Wither the civets? The eagles have been grounded. In the battle of economic acronyms, one man towers over the financial world like a colossus swatting aside pretenders to his throne.
Jim O’Neill, former chairman of Goldman Sachs Asset Management, who introduced the Bric concept in 2001 to the delight of headline writers everywhere, has returned with his latest thesis. The upcoming decade belongs to the Mint countries – Mexico, Indonesia, Nigeria, and Turkey. Although first coined by Fidelity in 2011, the term has become increasingly popular in the past month following a swathe of blog commentary and Mr O’Neill’s excellent BBC radio mini-series. Mr O’Neill himself believes that each of these countries has the potential to become one of the world’s 10 largest economies by 2050. As the experience of the Brics has shown in the past 12 years, though, economic progress rarely follows a straight line.
Although all have grown more than the global average, it is China that has proven the most successful of the Bric economies. Chinese gross domestic product growth in recent years has accounted for almost half of the global total and its average growth rate since 2001 has markedly outstripped its Bric brethren. However even China now faces the difficult task of rebalancing an economy that has been built on investment to one where domestic consumption plays a greater role. Russia, although benefiting from higher commodity prices, is hindered by both a political kleptocracy and an ageing and declining population. India, which once dreamt that its tiger economy could consistently outpace China’s, managed the feat once in 12 years (and even then by a meagre 0.1 per cent). Lacking the ability of one-party China to ‘get things done’, the world’s largest democracy has been hampered by regulation and bureaucracy. Brazil benefited from a significant positive terms of trade shock but failed to capitalise on its windfall.
The Mints do share one similarity that should stand them in good stead in the upcoming decades: large populations with a favourable demographic profile. The average citizen of a Mint country is 12 and 15 years younger than his US and EU counterparts respectively. With growing working-age populations and low elderly dependency ratios, each will be hoping they benefit from such a “demographic dividend”. However beyond this it is the unique challenges that the individual countries face that are likely to shape their future.
The immediate outlook for Nigeria is fraught. Of all the Bric/Mint countries, Nigeria ranks lowest in both the World Bank ‘ease of doing business’ and transparency international corruption indices. The country has also been plagued by sectarian strife as elections highlight a country riven by ethnic and religious tensions. In the late presidential race, the mainly Christian southern states voted for Goodluck Johnson while the predominantly Muslim north voted for Muhammadu Buhari (the former military ruler). The election of Mr Johnson led to widespread rioting and the destruction of churches in the north of the country.
Mexico, while having problems of its own, appears a much safer bet for investors. Inextricably linked with the US, which accounts for almost 80 per cent of Mexican exports, the country will benefit as the recovery of its neighbouring behemoth gathers pace. When China entered the World Trade Organisation in 2001, Mexico lost market share as it struggled to compete with the lower labour and production costs offered by its Asian rival. In the past decade, however, the unit labour costs of the two nations have converged helping Mexico regain its lustre. Since Enrique Pena Nieto was elected as president in 2012, he has demonstrated a willingness to make the necessary structural reforms which should cheer investors. The first significant energy reforms in 70 years, which will allow foreign investment and production-sharing agreements, should light a fire under the country’s underperforming oil and gas industry. Similarly education and financial reforms may prove a catalyst for change. Such as each of the Mints, however, Mexico faces significant challenges. Opposition to the government’s reform process could derail the progress that has been made. The ongoing drug war against the cartels has cost tens of thousands of lives and had a deleterious effect both domestically and internationally.
Of all the Mints, it appeared as if Turkey would win the ‘most likely to succeed’ prize. Since Recep Erdogan and his Justice and Development Party assumed power in 2003, Turkish GDP for each person has more than doubled, progress has been made in resolving the long-standing Kurdish conflict in the country and the influence of the army in political life has diminished. Recent events, however, have demonstrated the fragility of such progress. Rioting in Istanbul in the summer of 2013 and the AKP’s handling of a recent corruption scandal have raised fears that Turkish democracy is sliding towards autocracy. With a sizeable current account deficit, which has reached more than 7 per cent of GDP and is largely financed by short-term foreign money, the economy is particularly impacted by US tapering. Mr Erdogan’s reluctance to increase rates is unlikely to help matters in the near term.
Indonesia faces similar near-term issues. The rupiah (Indonesia’s currency) has declined markedly in recent months as tapering fears have raised questions about the country’s ability to maintain a current account deficit of more than 4 per cent. At least the Indonesia central bank has responded by raising rates and the country’s debt dynamics are much improved from the time of the Asian crisis in the late 1990s. With abundant natural resources and in a prime geographic location next to the still rapidly growing China, there is much to like about Indonesia’s long-term prospects. However the country still requires significant structural reform, suffers from chronic underinvestment in infrastructure and has an immature political system.
Can the Mint economies fulfil Mr O’Neill’s prediction and each become one of the world’s largest economies by 2050? Of course they can. Each of the Mints has enormous potential, but they require both competent and stable leadership in combination with the necessary structural reforms. While near-term external issues such as US tapering may cause turbulence, the greatest barriers to success are mostly domestic. All four countries should already be large and powerful enough to ultimately withstand all but the greatest external shocks. For most investors, however, this is irrelevant. It has become a well-worn truism, but economic growth does not necessarily translate into an outperforming equity market – something Chinese investors know only too well. The idiosyncrasies of each nation should be foremost in investor minds.
Neil Veitch is manager of SVM World Equity Fund
Key Points
The upcoming decade belongs to the Mint countries – Mexico, Indonesia, Nigeria, and Turkey.
The Mints share one similarity that should stand them in good stead in the upcoming decades: large populations with a favourable demographic profile.
Each of the Mints has enormous potential but they require both competent and stable leadership in combination with the necessary structural reforms.
