000 2003 2006 2009 2012 2015
16
Investors are reassessing risks in RGMs

Since May, there has been a sharp sell-off in global financial markets, posing new questions about the robustness of the global recovery. Incoming economic data has contributed to these jitters, especially for manufacturing, with weak May PMIs in the US, Brazil, India and China. Currencies weakened in many of the larger RGMs in June, reflecting both a perception that quantitative easing in the US may taper earlier than previously expected and a wider reassessment of emerging market risks relative to more developed economies. In general, there has been a sharper sell-off in RGMs with higher perceived risks. In South Africa, for instance, the rand has fallen by nearly 20% since the beginning of 2013, partly reflecting concerns over the expansion in the current account deficit to more than 6% of GDP last year.
Figure 7
In the US, despite the recent sell-off, equity markets remain well above levels of one year ago, delivering wealth gains for US consumers. In contrast, many emerging market equities have performed poorly over the past year. The overall MSCI index is below the levels at the start of last year. An improving housing market, a competitive manufacturing sector and low interest rates will help drive the recovery in the US from 2% growth this year to 3% in 2014.
Figure 8
Emergers: equity markets

Index (30 Dec 2010 = 100) 140
130
120
Emergers: exchange rate vs. US$

Index (30 Dec 2010 = 100) 110 105 100 95 90 85 80 75 70 65 60 2011 2012 2013 India South Africa Brazil Thailand
US S&P 500
110
100
90
80 Emergers (MSCI, US$) 70 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Haver Analytics.
The Eurozone is expected to start growing again from mid-2013, but overall a decline of 0.6% is still forecast for 2013, followed by very sluggish growth of only 1.4% a year in 201417. Improving competitiveness and strengthening demand from the US and emerging markets will start to boost Eurozone exports over the coming year.
17
Financial market volatility and subdued investment and trade will keep growth in RGMs at 4.6% in 2013, similar to the growth in 2012. But we expect improving domestic demand and a gradual recovery in world trade to drive a strong recovery in RGMs to 5.7% in 2014.
Figure 9
GDP growth
% Annual growth 7 RGMs Advanced economies Forecast
The authorities in Brazil abandoned a tax on foreign investments in domestic bonds (which had been designed to discourage capital inflows) and in early June interest rates were increased by an unexpectedly high 50 basis points. The depreciating exchange rate could mean higher import prices at a time when inflationary pressures are already significant. We expect further interest rate rises this year, but there are also some more positive signs. Investment recovered significantly in Q1 2013 and imports of capital goods reached a five-month high in April. Brazils recovery will eventually pick up steam, with growth rising above 4% in 2014.
Mexico enjoys competitiveness dividend

Mexico, where growth in wage costs in the manufacturing sector has been broadly flat over the past decade, is much more competitive. As a result, it has rapidly expanded its exports of higher-value-added goods, such as cars. Nonetheless, having weathered the global downturn well in 2011 and 2012, more recently Mexico has also been affected by the more subdued world trade flows. Quarterly GDP growth in Mexico slowed to 0.5% in Q1 2013 and the industrial sector grew just 0.2%, held back by weak external demand as exports to the US declined. More recent monthly indicators suggest that the situation has not improved since then. The manufacturing PMI for June was the lowest in the surveys 27 month history. By contrast, the service sector continued to pick up speed in Q1, with relatively robust growth of 1.5%. We now think that GDP will grow close to 3% in 2013, but an increase in government spending, low interest rates and a strengthening US economy will help to lift growth close to 5% next year.
0 2012 2013 2014 2015 2016
Currency falls create policy dilemmas

Sustained currency weakness may indicate higher inflation (from higher import prices, as in the case of India) which could hold back activity. But it also makes exports more competitive and could act as a spur to world trade growth. Brazils manufacturing sector has been struggling for several years with competitiveness issues caused in part by an overvalued exchange rate. The recent rapid depreciation of the Brazilian real could help to make the country more competitive and spur innovation in its manufacturing sector. But managing monetary policy in the face of sharp currency fluctuations will not be easy.
18
Rupee limits Indias room for maneuver

The Indian economy remains subdued, growing by less than 5% for a second successive quarter in Q1 2013. And with the manufacturing PMI easing to its lowest in more than four years in May on weak orders, the fragile performance looks set to continue in the coming months. The recent impact of the depreciation of the rupee on import prices may limit some of the Reserve Bank of Indias room for maneuver to counteract weak growth and might push up inflation. Nevertheless, the three cuts of 25 basis points that have already been implemented this year will help build the economys momentum in H2 2013. India is expected to see a strong recovery, with the economy set to grow by around 7.5% in 2015-16.
Low interest rates have supported investment

With high liquidity and low returns in advanced economies, investors have sought out emerging markets, particularly their debt markets. As a result, real yields have fallen across many RGMs, as illustrated by the chart below. Lower yields have reduced the costs of debt and encouraged domestic investment. By reducing the debt payments on government borrowing, it has also increased the fiscal space to fund large-scale infrastructure projects. In Brazil, for example, real 10-year government bond yields were nearly 9% in early 2010, but are less than 3% now. In Turkey, they have fallen from over 5.5% in early 2011 to around zero today.
Figure 11
Strong medium-term prospects underpin investment flow to RGMs

Strong growth prospects and improved risk management have led to increased demand for investment into RGMs over the past decade. At the same time, loose monetary policy in most advanced economies and quantitative easing in the US, UK and Japan has increased the supply of liquidity. Between 2005 and 2008, a total of US$508b portfolio investment was invested in emerging markets. Over the subsequent four years, this more than doubled to US$1,130b.
Figure 10
Emergers: 10-year government bond yields

% 11 10 9 8 7 6 5 4 3 2 2011 2012 2013 Korea Poland South Africa Turkey
Emergers: cumulative portfolio inflows since 2002

US$b 250 225 200 175 150 125 100 75 50 25 0 -25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mexico Korea China India
Source: Haver Analytics; Oxford Economics.
19
Managing the tapering of quantitative easing will not be easy

Figure 11 also highlights a more recent trend. Having fallen steadily in the last few years, bond yields picked up notably in Q2 2013, as a result of higher investor uncertainty. The US Federal Reserve System is likely to begin tapering quantitative easing from Q4 2013. And as we have seen in recent weeks, managing the transition away from quantitative easing in the US and other advanced economies has the potential to disrupt equity and bond markets as investors adapt to changes in liquidity. So emerging markets that are heavily dependent on portfolio flows to fund their current account deficit, such as Turkey, face near-term risks. Though quantitative easing will be phased out gradually in coming years, we expect monetary policy in the advanced economies to remain very loose through to 201516 as growth slowly picks up speed. This will boost RGM growth prospects. A surge in investor flows can, however, lead to asset-price bubbles, particularly if there is a limited supply of domestic investment opportunities and hot money can leave just as fast as it arrives. Demand for property in some RGM cities with restricted land for development has driven strong property price inflation. This creates more dilemmas for monetary policy, as low interest rates may further fuel asset-price bubbles. The authorities in some countries have intervened to restrict investment in property in an attempt to prevent bubbles from emerging, notably in China, Singapore and the Middle East. Credit growth has been very strong in recent years in many emerging economies, which in some cases has caused enough concern to merit intervention. In Indonesia, for example, the authorities have restricted the availability of credit to buy motorbikes and cars.
Figure 12
Emerging Asia: residential property prices

Index (2006 = 100, quarterly averages) 260 240 220 200 180 160 140 120 100 80 60 2000 2002 2004 2006 2008 2010 2012 Singapore China (luxury residential) Hong Kong
Reform is the key to encouraging FDI

Brazil, India and Indonesia in particular would benefit from increased spending on infrastructure and better financial services. In April, the Indian Government announced further reforms to attract greater FDI. By improving technology and skills through partnerships on specific projects, FDI has been shown to boost a countrys potential. FDI flows tend to be more stable than portfolio flows into equities or bonds.
FDI is boosting the Turkish economy

The potential for FDI to help transform economies is well illustrated by the outlook for Turkey. As outlined in EY's Turkey attractiveness survey 2013, Turkey plans to attract investment of US$250b in the fields of energy and transportation to support its goal of becoming one of the worlds top-10 economies within the next decade. Turkey has a huge domestic market and our forecast suggests that in 10years time there will be over 11 million households earning more than US$30,000, the same number as in Canada now.
20
Growth in Turkey accelerated to 3% in Q1 2013, driven by rising consumer spending and investment. The recovery reflects the major easing in monetary policy since the middle of last year that is starting to feed through the economy. Meanwhile, consumers real incomes are benefiting from lower inflation as well as still-buoyant employment growth. However, the uncertain political situation in Turkey, following large demonstrations in Istanbul and other cities, is affecting the economic outlook. The exchange rate and Turkish capital markets fell sharply at the end of May and in early June in response to news of a large widening in the external deficits and sizeable political demonstrations. But assuming the political situation improves, we forecast Turkey to grow by around 5% per year over the longer term. Nonetheless, Turkey remains vulnerable to a reversal of portfolio flows, pressures on its exchange rate and the implications for the external borrowing of its banking sector.
Figure 13
Opportunity to expand trade links with the Middle East

Turkeys geographic position has helped it to benefit from increased trade with Europe, the Middle East, North Africa and Central Asia over the last decade. Around half of Turkeys FDI came from Europe last year, but having nurtured stronger links with the Middle East in recent years, the authorities are keen to attract more FDI from other emerging markets over the next decade particularly from the Middle East.
Non-oil sector buoyant in Middle East

