Growth 'survivors' PHL, Mexico now define emerging markets
London — Headline growth numbers are no longer enough to
attract foreign capital to emerging markets as discriminating investors home in
on countries with the most sustainable economic models.
Mexico and the Philippines are among those
trying to ensure growth can be maintained long-term by encouraging domestic
saving that can be used to fund infrastructure projects.
This transition to a new model is already
underway, with equity and bond funds in both countries attracting net inflows in
the past six months despite a sharp emerging market sell-off.
The Federal Reserve's plan to withdraw its
massive monetary stimulus is dividing emerging markets fortunes, with capital
draining rapidly out of countries with large financing needs.
To make themselves less vulnerable to the ebb
and flow of foreign short-term money, some countries are beginning to invest in
their economies, backed by a more stable financing base.
The Philippines, where remittances from
overseas workers provide a steady flow of income, is channeling a pool of
domestic money to build airports and roads in a project costing 3 percent of
gross domestic product.
Mexico plans to spend almost a third of GDP
on improving its infrastructure in the next six years and is among Latin
American countries that have reformed their pension systems to encourage workers
to save regularly.
That creates a base to finance infrastructure
spending, which should boost domestic demand and potential growth.
"In emerging markets, you are no longer
trying to find a winner but you're trying to find a survivor," said Salman
Ahmed, global fixed income and FX strategist at Lombard Odier Investment
Managers.
"We still think Mexico and Philippines are
well placed... Winners of yesterday, Brazil and Turkey, are looking
trickier."
According to estimates by Lipper, dedicated
Mexico equity and bond funds saw a combined inflows of $3.7 billion in the six
months to end-June, while Philippine equity and bond funds attracted a combined
net inflows of $2.56 billion.
Mexico's stock market has risen 1.6 percent
since May 22, while the broader index has lost nearly 7 percent.
The Philippines' stock market has risen more
than 14 percent in 2013 and its sovereign credit rating is on review for an
upgrade by Moody's.
The ratings firm has cited stable and
favorable government funding conditions and a strengthened government policy
mandate among triggers for the rating review.
HOW TO SPEND IT
Latin America is a step ahead in building up
an institutional domestic savings base, having reformed its pension systems
following the debt crisis of the 1980s. Mexico, Chile, Peru, and Columbia all
have relatively high savings rates of above 20 percent of GDP, according to the
World Bank.
Chile is the highest-ranked emerging economy
after Singapore and Taiwan in BlackRock's Sovereign Risk Index, which measures
credit risk through a broad list of fiscal, financial and institutional
metrics.
"It's interesting to know that a considerable
number of emerging markets get very high ratings in that index because of
domestic finance savings institutions," said Ewen Cameron Watt, BlackRock
Investment Institute's chief investment strategist.
"Countries that are tending to find their
financing of currencies more resilient are those who have deepened their
domestic financial system, usually with the development of the domestic
contractual financing and savings industry."
Mexico is beginning to channel domestic
savings to building projects via its state pension funds, which have about 1.919
trillion Mexican peso ($150.76 billion) in assets, representing about 23 percent
of private savings. They hold 1.5 percent of assets in domestic debt
specifically labeled as infrastructure.
State funds may be key to its plans to spend
$300 billion in the next six years to build highways, rail lines and
communications infrastructure, and upgrade the country's ports.
After two decades without a passenger rail
service, Mexico has earmarked 95 million pesos for three routes, including a
300-km line across the Yucatan peninsula, home to its famous Cancun beach resort
and the ancient Maya pyramids.
The government has also promised to consider
a second airport in Mexico City to ease pressure on the current sole hub, which
is Latin America's second largest by traffic.
The Philippines government has offered
private sector firms contracts to modernize at least five airports in two of its
three main regions and will soon take bids for an $814-million toll road
contract in two provinces just south of the capital.
For both economies, Japan could be a model.
Much of its post-war growth, kick-started with foreign capital, was driven by
private savings that were channeled by banks to finance massive infrastructure
and reconstruction projects.
By the time it passed West Germany to become
the world's No. 2 economy in the 1960s, Japan no longer relied on foreign
capital to grow.
"Infrastructure in the long term is a
positive factor. It makes you more competitive and improves the supply side of
the economy," Ahmed at Lombard Odier said. — Reuters
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