The advantages of investing in emerging economies
As per MSCI, an international financial services company, emerging economies are projected to contribute to 43% of the global GDP in 2022. However, it's worth noting that according to IMF data, overall global economic growth is slowing down, with a forecast of 3.5% in 2022 and 3% in 2023. The decline is more pronounced in advanced nations, dropping from 2.6% in 2022 to 1.5% in 2023, compared to emerging countries, which are expected to go from 4.1% in 2022 to 4.0% in 2023. In contrast, the IMF predicts a further decline in growth for advanced nations (1.4% in 2024), while it anticipates stability in emerging countries (4% in 2024).
China, a key member of the BRICS group (Brazil, Russia, India, China, and South Africa), stands out as one of the rapidly growing emerging economies, with a projected growth rate of 5% in 2023, according to the IMF. Some economists consider that China is no longer an emerging economy. Others, on the contrary, point out that there are still major disparities within the population and that only part of the country is benefiting from growth. Regardless of this debate, China is leading the BRICS nations in its competition with Western powers.
The BRICS 2023 summit announced the arrival of 6 new countries in 2024: Saudi Arabia, the United Arab Emirates (UAE), Ethiopia, Egypt, Argentina, and Iran. The UAE is banking on its economic growth, which is expected to be +3% in 2023 and with a projected +4% for 2024, according to the World Bank, to attract entrepreneurs and foreign investors. On the other hand, Saudi Arabia's growth is sluggish at 0.8%, a result of lower oil prices and production, as per revised forecasts by the IMF. Despite being the world's leading oil exporter, Saudi Arabia is anticipated to bounce back to growth as early as 2024, with an estimated +4%, according to the IMF.
Countries in full economic expansion
According to IMF reports from the first quarter of 2023, the most vibrant economic regions globally are found in Asia and sub-Saharan Africa, with growth estimated between 1.5% and 4%. It's worth noting that South Africa and Nigeria, two major players in Africa, are projected to experience slower growth (0.5% and 2%, respectively, in 2023, as per the World Bank's Africa's Pulse report). This can be attributed to factors such as inflation, a weakened currency, and economic challenges. Nevertheless, a rebound in growth is anticipated as early as 2024, with a forecast of 3.9%. In Nigeria, prime sectors for entrepreneurship continue to be oil and other natural resources, agrifood, and industry. Like South Africa, the country has also embraced the digital age.
Doing business in emerging countries means investing in dynamic, fast-growing ecosystems. A prime illustration is the UAE, where the majority of the population comprises foreigners. Foreign entrepreneurs enjoy the perks of a favorable tax system, encouraging them to establish businesses in the region. The UAE aspires to position itself as a hub for foreign entrepreneurs and investors by 2030. Similarly, Saudi Arabia is extending a warm welcome to expatriates, with Riyadh directly competing with Dubai. Numerous other emerging countries, including India, Indonesia, and Mexico, present further opportunities for business ventures.
Doing business while preserving the environment
Entrepreneurship is commonly associated with traditional sectors like raw materials, industry, agrifood, and digital. However, there's a growing wave of entrepreneurs driven by a desire to enhance local living conditions and safeguard the environment. Since emerging countries are among the most affected by the repercussions of global warming, there's a shift towards sustainable economic entrepreneurship, offering fresh opportunities. Instead of solely relying on traditional resources like oil, the focus is on embracing solar energy, implementing innovative irrigation systems, adopting new agricultural technologies, and supporting sustainable projects involving local businesses, among other initiatives.
Investing in emerging countries not only addresses climate change but also promotes the growth of local businesses and organizations. Take the healthcare sector- strained even before the recent health crisis – it faces shortages in human and technical resources. Many investments and projects are underway, extending beyond the immediate health sector: research, construction, modernization of infrastructures, manufacture of medicines and medical equipment, electrification, road construction and maintenance, etc. Inequalities abound within these countries.
The risks of doing business in an emerging country
One of the main risks when investing in an emerging country is the political context. Dealing with nations struggling with political tensions, instability, vulnerable currencies, significant social inequality, a lack of democracy, state interference, or conversely, state inaction poses considerable challenges. Due to their inherent characteristics, emerging markets present a combination of faster growth potential along with greater risks.
Despite having practical intercultural training and a strong understanding of local dynamics, expanding your business in an emerging country can still be challenging. In China, for instance, the government's executive has a growing influence on the economy. Many foreign entrepreneurs found the "Covid zero" policy to be a critical point. They chose to exit a state whose approaches were considered unproductive and, more importantly, a hindrance to the smooth running of their business.
Emerging economies may find themselves more vulnerable to global economic uncertainties. While the slowdown in Chinese growth affects the global economy, its impact is even more pronounced on emerging markets. Additionally, there's the potential vulnerability of foreign direct investment (FDI) transfers. When FDI flows from one country to another, the emerging market receiving less FDI experiences a negative impact that affects its economic performance.
While emerging countries exhibit faster growth than developed economies, the disparity between the rich and the poor is expanding. The situation has worsened since the health crisis, further destabilizing governments. All these factors, and not just short-term economic performance in a particular sector, must be taken into account when considering an investment in an emerging country. This same level of scrutiny should be applied to entrepreneurial projects in developed countries.