We expect the Middle East region to grow by 3.0% this year, down from growth of 3.7% last year, which partly reflects lower commodity prices. However, the recovery in global trade will boost the region next year, underpinning growth of 4% or more. Our slightly more subdued forecast for activity in China will reduce demand for Middle Eastern exports a little in the medium term, however. But in the key Middle Eastern RGMs, a young population is helping to foster entrepreneurship and the growth of the non-oil sector is buoyant, protecting these economies from slower global oil demand. Despite cutting its oil output this year, Saudi Arabia is still expected to grow by around 4.5% this year and next as growth in the non-oil sector has very strong momentum. In Qatar, growth of 5% this year will be driven by a gain of nearly 10% in the non-oil sector.
Turkey: monthly trade balance

US$m (seasonally adjusted) 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 -7,000 -8,000 -9,000 -10,000 -11,000 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Turkish Statistical Institute; Haver Analytics.
21
FDI flows will boost Africas growth

Strong FDI flows, easier access to credit, and the growth in entrepreneurship is fuelling the development of new businesses and sectors within RGMs and helping to diversify their economies. Africa, for example, is attracting more FDI and not just to natural resources. The service industry is developing fast in the continent with finance, real estate and insurance representing more than 20% of South Africas GDP.
Figure 14
Figure 15
Sub-Saharan Africa: private credit

US$b 12 US$b 350
10 South Africa (right-hand side) 8 Ghana (left-hand side)
300
250
200
Sub-Saharan Africa: total annual inward FDI

US$b 45 40 The total includes the largest 11 countries in sub-Saharan Africa by nominal US$ GDP Forecast
150 4
100
35 30 25 20 15 10 5 0 1990 1994 1998 2002 2006 2010 2014

0 2001 2003 2005 2007
Nigeria (right-hand side) 2009 2011
50 0
Source: World Bank.
Conclusions
A weaker recovery in trade and investment across RGMs will keep the outlook in 2013 subdued. Growth is expected to be close to 4.6%, similar to growth in 2012. Currencies have weakened across many RGMs in recent weeks, as investors have become more cautious about the relative risks in emerging markets. Uncertainty around the tapering of quantitative easing in advanced economies has added to financial market volatility. Slower but more balanced growth in China will help to drive higher consumption rates across Asia, creating opportunities for new businesses to expand. Rising FDI flows are helping to transform trade opportunities across Turkey, the Middle East and Africa, with particular expansion in financial services. Rising domestic demand and growing world trade will drive a strong recovery in RGMs, to close to 6% in 201516. This will far outpace growth in the advanced economies.
As Box 5 shows, the increasing use of mobile phones in Africa presents new business opportunities, allowing people even in remote locations to manage their finances electronically. This is also increasing access to private credit, which is in turn enabling new businesses to expand. A growing middle class, particularly in Asia, provides the market and catalyst to fuel new business growth.
22
Box 5
Technological advances welcome new opportunities and faster growth in Africa

Africa will enjoy strong growth over the next decade, supported by ICT
Advances in information technology and communications have helped sub-Saharan African economies to grow by 5% a year for the past 10 years. As well as freeing a vast and disparate region from some of the difficulties caused by a lack of physical infrastructure, mobile phone usage has opened up access to financial markets. At the same time, rising world demand for commodities like oil and minerals has increased inward investment in the region. Although GDP per capita is still low by world standards, South Africa and Angola are comparable with China (where per capita GDP was estimated by the International Monetary Fund at just over US$6,000 last year). Faster growth goes hand in hand with improvements to institutions, infrastructure and human capital, but there are still plenty of gains to be secured.
Figure 16
Sub-Saharan Africa: annual GDP growth*

Compound annual growth rate Zambia Angola Tanzania Ethiopia Uganda Cote D'Ivoire Nigeria Ghana Cameroon Sub-Saharan Africa Kenya South Africa World Advanced economies 0 2 4 6 8 10 12 201222 200212
and benefitting from natural resources

We expect most sub-Saharan countries to grow faster than the world average for the next 10 years (see Figure 16). Natural resources will remain an important growth driver, although the trend toward economic diversification will continue. It is notable that the three largest economies in GDP terms South Africa, Nigeria and Angola each have substantial natural resources at their disposal.
*Compound annual growth rate. Source: Oxford Economics.
Africa is attracting more FDI

But it is not just natural resource wealth that is driving growth. The ready availability of funds (from loose monetary policy in much of the advanced world) has led to a surge in FDI into sub-Saharan Africa, up to more than US$20b in 2011. The natural resources are a big attraction, but the potential benefits available from technological progress have also helped to make Africa a more attractive investment location. The EYs Africa attractiveness survey 2013 highlights the key role FDI will play in African growth in years to come, not only as a source of capital, but also a source of job creation, skills development and technology transfer. This will enable the economies to diversify and sustain longer-term rapid growth.
23
Box 5
Technological advances welcome new opportunities and faster growth in Africa (continued)
as the penetration of modern technology offers new opportunities
Mobile telephone penetration is now over 50% in every major sub-Saharan country.
Figure 17
more than 80% of mobile users now use their phone for monetary transactions. Education: Internet penetration is still relatively low, but as technologies develop the rise in virtual learning could bring huge benefits in terms of knowledge and skills. The rapid spread of information is already having a positive impact on the quality of health care, for example.
Mobile phone subscriptions

Number per 100 people Tanzania Nigeria Zambia Kenya Ghana Cote d'Ivoire US Eurozone South Africa 0 20 40 60 80 100 120 140 2011 2001
Access to technological advances has raised potential growth across Africa

The increasing use of mobile technologies could help sub-Saharan economies to catch up fast, by freeing up capital constraints and sharing skills and information. Private credit already accounts for over 100% of GDP in South Africa and nearly 40% in Kenya. This facilitates start-up businesses and enables more efficient markets to develop. If physical infrastructure, such as roads and power supplies, are also improved (FDI may help with this), both international and intra-African trade will benefit. We expect intra-African trade to grow strongly, compensating for a relatively subdued medium-term growth outlook in more developed regions. The share of exports destined for Europe is forecast to fall sharply over the next few years. And as incomes and labor costs increase in more advanced regions, such as emerging Asia, opportunities will be created for lower-cost producers in Africa to compete in markets such as food, textiles and IT services.
Source: World Bank.
In development terms, this means that economies can leapfrog over older technologies (such as fixed telephone lines) which would have been prohibitively expensive to install. In South Africa, for example, the penetration of fixed telephone lines is just 8%, and in Nigeria and Kenya it is less than 1%. But with mobile penetration at 60% or more in these countries, the majority of the population now has access to modern communications. This has several advantages: Banking and Insurance: Mobile banking has surged in recent years, allowing people even in remote areas to manage their finances electronically. Industry sources estimate that there are 1.7 billion people worldwide without bank accounts, but with access to a mobile phone. In Kenya, a net commodities importer, annual growth still averaged 4.6% between 2002 and 2012, and
Improved macroeconomic stability is also needed

Technological improvements alone will not secure these benefits, however. Stable macroeconomic conditions are also needed. Ghana is a good example. Since 1992, when reforms ended more than 30 years of political troubles, the country has tripled its per capita income. This stability has encouraged foreign investment, and Ghana recently began exporting oil for the first time. It has also become the first African country to meet the Millennium Development Goal of halving its 2000 levels of poverty and hunger. As the tables opposite show, Ghana also ranks highly in the World Banks rankings for the ease of doing business, and has a low corruption score.
24
and the potential for even faster growth exists

Despite rapid economic growth in recent years, progress toward reducing corruption, ease of doing business and improving infrastructure has been slower. As the table below shows, South Africa and Angola have seen no improvement in their corruption scores over the past 10 years, and infrastructure in both Ghana and Tanzania has deteriorated. Although education and health care have improved, sub-Saharan Africa is still poor by world standards. But if continued progress can be secured through the rise in mobile technologies, the potential for even faster growth exists.
Table 2
Table 3
Corruption score
2002 South Africa Nigeria Ghana Kenya Zambia Angola Tanzania Ethiopia Cote DIvoire Turkey Indonesia 27 16 39 19 26 17 27 35 27 32 19 201213 29 27 45 27 37 22 35 33 29 49 32
Ease of doing business ranking

2006 South Africa Nigeria Ghana Kenya Zambia Angola Tanzania Ethiopia Cote DIvoire Turkey Indonesia Scores represent global ranking. Source: World Bank. 28 94 82 68 67 135 140 101 145 93 115 201213 39 131 64 121 94 172 134 127 177 71 128
Scores measured from 1 to 100, where 100 is least corrupt. Source: Transparency International.
Table 4
Infrastructure score
2006 South Africa Nigeria Ghana Kenya Zambia Angola Tanzania Ethiopia Cote DIvoire Turkey Indonesia 4.04 2.26 2.98* 2.75 2.75 2.07 2.65 2.34 3.33* 3.46 2.72 201213 4.13 2.28 2.87 3.09 2.85 not available 2.27 2.65 3.1 4.38 3.75
* Earliest available datapoint is 2008. Scores measured from 1 to 10, where 10 is the best. Source: Global Competitiveness Report, World Economic Forum.
25
Forecast for rapidly growing countries
Argentina Brazil Chile Mainland China and Hong Kong special administrative region (SAR) Colombia Czech Republic Egypt Ghana India Indonesia Kazakhstan Korea Malaysia Mexico Nigeria Poland Qatar Russia Saudi Arabia South Africa Thailand Turkey Ukraine United Arab Emirates Vietnam
26
Russia Czech Republic Poland Ukraine
Kazakhstan
Turkey Saudi Qatar Egypt Arabia UAE
China
Korea
Mexico
India
Vietnam Thailand
Ghana Nigeria Colombia
Malaysia Indonesia Brazil South Africa
Chile
Argentina
25 rapid-growth markets
We define rapid-growth markets on the basis of three key criteria:
Proven strong growth and future potential Size of the economy and population Strategic importance for business
Figure 18 shows the GDP growth of our 25 rapidgrowth markets over the last 10 years, comparing these with the leading advanced economies. Together, they represent a significant proportion of the world economy (Figure 19).
To find out more, please visit ey.com/rapidgrowth
Figure 18
Figure 19
Real GDP growth 200212

