Which Emerging Markets are Up and Coming?
Illustration by Nigel Buchanan
Building on the foundation of the well-known BRIC countries—Brazil, Russia, India and China—a new set of up-and-coming emerging markets is gaining attention. the so-called “CIVETS” countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa— are now touted as hot markets because they have diverse economies, fast-growing populations, relatively stable political environments and the potential to produce outsized returns in the future.
Far-flung geographically and shaped by vastly different cultural, religious and political structures, the CIVETS show the potential to develop rapidly and reward those willing to take on emerging market risk beyond the more-established BRIC countries, experts say.
The BRICs were christened a decade ago by Goldman Sachs then-chief economist Jim O’Neill. Goldman Sachs now predicts that the BRICs’ combined GDP will surpass U.S. GDP by 2018 and that they will account for half the global economy by 2020. The CIVETS owe their acronym to the Economist Intelligence Unit (EIU), which forecasts the countries will grow at an annual rate of 4.5 percent during the next 20 years. that’s only slightly below the 4.9 percent average predicted by the EIU for the BRIC nations, and far above the rate of 1.8 percent forecast for the world’s richest—or “G7”—nations. (For what it is worth, a civet is a nocturnal, catlike mammal found in at least two of the CIVETS countries—Indonesia and Vietnam.)
In a recent survey conducted by Knowledge@Wharton and the global communications firm Fleishman-Hilliard, a majority of corporate executives, investors and business leaders indicated that they would be interested in doing business with multinationals in the CIVETS countries. Respondents said they were most attracted to CIVETS because of low labor and production costs and the countries’ growing domestic markets. When asked to identify weaknesses, the survey participants cited political instability, corruption, a lack of transparency and infrastructure and homegrown companies without much of a reputation or brand identification.
According to Wharton management professor Witold Henisz, while there are a total of 150 emerging markets worldwide, a catchy name and new focus may give multinationals and investors more incentive to look toward these lesser-known countries. “An acronym is a simplification, but it calls attention to growth opportunities in rapidly growing markets abroad that managers need to come to understand,” he says.
The Knowledge@Wharton/Fleishman-Hilliard survey of 153 corporate and business leaders found a range of enthusiasm for different CIVETS. When asked to say which of the six countries offered a “great deal of opportunity” or “some opportunity,” 86 percent cited Indonesia, followed by South Africa (84 percent), Turkey (82 percent), Vietnam (77 percent), Egypt (61 percent) and Colombia (56 percent). A significant set of respondents (42 percent) predicted that by 2020, the CIVETS countries would be on a level playing field with the BRICs in the global economy.
When compared to the BRICs, the CIVETS are much smaller. Indonesia is, by far, the largest with 242.9 million people, followed by Vietnam with 89.5 million, Egypt (80 million), turkey (77 million) and Colombia (44 million). By contrast, Russia has a population of 139 million, Brazil has 201 million, India 1.2 billion and China 1.3 billion.
Henisz says size is one reason the decision to invest in the CIVETS countries is not as clear-cut as it is with the BRICs. A western company might be willing to accept some missteps in China because the rewards would be so great given China’s size. Entering a CIVETS country, however, is a more complicated strategic decision, he notes, and will probably come with added pressure for short-term results, compared to larger countries where companies might be willing to stay the course. “China is so critical that if you mess up the first year, you can stay around. That’s not so clear about, say, Colombia— it’s not seen as mission critical.”
Wharton management professor Mauro Guillén points to another important difference between the two blocs. Unlike China, Brazil, India and other emerging markets like Mexico, the CIVETS lack established multinational corporations to act as platforms for further economic development, although that could happen in the future. “What makes the BRIC group unique is that not only are they big, but they have their own companies that are destined to be very important outside their own countries,” says Guillén.
The EIU acknowledges that the CIVETS do not have the economic power to “reshape the global economic order” as much as the BRICs and their combined GDP will only amount to one-fifth the size of the g7 nations’ combined GDP by 2030. Instead, the CIVETS are second-tier emerging markets that have relatively sophisticated financial systems and do not face runaway inflation, massive current-account deficits or public debt, according to the research firm.
“With emerging markets there is always risk,” cautions Guillén. “But whenever you have risk, if you are savvy you are going to make a nice return. this is a difficult game, but it is an interesting one.”
Romeo Dator, a portfolio manager at Texas-based U.S. global investors, which specializes in emerging markets and natural resources, says the only CIVETS country his firm has invested in is Indonesia, which, according to Bloomberg, had overall investment returns of 57 percent last year. The others, Dator notes, are still too small for major fund investments which need greater liquidity. The BRICs, he adds, are still far from mature, and the CIVETS “are almost like frontier markets, a step below the emerging markets in terms of size.” when does a country graduate to “emerging” status? Dator points to one sign: “once you start seeing ETFs [exchange-traded funds] developed around them, that means there’s enough interest and it’s worth looking into.”
Michael Geoghegan, chief executive of HSBC, is a CIVETS promoter. In a speech to the American Chamber of Commerce in Hong Kong last year, he remarked, “any company with global ambition needs to act now [with] regards to these markets. In today’s world, you can’t afford to wait for business. You have to go where the business is.”
