Emerging markets are slowing down. Many of their governments are seeing their finances deteriorate. A number of them are battered by falling oil prices, others are seeing their debts balloon as the dollar strengthens. A mooted rise in US interest rates could provoke sudden capital outflows for all.
Yet from an infrastructure investment point of view, 2015 should be a good year for emerging markets. Here’s why.
As their middle class grows and their population urbanises, developing nations are under increasing pressure to upgrade their infrastructure. The OECD says emerging markets need an annual $3 trillion of investments in the sector – equal to 4 percent of the world’s GDP – in the years to 2030. Protests and other forms of social expression are driving the point home, and governments are urged to act.
With many subject to existing or worsening fiscal constraints, this new-found political will is likely to translate into the roll-out of much bigger programmes aimed at bringing private capital into infrastructure. That will in effect remove one significant barrier for institutional investors looking to deploy money in developing countries: the lack of scalable deals. “The net effect will be much larger potential opportunities for private capital across emerging markets,” Bernie Sheahan, head of infrastructure at the IFC, recently told us.
Winners and losers
But another development may also help investors allocate more capital and resources towards growth markets. The drastic fall in oil prices – and commodity prices at large – since summer last year is creating winners and losers: economies which export lots of the stuff suffer, while those which are major consumers feel relieved.
One consequence is that a number of countries are now able to redirect resources previously tied to energy to more productive endeavours. This is the case in Indonesia, where Joko Widodo, elected President last July, has trimmed wasteful fuel subsidies and is planning to spend the savings on health, education and infrastructure. The country’s government last week announced the creation of a Land Bank and is courting foreign investors to help fund projects (see also p.38).
But the shifting energy landscape is also shedding light on the resilience of a best-in-class club of commodity exporters – by showing those who took advantage of the boom years to implement reforms, open up to foreign direct investment and diversify their economies. This is the flipside of Warren Buffett’s famous quote: “It’s only when the tide goes out that you discover who’s swimming naked.”
Despite the oil prices slump, Peru and Chile, large metal producers, will respectively grow by 3 and 5 percent in 2015. Sub-Saharan Africa, long seen as a major victim of the so-called “resources curse”, is to expand by 5 percent. No Middle Eastern oil producers are expected to suffer a recession this year. The habit of lumping emerging markets together may fade once it becomes apparent which ones have become more business-friendly and are now spending more wisely.
But even in some of the less fortunate economies, prospects for investments could improve. Deprived of their main source of revenues, countries such as Nigeria or Brazil are feeling the urge to make their economies more competitive – which includes tackling longstanding infrastructure bottlenecks. Some may decide it is time to put together sound, stable frameworks to enlist foreign capital as allies in the task.
Investing in developing economies remains a risky business, as was recalled during our inaugural Emerging Markets Forum last year. It’s not obvious what remains, for instance, of the $21 billion PPP programme announced by West African nations last September, after a popular uprising in Burkina Faso and turmoil in a number of others since. But institutional investors can only benefit from being able to break down emerging markets into more intelligible categories – and focus on those where things are made easier for them.