% Qatar China India Kazakstan Argentina Ghana Nigeria Vietnam Saudi Arabia Indonesia Malaysia Turkey Colombia Chile Egypt Russia Hong Kong UAE Poland Thailand Korea Brazil South Africa Ukraine Czech US World Mexico 0 1 2 3 4 5
Share of world GDP in PPP terms

% of World 60
Forecast
50
Asia RGMs Americas EMEA RGMs
40
30
20
10
% annualized growth rate, 200212
0
6 7 8 9 10 11 12 13 14 15
1988
1992
1996
2000
2004
2008
2012
2016
2020
27
Argentina
Moderate improvement in activity expected in 2013

We expect GDP to grow by 2.7% this year, assuming modestly rising consumption and an improvement in key trading partners, particularly Brazil. This should help drive a pickup in exports, and there should also be a moderate rebound in investment as a result of a depreciating currency. Although Argentinas economy may gain a short-term boost from its falling exchange rate, it faces several challenges that need to be overcome if it is to achieve its full growth potential. Intervention in many aspects of economic activity limits the flexibility of local businesses to compete internationally. Import restrictions,
for example, prevent the purchase of the investment goods and raw materials needed by industry. Despite these problems, we forecast GDP growth averaging over 4% in 2014 and 2015. The authorities also need to contain rising inflation, which will be exacerbated by the weakening exchange rate. High inflation harms competitiveness and erodes purchasing power. While official CPI inflation is expected to average 11% this year, the true rate may be over 30%. Argentinas longer-term prospects would benefit from measures to address these structural issues, as the country is rich in natural resources and has a well-educated workforce.
Figure 20
Figure 21
GDP and industrial production

% increase per year 25 20 15 10 5 0 -5 -10 -15 -20 -25 1990 1993 1996 1999 2002 2005 2008 2011 2014 GDP Industrial production Forecast
World: commodity prices

2007 = 100 (rebased) 200 180 160 140 120 100 80 60 40 20 2000 2002 2004 Commodity Research Bureau; raw industrial materials 2006 2008 2010 2012 Commodity Research Bureau; foodstuffs Oil
Source: Commodity Research Bureau; Haver Analytics.
Table 5
Argentina
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 8.9 9.8 -0.4 31.1 10.7 4.1 -1.6 40.8 444.7 10,897.6 2012 1.9 10.0 0.1 29.9 12.0 4.6 -2.5 41.2 475.1 11,540.7 2013 2.7 10.8 0.2 30.8 14.0 5.3 -1.8 41.5 462.3 11,134.7 2014 3.6 10.3 -0.1 31.1 12.4 6.0 -1.3 41.9 470.5 11,235.3
Source: Oxford Economics. 2015 4.6 9.7 -0.1 30.3 9.5 6.5 -0.9 42.2 496.2 11,753.2 2016 3.9 9.5 -0.1 29.3 8.4 7.0 -0.6 42.6 523.9 12,308.1
28
Brazil
Challenges remain for Brazil

There are signs of improvement after a lackluster 2012 (when GDP grew by just 0.9%), with output growing by 0.6% on the quarter in Q1 2013. But challenges remain for South Americas largest economy. Consumer spending, the economys main driver, ground to a halt in Q1, growing by just 0.1% on the quarter. And external demand remains patchy, with exports falling 0.8% year-on-year in April and May combined. Overall, the economy is expected to grow by 2.4% this year, down from 3.1% in our previous forecast.
Despite the moderation in domestic demand, inflationary pressures remain elevated. Inflation stayed at 6.5% in May, just inside the central banks 4.5% (+/-2%) target. The central bank has already raised the SELIC overnight rate to 7.5%, and we expect three further 25 basis point increases this year. Reforms to tackle the labor market and government bureaucracy, as well as invest in infrastructure, would significantly improve the economic environment. But the Government is increasingly focusing on short-term fixes to boost demand. With an election due next year, this is unlikely to change much in contrast to other countries in the region, such as Mexico. We expect growth to average more than 4% per year to 2016.
Figure 22
Figure 23
Contributions to GDP growth

% increase per year 12 10 8 6 4 2 0 Domestic demand Forecast
Prices and earnings

% increase per year 45 40 35 GDP 30 25 20 15 10 5 Consumer prices Producer prices Forecast
-2 Net exports -4 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
0 -5 1996 1999 2002 2005 2008 2011 2014
Table 6
Brazil
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 2.7 6.6 -2.1 11.8 11.7 1.7 -1.4 196.9 2,476.4 12,577.6 2012 0.9 5.4 -2.4 13.6 8.5 2.0 -1.0 198.6 2,255.0 11,354.7 2013 2.4 6.3 -3.7 13.4 7.7 2.0 -2.0 200.3 2,353.4 11,750.6 2014 4.1 5.8 -3.1 13.4 8.6 2.0 -1.9 201.9 2,608.0 12,916.6
Source: Oxford Economics. 2015 4.2 5.1 -2.7 13.4 8.7 2.2 -1.9 203.5 2,660.1 13,072.5 2016 4.0 4.5 -2.3 13.5 8.7 2.3 -2.0 205.0 2,745.9 13,394.1
29
Chile
Growth of 4.5% expected for 2013

GDP grew by just 0.5% on the quarter in Q1 2013. However, temporary factors, including fewer working days and a major port strike, may have exaggerated the scale of the slowdown. More recent trade data points to a pickup in export volumes in Q2, while domestic demand remains underpinned by solid fundamentals, suggesting that activity may improve through the year. Even so, the weak start to the year has led us to cut our 2013 GDP growth forecast to 4.5% from 4.9%. Low inflation and subdued activity prompted the central bank to consider an interest rate cut at the May meeting, and we now expect a 25 basis point cut to 4.75% in Q3 2013. However, given our view that
the economy should start to regain momentum soon and that inflation may be back to 3% in a years time particularly if the weaker peso persists and the labor market stays tight we do not expect further easing beyond this small cut. In 2014 and beyond, we expect annual GDP growth to be broadly in line with the regional average at 4%4.5%. The macroeconomic and financial stability of Chile should provide a stable backdrop for investment. Expanding mining capacity will boost copper exports to the emerging markets. But slowing growth in the working age population could hinder growth in the long run, while energy infrastructure bottlenecks must be addressed to achieve our forecast growth rates.
Figure 24
Figure 25
Exchange and interest rates

Peso/US$ 300 350 400 450 500 550 600 650 700 750 800 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Nominal interbank rate (right-hand side) 4 2 0 10 Peso/US$ (left-hand side) % 16 14 12
Monthly indicator of economic activity

2008 = 100 (IMACEC, seasonally adjusted) 130 120
110
100 8 90 6 80
70
60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Banco Central de Chile; Haver Analytics.
Table 7
Chile
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 5.8 3.3 -1.3 36.1 4.9 483.7 1.5 17.3 251.2 14,528.1 2012 5.6 3.0 -3.5 37.5 5.0 486.5 0.6 17.4 268.3 15,381.6 2013 4.5 1.5 -2.9 36.9 4.8 481.8 0.6 17.6 289.3 16,445.0 2014 4.7 3.0 -2.8 36.0 4.8 489.0 0.1 17.7 310.8 17,518.4
Source: Oxford Economics. 2015 4.6 3.2 -0.4 34.7 5.6 496.1 0.3 17.9 335.9 18,777.7 2016 4.4 3.0 0.4 33.8 5.8 505.3 0.4 18.0 358.2 19,868.6
30
Mainland China and Hong Kong special administrative region (SAR)

Slower growth, but more balanced
The global upturn is looking less robust than we expected a few months ago. Investment indicators are subdued and trade flows, particularly in Asia, are weaker than expected. GDP growth in China slowed to 7.7% in Q1 2013. The HSBC flash manufacturing Purchasing Managers Index (PMI) for June dropped to 48.2, a nine-month low, with new orders falling, suggesting this weakness has persisted in Q2. We have lowered our growth forecast for China this year to 7.5% from the 8.2% we forecast in April. The Government also appears more committed to rebalancing the economy toward higher consumption, accepting a slower rate of growth. Robust credit growth is providing less of a stimulus than we expected. We now foresee growth accelerating only mildly in H2 2013, with GDP growth of 8% next year, relative to the 8.5% we anticipated in our April forecast. Over the medium term, China faces the challenging task of moving further up the value-added chain and reforming its financial sector. We expect slowing investment rates and an aging population to contribute to a lower trend growth rate of just over 6.5% by 2020. Moreover, there is perhaps a 20% chance that China will face a more significant slump in productivity.
Figure 26
Figure 27
Hong Kong: Stockmarket Hong Kong: stock market
China: inflation
% increase per year 24 20 16 12 8 4 0 -4 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Food prices
32,000
28,000
24,000
20,000
Hang Seng index
16,000
12,000 Manufacturing producer prices Consumer prices 8,000 1999 2001 2003 2005 2007 2009 2011 2013
Source: China Bureau of Statistics; Haver Analytics.
Source: Hang Seng Index Services Limited; Haver Analytics.
Table 8
Mainland China
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 9.3 5.4 1.8 8.9 5.4 6.5 0.1 1,363.7 7,335.6 5,379.1 2012 7.8 2.6 2.3 9.1 4.6 6.3 -1.8 1,372.3 8,239.5 6,004.2 2013 7.5 2.8 3.2 9.2 4.2 6.2 -1.8 1,380.8 9,184.6 6,651.7 2014 8.0 3.7 2.6 9.0 4.2 6.0 -1.2 1,389.1 10,463.8 7,533.0
Source: Oxford Economics. 2015 7.9 4.0 2.5 8.8 4.3 5.8 -1.2 1,397.0 11,828.5 8,467.3 2016 7.7 3.4 2.3 8.7 4.8 5.7 -1.3 1,404.6 13,348.8 9,503.5
31
Colombia
Monetary and fiscal stimulus to support economy in 2013

