Important Trends For The Future
The highly respected Bank of International Settlements delivered its 77th annual report. If you have the time, its good to try and read through the thick document. The most interesting bit was the 45 pager on Ermerging Market Economies (EME). Here are some of the interesting conclusions:
a) EME grew on average of 6.8% p.a. in 2003-2005. In 2006 the rate was 7.4% and remained strong for 1Q2007. The 2007 figure is expected to beat the 2006 figure as well.
b) Current account surpluses increased in Africa, asia, Latin America, the Middle East and Russia. However, current account deficits grew in india, Turkey, South Africa and remained large in central Europe.
c) Median inflation in 2006 was 3.7%, up from 3.5% in 2005. In Asia, the median inflation was still well below that of other regions in 2006, but was clearly up from near zero rates in 2002.
d) Due to the much higher price of oil, many countries have substantially reduced subsidies to reduce current account deficits, namely Thailand, Malaysia, Indoensia and India.
e) The median debt/GDP ratio for EMEs fell from 47% to 33% between 2003 and 2006. In particular, those which saw debt reduction of more than 10% of GDP, include Brazil, Chile, Colombia, Indonesia, Peru, the Philippines, Russia, Thailand, Turkey and Venezuela.
f) This is probably the most significant trend for me to discover from the article: that Russia has improved in its management of surpluses and oil wealth. From February 2008 onwards, russia's oil stabilisation fund will be split into a reserve fund and a fund for future generations. In addition to taxes on crude oil (goes stright to the oil stabilisation fund), the 2 funds will receive the bulk of revenues from the mineral resource extraction tax for oil and gas, and export duties for the related products. The reserve fund will be maintained at a level equiv to 10% of GDP. This structure improves perception of stability, and accumulation of reserves to level out diequilibrium in the future. This will improve the appreciation rate for the rouble for the forseeable future.
g) There is a growing correlation between EME equity markets and MSCI World Equity markets. Asia EM used to be at 0.4 correlation 2 years ago but in 1Q2007 the figure has reached 0.82. This has linked all global markets as inter-connected. (Alluding to my fresh opinion that the best equity markets for 2H2007 are Japan and South Korea: if you are in EME or US, UK or DAX - its roughly the same net effect. Only Japan and South Korea seem to have the propensity to outperform and diverge away from the developed and emrging markets for the rest of the year.)
h) EME Asia (excluding China) exports to US has declined in importance. Between 1996-2001 exports to US make up 21% of total exports but that figure dropped to 14.6% in 2005-2006. The slack was taken up by China which grew from 12.9% to 21.8% over the same periods. This lends weight to the outsourcing model driving growth in EMEs. The rest of Asia basically act as an intermediary supplier to the outsourcing capital that is China. Surprisingly, EME Asia also saw a corresponding surge in imports from China from 13.7% to 18.4%. This solidifies the perception that trade deals with China will be #1 priority for all Asia for the next 5-10 years at least. Again, the loser on the imports scene was USA, dropping from 14.3% to 9.4% over the said periods. Even Japan saw similar trends, dropping from 17.9% to to 13.9%.