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Frontier markets to outpace emerging markets in investment growth

Jan 05 2017 17:38
Lameez Omarjee

Johannesburg – Frontier markets are expected to deliver superior investment growth to emerging markets over the next five years, research by Credit Suisse reveals.

Frontier markets are developing countries which are too small to be considered as an emerging market. These frontier markets are offering investors "risk-adjusted" returns through diversification.

The Credit Suisse Research Institute grouped 30 countries as frontier markets.

They account for $3.7tr of economic output, which is equivalent to 15% of the GDP generated by emerging markets, at $24.4tr.

Credit Suisse focused specifically on 10 frontier countries including Romania, Morocco, Argentina, Iran, Pakistan, Bangladesh and Vietnam. African countries included in the top 10 are Nigeria, Egypt and Kenya.  

Research shows that growth in investment spending in 2015 was stronger in these frontier markets at 5.1% than in emerging markets and developed markets.

READ: Emerging-market currencies, stocks advance

Growth in investment spending by frontier markets peaked in 2006 at 24%.

According to projections by Oxford Economics, the increasing growth by frontier markets is expected to continue until 2020.

However there are low savings ratios in frontier markets. This means they will continue to rely on foreign capital flows to fund investment.

The savings ratio for the aggregate 10 countries is at 20%, close to levels of developed markets at 19%. The ratios for Kenya are at 3% and Egypt at 4% and Pakistan at 10%, which is “worryingly low”.

“Such low savings impede the ability to channel necessary capital toward investment and infrastructure,” stated the report. Countries are then more reliant on inward foreign direct investment to fund projects. 

European and Middle Eastern frontier markets have been more successful in attracting foreign investment than Asian and Sub-Saharan African markets. The European Union (EU) is the largest investor across the Credit Suisse frontier markets.

The EU’s share of total foreign direct investment is more than 51%.

North America has a bias to raw material exporters. South Africa favours the Sub-Saharan African nations. China has an increasing interest in frontier markets as well, especially in Africa for its commodities as well as South Asia for its textile and apparel industry.

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investment  |  markets  |  emerging ­markets

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