We expect Colombias economy to grow almost 4% this year, as it begins to recover from a cyclical low, supported by expansionary fiscal and monetary policy. The central bank has cut its key policy rate by 200 basis points in this cycle, to 3.25%. Inflation is at the bottom of its 2%4% target range, so loose monetary conditions are likely to be maintained for some time. In addition, a new fiscal policy stimulus package was announced in April, which will boost consumer spending and construction activity. We expect fiscal policy to remain supportive in the run-up to presidential elections in 2014.
Several factors have held back recent activity, however. The economy was hit in the early part of 2013 by a series of strikes and supply problems in the coal and coffee sectors, which contributed to a decline in industrial output. And exports have been hit by falling commodity prices and a strong exchange rate. As these temporary hitches pass, the prospects for future growth will improve. Foreign investment in oil, coal and mineral extraction is rising, which will fund exploration and development. These activities account for two-thirds of exports, so should help bolster the economy especially as world trade begins to pick up again later this year.
Figure 28
Figure 29
Inflation
% increase per year 45 40 35 30 25 20
Real GDP growth

% increase per year
Forecast
8 Latin America and Caribbean
Forecast
Western hemisphere
Colombia
15 10 5 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
-2
-4
Colombia
-6 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Oxford Economics; World Bank.
Table 9
Colombia
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 6.6 3.4 -2.8 22.9 4.0 1,848.1 -2.0 46.9 336.3 7,170.1 2012 4.0 3.2 -3.1 21.5 5.0 1,796.9 -1.9 47.5 369.8 7,781.6 2013 3.9 2.1 -3.6 23.9 3.4 1,860.2 -2.2 48.1 379.0 7,872.4 2014 4.4 3.2 -3.6 26.4 4.3 1,970.8 -1.9 48.8 385.4 7,904.6
Source: Oxford Economics. 2015 4.2 3.3 -3.5 28.8 5.5 2,089.6 -1.8 49.4 391.2 7,925.0 2016 4.0 3.3 -3.3 30.8 6.5 2,195.0 -1.7 49.9 400.1 8,013.7
32
Czech Republic
Outlook improving, but GDP to decline again in 2013

GDP fell 2.2% year-on-year in Q1 2013, below our expectations. The running down of inventories largely drove this decline. Indeed, all other components made a positive contribution to GDP growth, including external trade. As a result, we believe that the Czech economy is likely to return to growth in Q2 2013, supported by improving forward-looking indicators, such as consumer confidence. Recovering demand from Eurozone countries, particularly Germany, will also boost Czech exports later this year. However, it will not be enough to offset the significant decline in GDP in Q1 and we still expect the economy to contract by 1% in 2013.
We think that austerity measures will slow this year, as the budget deficit should fall below 3% of GDP. However, there is some political uncertainty that must be resolved. Growth will pick up to 2.2% in 2014, driven mainly by exports. By 201516, we expect GDP growth to be 3%, with this pace likely to be maintained throughout the rest of the decade. The aging population will cause the labor supply to decline and will slow productivity growth. The current growth model of the Czech economy is very dependent on the external sector exports, export-related investment and external financing. Given the weak medium-term outlook for the Eurozone, neither exports nor foreign direct investment are expected to return to pre-crisis growth rates in the medium term.
Figure 30
Figure 31
Consumption and investment

% increase per year 25 20 15 10 5 0 -5 -10 -15 -20 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Investment Forecast
Unemployment
% 11 10 9 8 7 6 5 4 Forecast
Consumption
3 2 1 1996 1999 2002 2005 2008 2011 2014
Table 10
The Czech Republic

2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 1.8 1.9 -2.7 46.1 1.2 17.7 -3.7 10.5 216.2 20,595.0 2012 -1.2 3.3 -2.5 50.8 1.0 19.6 -2.6 10.5 195.7 18,630.2 2013 -1.0 1.8 -2.5 51.5 0.5 19.8 -2.9 10.5 194.6 18,512.4 2014 2.2 1.8 -3.2 53.8 0.7 21.3 -2.8 10.5 189.5 18,028.8
33
Egypt
Ongoing political and economic crisis weighing on activity

The political and economic crisis continues, with little prospect of the situation improving in the near term. In fact, latest developments have been overwhelmingly negative. There is still no agreement with the IMF over the US$4.8b loan program, which is urgently needed to trigger more international aid and boost confidence that the Government will be able to implement a credible medium-term economic program. Investor and business confidence continues to suffer. The currency has fallen sharply and we expect further depreciation to perhaps EGP7.15 by the end of the year. While foreign reserves jumped to
US$16b in May, this was only because of a US$2b deposit from Libya. The underlying trend is still falling. Reserves still cover less than three months imports. The budget deficit is likely to fall only slowly from the estimated outturn of close to 12% of GDP in 201213. Inflation picked up to 8.2% in May, due to higher food and fuel costs. We expect it to average 9% this year and about 10% in 2014. Our growth profile remains unchanged and sees GDP rising by just 2% in 201314 after estimated 1.7% growth in 201213. We expect any real recovery to be delayed until 2015, when growth is forecast at 4.5%.
Figure 32
Figure 33
Real GDP growth

% increase per year 8 7 6 5 4 3 2 1 0 1991 1994 1997 2000 2003 2006 2009 2012 2015 Middle East and North Africa Egypt Forecast
Government budget balance

US$b 0 -4 -8 -12 -16 -20 -24 -28 -32 1991 1994 1997 2000 2003 2006 2009 2012 2015 US$b (left-hand side) Forecast -14 % of GDP (right-hand side) -11 -2 % of GDP
-5
-8
-17
-20
Table 11
Egypt
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 1.8 10.1 -2.4 15.5 14.0 5.9 -9.8 82.5 231.1 2,799.9 2012 2.2 7.1 -1.3 15.0 13.0 6.1 -10.8 83.9 254.7 3,033.8 2013 1.7 9.0 -2.5 16.7 12.3 7.0 -11.9 85.4 246.1 2,882.7 2014 2.0 10.1 -2.7 16.7 11.5 7.4 -11.5 86.8 261.3 3,011.4
34
Ghana
GDP growth forecast to slow in 201416 as boost from oil fades

After accelerating to 14% in 2011 due to the onset of oil production boosting activity, the pace of GDP growth slowed to 7.1% in 2012 when the big boost from oil dropped out of the calculations. As the rise in oil output slows, we forecast GDP growth of about 7% in 2013, and then 5%6% per year in the medium term. Although under much better control than in the past, and in single digits in both 2011 and 2012, inflation has risen recently, driven by high world oil prices and cuts in fuel subsidies. In May 2013, the rate was 10.9%. Price pressures have also increased, created by high
spending ahead of the elections at the end of 2012, which saw the budget deficit balloon to 12% of GDP. With imports surging and the currency under pressure, the Bank of Ghana raised its key interest rate by 250 basis points in H1 2012. In addition, having kept policy unchanged in H2 2012, it then raised rates again by 100 basis points (to 16%) in May 2013, in response to rising price pressures. And despite high gold and cocoa prices, strong imports meant that a widening trade deficit and rising outflows of services and income lifted the current account deficit to almost US$5b in 2012 (over 12% of GDP). The deficit should fall slowly in the coming years as oil exports climb.
Figure 34
Figure 35
Inflation
% increase per year 60 Ghana Forecast
Real GDP growth

% increase per year 16 14 12 Forecast
50
40
10 8
30 6 20 4 2 10 Africa 0 -2 1993 1996 1999 2002 2005 2008 2011 2014 1990
Ghana
Sub-Saharan Africa
0 1990
1993
1996
1999
2002
2005
2008
2011
2014
Table 12
Ghana
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 14.4 8.7 -8.9 28.8 1.5 -3.1 25.0 39.2 1,569.3 2012 7.1 9.2 -12.6 36.9 1.8 -12.0 25.6 38.6 1,509.2 2013 6.9 9.0 -9.0 40.0 1.9 -9.2 26.1 41.6 1,591.5 2014 5.9 7.3 -4.7 39.5 2.0 -6.9 26.7 45.7 1,709.0
Source: Oxford Economics. 2015 5.5 6.0 -2.3 37.5 2.0 -4.8 27.3 50.3 1,842.6 2016 5.0 5.2 -2.3 36.2 2.1 -4.2 27.9 54.9 1,967.6
35
India
Ease in policy to support recovery

Indias economy grew by 4.8% year-on-year in Q1 2013, accelerating slightly from 4.7% in Q4 2012. Growth is likely to have bottomed out now and we expect the economy to pick up in H2 2013, driven by a gradual increase in investment. GDP growth is forecast to average 5.1% this year, picking up to 6.4% in 2014. Consumer spending will be supported by a gradual decline in inflation and easing in monetary policy. Indeed, core wholesale prices have been falling steadily over the past few months. Furthermore, the Reserve Bank of India lowered the repo rate by 25 basis points to 7.25% in May, the third cut this year. This will help spur growth and support spending.
But Indias economy continues to be held back by weak investment, particularly in the private sector. The 201314 budget fell short of measures to stimulate private businesses. Government expenditure was cut and the tax rate on corporations was increased to boost revenues. Although the Government has taken tentative steps toward improving the economic environment, a lot more needs to be done. Unless the reform process accelerates, we expect medium-term growth to reach 7.5%. This will miss the Governments stated target of 8% growth.
Figure 36
Figure 37
HSBC manufacturing purchasing managers index (PMI)

