Will MIST Obscure BRIC?

The term MIST has been coined by Jim O’Neil, the Goldman Sachs economist to describe the next tier of emerging economies: Mexico, Indonesia, South Korea and Turkey. The traits shared by these nations are - a large population and a sizeable market, a large economy at about 1% of global GDP each and membership of esteemed G20. Let us look at the dynamics of each economy.

Mexico: Mexico took a quantum jump to replace Brazil in emerging market index following China, India & Russia. The Mexican peso gained 0.3% on 3^rd October 2012 after encouraging results of US employment and service sector data. US is Mexico’s chief trading partner, hence bounce in US economy could its neighboring economy.

A host of benefits makes Mexico an attractive destination for US companies. Mexico is located in close proximity that reduces the transit time drastically as compared to China. This facilitates ‘just-in time’ delivery and curtails inventories and costs. Also, Mexico’s legal system is much more favorable to US companies than that of China. Mexico’s trade with US is duty free. Chinese wages have surpassed those of Mexico in recent years. According to Nomura forecast, the GDP will grow between 3.5% & 4.5% per year in the next decade. The private sector debt remains a miniscule 20% of GDP, while public debt is close to 35% of GDP. Inflation has been kept in an acceptable range under 4% and the fiscal position of Government is sound.

One of the challenges in Mexico is the war against cartels, which has left 55000 people dead in 2012.The other being declining oil output is due to lack of capital and craft to develop new fields. Mexico’s uncompetitive economy tends to block new market-entrants, with local oligopolies dominating the market. Taut labor laws & tax system exacerbate this situation.

The investors need to be cautious when looking at Mexico as an alternative to BRIC nations. Though the country faces certain risks, it has promising potential in the long run.

Indonesia: It boasts of consumer driven economy with a GDP growth of 6.5% in 2011 and 6.2% in 2010. Indonesia’s geographic location & demographic bestows it with numerous advantages like sustainable productive workforce & easy access to ocean trade.

Besides burgeoning middle class and thus rising incomes, unemployment rate is strikingly low at 6.3%. It has high literacy rates, consecutive current account surpluses & high young population. More than half of its population is under 30.Amongst the latest positives, is the upgrade in investment grade rating by Fitch to BBB+ from BBB-.

In spite of these opportunities, the investors might have doubts investing here. The feeble infrastructure problems, particularly electricity and transportation pose a tough challenge. Expediting infrastructure investment can alleviate this. Complex regulatory environment & corruption also affect the economy.

South Korea: It is an export driven economy with a GDP growth of 3.6% in 2011. A $1.1 trillion economy, South Korea showcases high purchasing power and low unemployment rates.

In striking contrast to most economies, which are grappled with credit rating downgrade, South Korea has, in recent weeks, received its second credit rating upgrade up to AA- by Fitch. Korean economy is comparatively robust as it withstood the global economic slowdown demonstrating its economical and financial stability. The country is producing impressive goods, thanks to the Companies like Samsung Electronics that deserve the credit for Korean success.

Despite these affirmative characteristics, the country is posed with challenges. Corruption makes it formidable for companies to do business. Lack of currency convertibility and equity settlements across multiple accounts are the problems cited by MSCI, which gives South Korea, a developing country status. Inflexible labor market & reliance on exports could make conducting business in this region difficult.

Turkey: The GDP growth rate of 9% in 2010 and 8.5% in 2011 might delight China. However, Turkey is not connected with a sustained raw materials demand from China. This can make the Turkish economy flourish in a world with little growth opportunities.

The country has high FDI levels, which are not directly correlated with GDP. This is evident from the fact that in ’06 and ’07, Turkey’s GDP grew by 9%. FDI dropped in ’09 and ’10 but GDP growth remained intact. FDI levels in ’07 were reduced to half, the GDP maintaining its position at 8.5%. Hence the country will be resistant against fluctuating FDI levels. Public debt has fallen to 40% in 2011 from 74% in 2002. Turkey’s recent unemployment rate is around 8.8%, which has steadily declined over the years. With these signals, the nation is augmenting in wealth thereby creating a bright outlook.

In contrast, there are several fallouts to this rapid growth. The inflation rate of Turkey is hovering around 10.4%, which is above central bank’s target. While considerable FDI levels favors the economy, over reliance on foreign capital has widened its current account deficit to 10% of GDP in 2011. Turkey’s block of banking system is partly owned by Eurozone banks and Europe accounts for half of Turkey’s exports.

Despite the challenges, there is hope than apprehension, because country is well positioned with an expanding domestic market. A recent research paper by Dani Rodrik of Harvard University illustrated that Income per head has tripled to around $10000 in less than a decade. Yet, the dangers of soaring foreign capital and current account deficit can ruffle the economy during crises.

Conclusion: MIST nations’ growth has outperformed that of BRIC in 2011. Yet the total GDP for MIST nations was $3.9 trillion in 2011, only one-third of BRIC’s GDP. Though the gap is considerable, the economies have tremendous potential to grow by leaps and bounds in coming years. This can be attributed to inviting geographic locations, favorable demographics and increasing productivity which act as catalysts for growth. The wavering interests of investors in BRIC due to structural problems & over dependence on exports, MIST nations are expected to close the GDP growth gap in long-term.