Each of the CIVETS presents opportunity and risk, according to emerging market analysts and Wharton faculty:
Colombia: Following years of high-profile drug wars, Colombia remains a small market, but has always been a dynamic economy with some key industries, including fresh flowers, oil and coffee.
Indonesia: The largest of the CIVETS, Indonesia has a huge, sprawling population and has already benefited from investment by the U.S., China and Japan, but political and social stability is never certain.
Vietnam: A low-cost alternative to China for manufacturing, Vietnam has ambitious plans to grow its economy despite a Communist government.
Egypt: Although Egypt has a well-educated, prosperous population in its Nile Valley cities, much of the country remains poor and the country has a high level of debt (80 percent of GDP). The political future beyond the rule of President Hosni Mubarak is cloudy, and the country could face religious turmoil.
Turkey: Not a destination for manufacturing because costs are already high, turkey remains a promising regional center which has benefited from relative stability and ties to the west in a volatile part of the world. Membership in the European Union would be a plus, experts note, but religious turmoil might hurt its economic prospects.
South Africa: Although it faces problems with unemployment and HIV/AIDS, South Africa has strong companies, a well-developed business infrastructure and can serve as a gateway to southern Africa.
Henisz notes that in addition to their internal strengths, turkey, Indonesia and South Africa have some companies that are strong in their regions, which might make these countries especially interesting for companies or investors looking to gain additional traction beyond a single country’s borders. “they could be a platform for investment the way Ireland was for Europe,” he says, adding that these countries could also provide opportunities for “reverse learning” about business approaches to their regions (as opposed to the traditional model of applying western business methods to foreign markets).
According to the survey results, respondents agree that the most important factors positioning CIVETS companies to compete in the global economy are: the value of their products and services (75 percent); GDP growth in their countries (74 percent); their financial position (53 percent); innovativeness of products or services (45 percent); and recognition of their brands outside their home countries (28 percent).
Respondents also characterized the strengths and weaknesses of CIVETS-based multinationals in the global marketplace. The top response (85 percent) was that these companies need more visibility to get the respect of leading companies in the United States and Europe. that was followed by 67 percent of participants who agreed that these companies lack appropriate transparency and corporate governance standards to compete internationally; 66 percent who felt the companies do not have the public policy or public affairs expertise needed to compete; 64 percent who said the firms do not have the marketing and branding capabilities to succeed in the global marketplace; 52 percent who felt multinationals in CIVETS nations do not have the communications capabilities to succeed in the global marketplace; and, finally, 51 percent who felt CIVETS companies are limited in their global thinking.
When asked what they look for in determining whether a CIVETS country has the potential to be on a level playing field with one or more BRIC countries, the respondents’ top consideration was political stability. According to Wharton finance professor Franklin Allen, the CIVETS countries are so different, it is hard to generalize about politics across the group. He cites income inequality, religious fundamentalism and regional volatility as issues to watch for when evaluating investments in these markets. “You have to look at the politics carefully in each of the countries.”
The era in which foreign investors had to fear nationalization of assets has largely faded, but foreign governments can still add risk to investment projects, perhaps through heavy taxation or regulation. “There are very few countries where the government believes that they should own the means of production. That’s why we don’t see political risk as too much of a problem, but I would be surprised if it went away for good,” Allen adds. “It may take other forms. government debt problems may [result in] taxation being much higher—although we have got a ways to go before I think that would happen.”
In 2005, Goldman Sachs’ O’Neill came up with a new concept for the next generation of emerging markets—the “Next 11” or “N11,” made up of four CIVETS and seven other countries. O’Neill, who is now chairman of Goldman Sachs asset Management, notes that Colombia and South Africa were not included in his n11 because their population size restricts their ability to grow into large markets. “Our N11 group would also include Bangladesh, Pakistan, the Philippines, South Korea, Iran, Nigeria and Mexico, and these 11 would be a more diverse and attractive group,” O’Neill says.
The EIU, in turn, narrowed that list down. Nigeria, according to the research firm, is too dependent on commodities. Iran’s politics and international relations are too unstable. The Philippines—dubbed a “perennial underperformer”—also suffers from weak, unstable politics, according to the EIU. Political instability will hold back Thailand as well, and Pakistan’s security problems are acute. Bangladesh, meanwhile, is too poor and vulnerable to the effects of climate change. O’Neill plans to release a paper this month elevating Mexico, South Korea, Indonesia and turkey, along with the BRICs, to a new status as “Growth Markets.” the EIU left Mexico and South Korea off its list because they were already successful and were “old news” to investors.
Wharton faculty point out that Russia, which remains dependent on natural resources and has faced political ups and downs, does not really rank with the other more successful BRICs. However, Henisz notes that Russia illustrates the gamble with any emerging market strategy, and he suggests that five or 10 years from now, one or more of the CIVETS may be laggards. “I’m not laying odds on which ones, but one or two will be outliers,” he says.