50 = expansion/contraction breakeven point 65
Interest rate and wholesale price index inflation

% 10 Repo rate 8
60 6 55
50
0 45 -2 Wholesale price index non-food manufacturing products ination
40 2005 2006 2007 2008 2009 2010 2011 2012 2013
-4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Markit.
Table 13
India
2011 Real GDP growth (% per year) Wholesale price index (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 7.5 9.5 -3.4 17.1 9.5 46.7 -6.7 1,232.8 1,864.2 1,512.2 2012 5.1 7.5 -5.1 19.4 9.5 53.5 -5.6 1,249.0 1,827.2 1,463.0 2013 5.1 5.2 -4.8 18.4 8.5 55.3 -5.1 1,265.0 2,000.5 1,581.5 2014 6.4 4.7 -4.5 17.4 7.6 57.4 -4.8 1,280.7 2,196.3 1,714.9
Source: Oxford Economics. 2015 7.5 4.5 -4.4 16.5 7.7 59.9 -3.9 1,296.1 2,402.6 1,853.7 2016 7.6 4.2 -4.2 15.9 7.8 62.7 -3.2 1,311.2 2,593.6 1,978.0
36
Indonesia
Export demand is very subdued, but domestic activity remains solid

The economy slowed for a third straight quarter in Q1 2013, though at 6% it is still growing at a robust pace. Annual growth in private spending was over 5% for the fourth quarter in a row, but annual growth in investment has slowed since H1 2012. Lower commodity prices have dampened mining investment and the Governments commitment to cut the budget deficit has hit public investment. The revised 2013 budget includes a 44% increase in the gasoline price and a 22% hike in the diesel price. In the near term, higher inflation will dampen spending. But consumer spending will not be completely derailed, given initial high levels of confidence and widening access
to credit. Exports remain weak, with low commodity prices hitting coal, crude oil and natural gas revenues. However, export volumes picked up in Q1 and this improvement is likely to continue, albeit gradually. The authorities have encouraged more long-term investment to help develop infrastructure projects. This is starting to bear fruit, with annual FDI inflows exceeding US$19b for the second year running in 2012. Lower subsidies should also free up more funding for infrastructure investment. We expect higher FDI to help support overall investment in the next few years. The economy is expected to grow by 6.1% in 2013 and 6.0% in 2014. Strong domestic fundamentals should support medium-term growth above 5.5%.
Figure 38
Figure 39
Inflation
% increase per year 35 30 25 20 15 10 5 0 -5 -10 2000 2002 2004 2006 2008 2010 2012 2014 2016 Consumer prices Producer prices Forecast
Bank lending growth

% increase per year 45 40 35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Bank Indonesia; Haver Analytics.
Table 14
Indonesia
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 6.5 5.4 0.2 26.1 6.5 8,789.4 -1.1 235.3 844.9 3,591.0 2012 6.2 4.3 -2.7 27.5 4.7 9,403.2 -1.8 237.7 876.4 3,687.5 2013 6.1 5.4 -2.7 26.6 5.0 9,733.5 -1.7 240.0 941.4 3,922.4 2014 6.0 5.0 -2.1 23.4 5.7 9,566.2 -1.7 242.3 1,066.2 4,401.0
Source: Oxford Economics. 2015 5.6 4.8 -1.9 21.1 7.3 9,548.4 -1.4 244.5 1,181.8 4,834.4 2016 5.5 4.8 -1.6 19.5 7.5 9,724.9 -1.1 246.6 1,283.0 5,203.3
37
Kazakhstan
Higher metal prices and ongoing fiscal stimulus to support a strong recovery
After slowing to 5% in 2012, GDP growth is forecast to accelerate to 5.7% this year, and then 6.9% in 2014. This improvement is the result of several factors, including stronger growth in key export markets, rising oil production, a better performance by agriculture and higher metal prices. Fiscal stimulus will continue, given the healthy public finances and oil prices that are still historically high. The National Oil Fund continues to rise it reached US$60b at the end of March. Interest rates remain at an historic low of 5.5% and are expected to be kept low to support growth and the banking sector.
The giant US$46b Kashagan offshore oil field will come on stream by 2014. It holds 13 billion barrels of recoverable oil reserves and could result in a near doubling of output within a decade. In addition, there will be heavy investment in copper production. But GDP growth will fall short of rates reached in 200007, averaging 7% in the medium term. This is in part due to more modest growth in public spending, but mostly because the banking sector will take time to recover from the global financial crisis.
Figure 40
Figure 41
Real GDP growth

% increase per year 15 Kazakhstan 10 Forecast
Inflation
% increase per year 50 45 40 Europe and Central Asia 35 30 25 20 Kazakhstan Europe and Central Asia Forecast
-5
15 10 5
-10
-15 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Table 15
Kazakhstan
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 7.5 8.3 7.7 68.0 1.9 146.6 -2.1 16.2 183.1 11,304.3 2012 5.0 5.1 3.8 68.3 2.4 149.1 -3.0 16.4 200.5 12,246.9 2013 5.7 6.9 1.1 59.6 3.5 151.5 -2.8 16.5 218.5 13,206.3 2014 6.9 7.0 0.4 52.0 4.7 159.1 -2.8 16.7 238.0 14,238.4
Source: Oxford Economics. 2015 7.1 6.5 1.1 44.8 5.7 163.8 -2.8 16.9 263.5 15,606.9 2016 6.7 6.2 1.3 38.9 6.5 168.8 -3.0 17.0 290.1 17,018.0
38
Korea
Modest performance now, but pickup expected in H2 2013

Our GDP growth forecast for 2013 has only edged down to 2.1%, compared with the 2.2% we forecast in April. However, our forecast for 2014 has fallen more significantly, to 4.1% from 4.6%. These lower estimates reflect our more cautious assessment of the likely pace of growth in China. However, despite the subdued developments in China and the mixed picture of Korean data so far this year, we still think there is a reasonable chance that both domestic and external demand will start to rise more consistently in H2 2013 and gain further strength
in 2014. Global trade should receive a modest lift from an expected end to the Eurozone recession, faster growth in the US, and a steady expansion of 7%8% in China. Even only a relatively small improvement in global trade could be enough to trigger a greater willingness to invest among Koreas exporting companies provided that there is the expectation that the global pickup will gather momentum in 2014 (which we are anticipating). Meanwhile, consumer confidence remains at a reasonable level and, with inflation very low, even fairly modest wage and employment growth should ensure acceptable real income growth for households. We expect monetary and fiscal policy to remain accommodative, supporting medium-term growth in excess of 4% per annum.
Figure 42
Figure 43

% increase per year 15 GDP Forecast
GDP and industrial production

% year 35 Industrial production 25 Forecast
10
15
0 Net exports 5
-5
-5 -10 Domestic demand -15 GDP
-15
-20 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
-25 1990 1993 1996 1999 2002 2005 2008 2011 2014
Table 16
South Korea
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 3.7 4.0 2.3 35.4 3.4 1,108.2 1.5 48.7 1,115.0 22,907.7 2012 2.0 2.2 3.8 36.8 3.3 1,126.8 1.4 48.8 1,129.8 23,144.8 2013 2.1 1.5 3.8 34.4 2.7 1,103.9 -0.5 48.9 1,189.0 24,292.6 2014 4.1 2.5 2.3 32.0 3.0 1,090.7 -0.2 49.1 1,274.6 25,978.7
Source: Oxford Economics. 2015 4.4 2.7 1.4 30.1 4.0 1,090.8 -0.2 49.2 1,356.8 27,596.1 2016 4.1 2.6 1.2 28.4 4.9 1,094.0 0.0 49.3 1,436.8 29,170.7
39
Malaysia
Domestic activity is solid and export demand to pick up in H2 2013

Challenging external conditions led to a sharp slowdown in GDP growth to 4.1% in Q1 2013, from 6.5% in Q4 2012. Net exports subtracted 3.7% points from annual growth, while government spending was also surprisingly weak. In contrast, both consumer spending and investment remained dynamic. We expect soft external conditions to lead to another quarter of modest growth in Q2, before a pickup in the second half of the year. As a result, we have downgraded our 2013 GDP growth forecast to 4.7% from the 5% we gave in April. However, strengthening world trade and solid domestic demand should lift GDP growth to 5.7% in 2014.
Bank Negara left its policy interest rate at 3% in May. Comments from Governor Zeti suggest that interest rate cuts are unlikely, as long as domestic demand remains resilient. Although inflation remains benign, at 1.7% in April, our forecast assumes that rates remain steady this year. In the medium term, expansion will be driven by strong investment growth, underpinned by the various economic programs under way. The Government must now push forward with its reform agenda. This is crucial if the economy is to achieve growth of 4% per annum over the longer term.
Figure 44
Figure 45
Exports and imports

% increase per year 50 40 Exports (US$) 30 20 10 0 -10 -20 -30 Imports (US$) -40 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Three-month moving average
Industrial production
% increase per year 30
20
10
-10 Three-month moving average -20 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Department of Statistics.
Source: Department of Statistics.
Table 17
Malaysia
40
Mexico
Growth remains patchy

Mexicos economy slowed in Q1 2013, with GDP growth falling back to 0.5% on the quarter from 0.7% previously. The deceleration is partially explained by a sharp slowing in government spending (caused by the transition to the new administration), but growth in other sectors has also moderated. External demand remains subdued, with exports falling 2.2% on the month in April. And domestic demand is also weak. The volume of retail sales remained flat on the quarter in Q1. As a result, we have downgraded our forecast for GDP growth this year from 3.5% to 2.8%.
Growth is expected to accelerate gently this year, as a result of a steady improvement in both external and domestic demand. Although the tax rises and spending cuts in the sequester are beginning to bite, consumer spending in the US is building momentum. And back in Mexico, demand is being supported by moderating inflation and the central banks interest rate cut in March. The Governments reform agenda has continued at a rapid pace, with laws to improve the functioning of the labor market and telecoms sector, followed up by proposals to privatize the oil industry. If implemented, these changes will allow the economy to grow rapidly (4.5% per annum) over the medium term. But political infighting in the main opposition party is threatening the political consensus, and to slow or even derail the reform process.
Figure 46
Figure 47
Merchandise trade: US vs. Mexican growth

% increase per year 50 40 30 20 Mexican goods exports Forecast
Consumption and investment

% increase per year 30 Investment Forecast
20
10
0 10 -10 0 -10 -20 -30 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 -20 US goods imports -30 Consumption
-40 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Table 18
Mexico
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 3.9 3.4 -0.9 23.4 4.4 12.4 -1.9 115.0 1,160.3 10,094.2 2012 3.9 4.1 -1.0 25.1 4.4 13.2 -2.2 116.3 1,177.6 10,125.0 2013 2.8 4.0 -1.2 23.5 4.0 12.5 -2.2 117.6 1,311.8 11,151.0 2014 4.8 3.6 -1.1 22.7 4.2 12.6 -2.4 118.9 1,409.8 11,852.2
Source: Oxford Economics. 2015 4.5 3.4 -0.9 22.4 4.9 12.9 -2.5 120.2 1,485.7 12,359.3 2016 4.3 3.2 -1.0 22.2 5.3 13.2 -2.5 121.4 1,560.2 12,847.2
41
Nigeria
Growth close to 6.5% in 2013, underpinned by non-oil sector

GDP growth slowed to 6.6% in Q1 2013, down from 7% in Q4 2012, but close to the overall 2012 rate of 6.5%. The non-oil sector continues to drive growth. Meanwhile, the oil sector remains weak, hit by severe flooding last year, rebel activity in the Niger Delta and weakening world demand and prices. With oil output expected to remain around current levels in 2013, constrained by softer demand from the US in particular, and also from a 6% drop in oil prices, GDP growth is forecast to stay close to 6.5% through this year, before easing a little to 5.5% per year over the medium term.
Inflation stayed high in 2012, averaging just over 12%, with core inflation close to 14%. The headline rate dropped to just under 9% in May but the central bank left interest rates on hold at its May policy meeting. Given the high spending by the states, concerns persist about the fiscal deficit. Strong oil exports lifted the current account surplus to about 5.9% in 2012, despite rising imports and heavy income and services outflows. With world oil prices lower and imports rising strongly, the surplus is forecast to fall back in 2013. But the external position will remain solid, underpinned by high oil revenues.
Figure 48
Figure 49
Inflation
% increase per year 80 70 60 50 40 30 20 10 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Forecast Nigeria
Real GDP growth

% increase per year 12 Nigeria 10 8 6 4 2 0 -2 -4 1990 1993 1996 1999 2002 2005 2008 2011 2014 Forecast
Africa
Sub-Saharan Africa
Table 19
Nigeria
42
Poland
Growth forecast cut again due to weaker external outlook

Real GDP rose by 0.1% on the quarter in Q1 2013 (on a seasonally and working-day adjusted basis), a touch below our forecast. Growth was again driven by net trade, as exports rebounded strongly. On the other hand, both consumption and investment growth remained very weak. We have downgraded our forecast for 2013 real GDP growth to 0.9%, from the 1.5% given in our April forecast. The move reflects disappointing Q1 growth and downgrades to our forecast in key trading partners. Recent data releases suggest that the slowdown may
have bottomed out, but we expect growth to remain very subdued in Q2. Activity should pick up a little in the second half of the year, with the economy set to benefit from the extensive monetary easing implemented over the past nine months. In the medium term, we expect growth to pick up gradually to just over 3.5%. This reflects a combination of sound fundamentals, particularly in the banking sector, and the existence of spare capacity following the prolonged slowdown.
Figure 50
Figure 51

% increase per year 12 Domestic demand 10 8 6 4 2 0 -2 -4 -6 1993 1996 1999 2002 2005 2008 2011 2014 Net exports GDP Forecast
Government budget balance and debt

% of GDP 2 Government balance (left-hand side) % of GDP Forecast 80
0 70 -2 60
-4
-6
50
-8 Government debt (right-hand side) 40
-10
-12 1992 1995 1998 2001 2004 2007 2010 2013 2016
30
Table 20
Poland
43
Qatar
Non-oil sector growing by 10% per annum

A 6.6% increase in GDP in Q4 2012 left growth for the full year at 6.2%. This was concentrated in manufacturing, construction and government services. Most anecdotal evidence suggests that these sectors continue to be the main drivers of activity, with the hydrocarbon sector broadly flat. Our growth forecast remains unchanged at 5% this year and 6% in 2014. Growth will be driven by a near 10% per annum rise in the non-oil sector. More specifically, construction, transport and communications, trade and hotels, and government services will lead the way as the Government implements its huge infrastructure plans. This is driven by its planned hosting of the 2022 FIFA World Cup and also by an
expanding population. Hamad International Airport is set to open soon and the first contracts for a US$36b rail system are due to be signed. The 201314 budget shows spending up 18% on 201213 plans. There will be no additional gas export capacity until at least 2015 and we do not expect any rise in oil production this year, with only a 0.5% increase coming in 2014. This reflects marginal spare capacity and no pressure to add to supply, because of added supplies elsewhere and potential price weakness. After posting double-digit rates in 200611, we expect GDP growth of around 6% over the medium term.
Figure 52
Figure 53
Real GDP growth

% increase per year 30 Forecast
Inflation
% increase per year 18 15 12 9 Middle East and North Africa Forecast
25 Qatar
20
15 6 10 3 5 Middle East and North Africa -3 -6 1994 1997 2000 2003 2006 2009 2012 2015 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 0 Qatar
-5 1991
Table 21
Qatar
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 13.0 1.9 30.3 50.4 3.6 8.7 1.8 173.5 95,666.0 2012 6.2 1.9 32.4 44.1 3.6 12.8 1.9 192.4 102,966.1 2013 5.0 3.8 25.6 39.1 3.6 9.3 1.9 217.2 112,938.8 2014 6.0 4.3 21.8 36.3 3.6 8.7 2.0 228.9 115,730.5
Source: Oxford Economics. 2015 6.1 4.5 19.7 33.4 3.6 8.5 2.0 243.7 119,882.6 2016 6.0 4.5 17.8 30.7 3.6 8.2 2.1 260.0 125,827.6
44
Russia
2013 growth revised down following weak first quarter

Our preliminary estimate indicates that real GDP growth slowed very sharply to 1.6% in Q1 2013, below our initial forecast. As a result, our forecast for real GDP growth this year has been downgraded to 2.7%, from the 3.5% we forecast in April. The move also reflects downward revisions to our growth forecasts in key global markets. Our baseline forecast remains that growth will pick up gradually throughout the year, driven by a rebound in consumer spending. Although, official data for consumption in Q1 is not yet available, retail sales figures suggest that it was one of the principal drivers
of the slowdown. However, given the continued strength of labor market conditions, we expect consumption to pick up during the remainder of this year, particularly if, as expected, inflation falls back in the second half of the year. In the medium term, the economys poor demographic profile, together with a fairly limited pace of policy reform, will constrain real GDP growth to around 4%. We think that risks are broadly balanced, with the potential for faster medium-term growth if a more ambitious modernization program is implemented.
Figure 54
Figure 55
Contributions to GDP
% increase per year 15 Domestic demand Forecast
Inflation
% increase per year 60 50 40 30 Wages Producer prices
10
0 20 -5 Net exports -10 GDP -15 10 0 -10 -20 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Consumer prices
-20
Source: Federal State Statistics Service; Haver Analytics.
Table 22
Russia
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 4.3 8.4 5.2 28.1 5.6 29.4 2.1 142.8 1,897.2 13,286.5 2012 3.4 5.1 3.9 29.8 7.2 31.1 -0.1 142.7 2,012.2 14,104.8 2013 2.7 6.3 1.5 31.9 7.4 31.3 -1.1 142.5 2,168.6 15,215.2 2014 3.4 4.8 1.1 33.8 7.6 32.0 -0.8 142.4 2,327.8 16,349.3
Source: Oxford Economics. 2015 4.1 5.2 0.8 35.0 7.3 32.5 -0.8 142.2 2,501.4 17,590.4 2016 4.1 4.9 0.2 36.0 7.0 33.1 -0.7 142.0 2,679.8 18,871.5
45
Saudi Arabia
Lower oil production, but non-oil private sector to remain buoyant

We expect the Saudi economy to grow by 4.3% this year and 4.6% in 2014 a slowdown from the 6.8% growth achieved in 2012. This slowdown largely reflects lower oil production, which we see down 3.5% on the year in 2013 and then up by a modest 2.1% in 2014. A dip in Saudi production compared with recent years reflects a number of factors, including higher supply from Libya, Iraq and North America, as well as relatively weak oil prices. In contrast to developments in the oil sector, non-oil growth will remain robust in the next few years. Consumer spending will grow strongly, buoyed by fast growth in retail lending and a falling
unemployment rate, particularly for males. Meanwhile, fiscal policy will remain supportive, with government spending forecast to rise by an average of 7.4% per annum across 201416. We expect growth to average 4.5% per annum in the medium term, supported by strong fundamentals. But there are a number of downside risks to our forecast. On the oil front, the development of shale oil and gas in the US and rising supplies elsewhere threaten to limit potential oil output in a sustained way. And on the non-oil front, political instability stands out as a potential concern, given the uncertainty over the succession, youth unemployment and tensions in neighboring countries.
Figure 56
Figure 57
Real GDP growth

% increase per year 10 Forecast
Current account balance

US$b 210 180 % of GDP Forecast 90 75 60
8 Middle East and North Africa 6 150 120 90 4 60 2 30 0 0 Saudi Arabia -2 1990 1993 1996 1999 2002 2005 2008 2011 2014 -30 -60 1991 1994 1997 2000 2003 2006 2009 2012 2015
US$b (left-hand side)
45 30 15 0 -15 -30
% of GDP (right-hand side)
Table 23
Saudi Arabia
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 8.5 3.9 23.7 13.0 0.7 3.8 11.6 28.1 669.5 23,854.7 2012 6.8 2.9 22.7 12.3 0.9 3.8 13.7 28.7 727.3 25,355.8 2013 4.3 4.1 14.3 12.2 1.0 3.8 8.4 29.3 739.7 25,243.0 2014 4.6 4.0 12.9 11.2 1.0 3.8 5.4 29.9 792.9 26,501.1
Source: Oxford Economics. 2015 4.3 3.8 12.0 10.1 1.0 3.8 2.7 30.5 864.8 28,317.6 2016 4.0 3.8 11.5 9.2 1.5 3.8 1.0 31.1 926.9 29,768.1
46
South Africa
Growth driven by domestic activity and a mild external pickup

Quarterly GDP growth of 0.2% in Q1 2013 was lower than expected, and the slowest quarterly rate since 2009. There was a slight recovery in the mining sector. But this was offset by a contraction in manufacturing, which has been hit by weak external demand due to a slower recovery in global trade than foreseen. A reasonable rate of growth in domestic demand and a mild recovery in the external sector are forecast to drive GDP growth of 2% in 2013 and 3.6% in 2014. Consumer spending is expected to soften as high inflation erodes real incomes. We predict that the weak exchange rate will push inflation over the 6% target ceiling in Q3 2013. Consumption growth is forecast to be 2.4% for 2013, after 3.4% in 2012.
Figure 58
Investor confidence is being hit by both foreign and domestic challenges such as labor unrest, high wage growth, currency volatility and structural rigidities. Investor perceptions could deteriorate further if the fiscal position remains poor. These factors pose the risk of a reduction in FDI, and a further weakening of the rand. Investment growth is forecast to slow to 3.3% in 2013, after growing by 5.7% last year. Medium-term growth should exceed 4%, but risks come from a weaker-than-expected recovery in key trading partners, resulting in a stubbornly high external deficit. Recurrence of serious labor unrest in mining would also limit growth.
Figure 59
Contributions to GDP
% year 10
Current balance
US$b
GDP
8 6 4 2 0 -2 -4 -6 1990 1993 1996 1999 2002 2005 2008 2011
Forecast
10 5 0 -5 -10 -15
Trade balance
Forecast
Domestic demand
Net exports
-20 -25 -30 2014 1990 1993 1996 1999
Current account
2002
2005
2008
2011
2014
Table 24
South Africa
47
Thailand
First quarter domestic activity slows, but loose monetary policy should help
Seasonally adjusted GDP fell by 2.2% on the quarter in Q1 2013. We had expected growth to slow this year as the boost from post-flooding reconstruction faded, but the underlying pace of activity has slowed beyond that. In Q1, both seasonally adjusted consumer spending and manufacturing fell on the quarter for the first time since 2011. At the monetary policy meeting in May, the central bank cut its key interest rate for the first time since October. The bank highlighted the slower-than-expected global recovery, tepid domestic demand in Q1 and concerns about attracting excessive capital inflows. However, with
credit continuing to grow at a double-digit pace, share and property prices rising, and real wage growth robust, we do not expect the bank to reduce rates again this year. We have cut our forecast for GDP growth in 2013 as a whole from 5.3% to 4.2% in light of the disappointing Q1 performance, the patchy global recovery and concerns about the impact of the strength of the Thai baht on Thailands export competitiveness. Estimated seasonally adjusted exports have struggled to make much headway in 2013, but should strengthen as the year progresses. This ought to help drive stronger industrial output, and underpin solid medium-term growth of 5% or more.
Figure 60
Figure 61
Exports and imports

% increase per year 75 60 45 30 15 0 -15 -30 Three-month moving average (US$) -45 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Exports Imports
Private investment indicator

2000 = 100 (seasonally adjusted) 260 240 220 200 180 160 140 120 100 80 2000 2002 2004 2006 2008 2010 2012
Source: Customs Department; Haver Analytics.
Source: Bank of Thailand; Haver Analytics.
Table 25
Thailand
48
Turkey
Growth coming through, but markets are volatile

Year-on-year GDP growth accelerated to 3% in Q1 2013. Moreover, unlike the pattern of previous quarters, the pickup in activity was driven by rising consumer spending and investment rather than external trade. The recovery reflects the fact that the major easing in monetary policy since the middle of last year is starting to filter through the economy. Meanwhile, consumers real incomes are benefiting from lower inflation, as well as still-buoyant employment growth. In April and May, the central bank cut interest rates further in response to worries about the robustness of the global economy and a desire to dampen capital inflows. However, the exchange rate
and Turkish capital markets fell sharply at the end of May and in early June in response to news of a large widening in the external deficits as well as sizeable political demonstrations. These developments, together with the evidence that the economy was growing soundly in early 2013, are likely to make the bank more cautious with regard to policy. However, provided that the political situation does not worsen and that prudent economic policies are followed, the economys recovery should build further, with rising EU demand for Turkish exports in 2014 adding to robust demand and pushing GDP growth above 5% in the medium term.
Figure 62
Figure 63
Monthly trade balance

US$m (seasonally adjusted) 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 -7,000 -8,000 -9,000 -10,000 -11,000 1997 1999 2001 2003 2005 2007 2009 2011 2013
Interest rates
% 24 22 20 18 16 14 12 10 8 6 4 2006 2007 2008 2009 2010 2011 2012 2013 Average bank lending rate
Policy rate (instrument changed in May 2010)
Source: Turkish Statistical Institute; Haver Analytics.
Source: Oxford Economics; Central Bank of Turkey; Haver Analytics.
Table 26
Turkey
Source: Oxford Economics. 2015 5.2 5.0 -6.9 39.0 9.4 2.0 -1.4 77.1 954.2 12,375.5 2016 5.2 4.6 -6.7 37.1 9.5 2.0 -1.3 77.9 1,034.4 13,280.4
49
Ukraine
Growth close to zero this year, but exports will drive pickup in 201416
Although GDP rose 0.5% in Q1 2013, weaker exports and private investment meant that it was 1.3% lower compared with a year earlier. And despite improving agriculture, weak industrial output will delay any recovery until Eurozone markets improve. As a result, our 2013 GDP growth forecast has been cut to just 0.3%. With output focused on intermediate inputs, demand for which is highly cyclical, recovery in sales to the EU and Russia is forecast to lift growth to about 4% in 2014 and then about 4.5% in 201516. But political uncertainty ahead of presidential elections in early 2015 may undermine prospects.
Inflation has fallen sharply in the past year, but subsidy cuts to curb the fiscal deficit (5% of GDP) may see a rebound in H2 2013, with the medium-term rate climbing back to 5%6%. An IMF deal (which is hoped for) would be conditional on higher residential gas prices and other cost rises, in turn prompting faster wage growth. The large current account deficit (equal to 9% of GDP in 2012) and heavy debt service costs will require a new IMF standby or bilateral loans this year. Risks of the currency suddenly weakening will rise if the trade deficit erodes foreign reserves, though prospects would be enhanced if an EU association agreement is signed in H2 2013.
Figure 64
Figure 65

US$b 2 0 -2 -4 -6 -8 -10 -12 -14 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 % of GDP Forecast 2 0 -2 -4 -6
Inflation
% increase per year 45 40 35 30 25 Ukraine Forecast
% of GDP (right-hand side)
20 -8 -10 -12 -14 15 10 5 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Europe and Central Asia
US$b (left-hand side)
Table 27
Ukraine
50
United Arab Emirates
Growth of around 4% forecast over the next four years

Growth in the UAE will remain robust in the medium term, averaging 3.9% between 2013 and 2016. Several factors will drive this, including broad-based recovery across key sectors (such as financial services and construction), where performance since the financial crisis has been underwhelming. Moreover, fiscal policy will remain accommodative in both Dubai and Abu Dhabi, with several infrastructure projects in the pipeline. A generally brighter global outlook in 201314 and beyond will also benefit Dubai in particular, which accounts for 75% of the UAEs non-oil trade.
Growth in Abu Dhabi will remain respectable, as oil production rises in line with ongoing capacity expansions. However, growth will be tempered by weak oil prices over the next two years, with Brent expected to end 2013 and 2014 at US$102 per barrel and US$108 per barrel respectively. Risks to our forecast are broadly balanced. Higher oil prices and safe-haven capital flows arising from instability elsewhere in the region could lead to a surprise on the upside. Conversely, financial instability presents a downside risk. Elevated levels of non-performing loans, alongside comparatively low coverage ratios for local banks, are areas of concern.
Figure 66
Figure 67
Real GDP growth

% increase per year 21 18 15 12 9 6 3 0 -3 -6 1990 1993 1996 1999 2002 2005 2008 2011 2014 Middle East and North Africa United Arab Emirates Forecast

US$b 60 50 40 30 20 10 0 -10 -20 -30 -40 1990 1993 1996 1999 2002 2005 2008 2011 2014 -20 -10 % of GDP (right-hand side) 0 10 US$b (left-hand side) 20 Forecast % of GDP 30
Table 28
United Arab Emirates

2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 4.2 0.9 9.1 35.4 1.7 3.7 6.2 7.7 338.7 44,075.0 2012 3.3 0.7 8.6 30.5 1.4 3.7 8.7 7.9 360.4 45,865.4 2013 3.7 1.5 5.8 26.4 1.4 3.7 5.9 8.0 379.0 47,201.6 2014 3.9 2.4 4.5 22.2 1.4 3.7 5.7 8.2 406.3 49,535.3
Source: Oxford Economics. 2015 4.1 2.7 5.1 19.4 1.5 3.7 6.1 8.4 439.0 52,428.9 2016 3.8 3.0 5.1 17.1 2.0 3.7 6.2 8.5 468.9 54,946.0
51
Vietnam
Steady recovery and growth to peak at 7% in 2015

Although monetary and fiscal restraints are slowly easing as inflation comes under control, 2013 will be another year of 5%6% growth. Spare capacity and slack demand continue to deter private investment. Meanwhile, credit growth also remains constrained, as banks continue to react to last years increase in non-performing debts. The consequent weighting of investment to state-owned companies and infrastructure projects in 2013, and the slow recovery of EU and US markets, will also limit export growth this year, reducing last years current account surplus. The slippage into deficit seen from 2015 will be minor and financed by capital inflows. However, it highlights the
continued reliance on inward and domestic investment to attain the medium-term growth target of 7% or more. Inflation slowed to 6.4% in May. Price stability will be promoted in the medium term by increased domestic energy and food production, better monetary management and greater stability of the Vietnamese dong. But commodity prices and currency movements remain sources of inflation risk in 201314. GDP growth will peak at over 7% in 2015, as exports improve and there is stronger industrial investment (boosted by favorable regional trends) and rising private consumption.
Figure 68
Figure 69
Real GDP growth

% increase per year 14 East Asia and Pacic 12 Forecast
Inflation
% increase per year 70 60 50 Vietnam 40 Forecast
10
8 Vietnam 6 20 4 10 0 -10 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015 East Asia and Pacic 30
0 1991
Table 29
Vietnam
2011 Real GDP growth (% per year) CPI inflation (% per year) Current account balance (% of GDP) External debt total (% of GDP) Short-term interest rate (%) Exchange per US$ (year average) Government balance (% of GDP) Population (millions) Nominal GDP (US$b) GDP per capita (US$ current prices) 6.0 18.7 0.2 46.8 15.0 20,509.8 -2.8 88.8 123.6 1,392.4 2012 5.0 9.1 4.7 37.8 8.3 20,858.9 -3.5 89.7 139.2 1,552.6 2013 5.5 7.7 2.7 31.9 7.0 21,402.3 -3.7 90.6 154.2 1,702.1 2014 6.9 6.4 0.8 28.2 6.0 21,995.1 -3.7 91.5 170.7 1,865.2
Source: Oxford Economics. 2015 7.1 4.8 -0.1 25.8 6.0 22,497.6 -3.4 92.4 187.3 2,025.9 2016 6.6 4.5 0.0 23.7 6.0 22,900.3 -3.2 93.2 204.9 2,197.8
52
Detailed tables
54
Cross-country tables
Real GDP growth
2011 Americas Argentina Brazil Chile Colombia Mexico EMEIA Czech Republic Egypt Ghana India Kazakhstan Nigeria Poland Qatar Russia Saudi Arabia South Africa Turkey Ukraine United Arab Emirates Asia China and Hong Kong Indonesia Korea Malaysia Thailand Vietnam Total 4.2 8.9 2.7 5.8 6.6 3.9 6.3 1.8 1.8 14.4 7.5 7.5 7.4 4.5 13.0 4.3 8.5 3.5 8.8 5.2 4.2 7.5 9.1 6.5 3.7 5.1 0.1 6.0 6.4 2012 2.6 1.9 0.9 5.6 4.0 3.9 3.8 -1.2 2.2 7.1 5.1 5.0 6.5 2.0 6.2 3.4 6.8 2.5 2.2 0.1 3.3 6.4 7.5 6.2 2.0 5.6 6.5 5.0 4.7 2013 2.8 2.7 2.4 4.5 3.9 2.8 3.5 -1.0 1.7 6.9 5.1 5.7 6.5 0.9 5.0 2.7 4.3 2.0 3.5 0.3 3.7 6.2 7.3 6.1 2.1 4.7 4.2 5.5 4.6 2014 4.4 3.6 4.1 4.7 4.4 4.8 4.7 2.2 2.0 5.9 6.4 6.9 6.1 2.5 6.0 3.4 4.6 3.6 5.4 3.9 3.9 7.0 7.8 6.0 4.1 5.7 5.5 6.9 5.7 2015 4.4 4.6 4.2 4.6 4.2 4.5 5.3 2.7 4.5 5.5 7.5 7.1 5.5 3.3 6.1 4.1 4.3 4.0 5.2 4.5 4.1 6.9 7.7 5.6 4.4 4.5 4.9 7.1 5.9 2016 4.1 3.9 4.0 4.4 4.0 4.3 5.3 3.0 5.9 5.0 7.6 6.7 5.1 3.6 6.0 4.1 4.0 4.4 5.2 4.4 3.8 6.7 7.5 5.5 4.1 4.5 5.0 6.6 5.8
55
Cross-country tables
CPI inflation
2011 Americas Argentina Brazil Chile Colombia Mexico EMEIA Czech Republic Egypt Ghana India Kazakhstan Nigeria Poland Qatar Russia Saudi Arabia South Africa Turkey Ukraine United Arab Emirates Asia China and Hong Kong Indonesia Korea Malaysia Thailand Vietnam Total 5.4 9.8 6.6 3.3 3.4 3.4 6.9 1.9 10.1 8.7 9.5 8.3 10.8 4.2 1.9 8.4 3.9 5.0 6.5 8.0 0.9 5.2 5.4 5.4 4.0 3.2 3.8 18.7 5.9 2012 5.1 10.0 5.4 3.0 3.2 4.1 5.9 3.3 7.1 9.2 7.5 5.1 12.2 3.7 1.9 5.1 2.9 5.7 8.9 1.7 0.7 2.8 2.7 4.3 2.2 1.7 3.0 9.1 4.3 2013 5.3 10.8 6.3 1.5 2.1 4.0 5.2 1.8 9.0 9.0 5.2 6.9 9.3 1.5 3.8 6.3 4.1 6.0 6.6 2.0 1.5 2.8 2.8 5.4 1.5 2.0 2.5 7.7 4.1 2014 5.1 10.3 5.8 3.0 3.2 3.6 4.8 1.8 10.1 7.3 4.7 7.0 8.6 2.4 4.3 4.8 4.0 5.5 5.4 6.0 2.4 3.6 3.7 5.0 2.5 2.9 2.7 6.4 4.3 2015 4.7 9.7 5.1 3.2 3.3 3.4 4.6 2.1 8.0 6.0 4.5 6.5 8.0 2.5 4.5 5.2 3.8 4.9 5.0 5.5 2.7 3.8 4.0 4.8 2.7 3.1 2.4 4.8 4.2 2016 4.4 9.5 4.5 3.0 3.3 3.2 4.4 2.1 6.0 5.2 4.2 6.2 8.0 2.5 4.5 4.9 3.8 4.8 4.6 5.5 3.0 3.3 3.4 4.8 2.6 3.0 2.4 4.5 3.9
56
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EY Rapid-Growth Markets Forecast July 2013

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12 Investment helping to diversify economies

26 Forecast for rapidly growing countries

EY Rapid-Growth Markets Forecast July 2013

EY Rapid-Growth Markets Forecast July 2013

Strong medium-term prospects underpin investment flows to rapid-growth markets

Risks of a slump in productivity in some RGMs could have global repercussions

EY Rapid-Growth Markets Forecast July 2013

Managing risk? Essential

Understanding a changing world

Fast, not faster

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Coping with financial fluctuations

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Tailoring technology in rapid-growth markets

EY Rapid-Growth Markets Forecast July 2013

Managing risk? Essential

Adapting to maturing growth

EY Rapid-Growth Markets Forecast July 2013

Sifting long-term trends

EY Rapid-Growth Markets Forecast July 2013

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Effective indirect tax management leads to success

EY Rapid-Growth Markets Forecast July 2013

EY Rapid-Growth Markets Forecast July 2013

Managing risk? Essential

Key questions for business

EY Rapid-Growth Markets Forecast July 2013

Investment helping to diversify economies

China: imports from Taiwan

World: cyclical indicators

0 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Haver Analytics; Oxford Economics.

Source: Oxford Economics; Haver Analytics.

Slower but more balanced growth in China

EY Rapid-Growth Markets Forecast July 2013

Low interest rates providing less of a boost to investment

Central and Eastern Europe: investment

Source: Oxford Economics; Haver Analytics.

EY Rapid-Growth Markets Forecast July 2013

Slower growth in China would be felt across RGMs

but investment-driven growth will wane as productivity slows

Fixed investment 2012

Links with other RGMs, particularly in Africa, have grown recently

Source: Oxford Economics.

EY Rapid-Growth Markets Forecast July 2013

Investment helping to diversify economies

Exports from sub-Saharan Africa

Managing financial sector reform is difficult

Source: Oxford Economics.

EY Rapid-Growth Markets Forecast July 2013

Slower growth in China would be felt across RGMs (continued)

Alternative GDP growth forecasts

World: oil price

Baseline Productivity slump

0 2000 2003 2006 2009 2012 2015

Source: Oxford Economics.

EY Rapid-Growth Markets Forecast July 2013

Investment helping to diversify economies

Investors are reassessing risks in RGMs