Emerging market GDP growth of 5.1%* in 2019 is ‘about right’ say 55.7% of survey respondents


The IMF has predicted average 2019 GDP growth of 5.1% for emerging markets. In your opinion, is this:

 

IMF forecast from July 2018. The IMF cut its emerging markets forecast to 4.5% in January.

As emerging markets take up an increasing share of the gains from more open global trade, some in advanced economies have questioned whether those gains are at the expense of advanced economies, and more widely questioned the very multilateral global systems on which the underlying trade and cooperation are based.

This questioning of and resistance to globalisation, however, comes at a time when global economic interdependence is greater than ever. Whether through trade, finance, knowledge transfers, migration or environmental concerns, both emerging and advanced economies, their citizens, and the supply chains which facilitate global economic activity are more dependent on multilateral cooperation than ever before. Moreover, in both emerging and advanced economies, it’s given rise to broader scepticism toward leaders, policies and institutions that have traditionally supported global cooperation.

Added to this is continued oil price volatility, tightening US monetary policy, which may leave emerging market borrowers exposed to higher repayments and currency volatility, as well as a range of structural challenges in individual emerging markets.

Emerging Markets Crisis

47.1% of survey respondents say currency volatility, geopolitical risk and US-China trade friction are evidence that an emerging markets financial crisis is ‘likely’ or ‘very likely’ in 2019


How likely is an emerging markets economic crisis in 2019?

 

The uncertainty across a range of economic, trade and political factors which characterised 2018 looks set to continue in the year ahead. Of the headwinds, perhaps most prominent is the bullish stance of the US as it seeks to redefine accepted global trade rules, particularly in its bilateral relationships with China and its North American neighbours. In another move away from multilateralism, the potential for a failure in negotiations between UK and European Union over the Brexit process creates further uncertainty in the world’s largest trading block and 7th largest economy.

Nearly 70% of survey respondents think emerging markets will be unaffected or will benefit from Brexit


What impact do you think Brexit will have on emerging markets?

 

58.9% expect emerging markets to seek concessions from the UK in post-Brexit trade agreements


Following the Brexit process, do you think most third countries will:

 

Survey respondents appear to have a broadly pessimistic view on the UK’s negotiating position in post-Brexit trade negotiations. The UK has a stated position that it will seek early and numerous trade deals with a number of markets in the period after Brexit. Currently, as an EU member, the UK’s trading relationship with external partners is governed via the EU’s wider trade agreements. Survey respondents indicated that their expectation in aggregate is that these agreements will form the basis of bilateral agreements and emerging markets will seek to roll over or, more aggressively, seek concessions from this starting point.

65.0% think Mexico will maintain or boost trade with the US and Canada following the renegotiation of NAFTA


Efforts by the US, Canada and Mexico to renegotiate the NAFTA agreement will:

 

Announced in late 2018, the NAFTA replacing United States-Mexico-Canada Agreement (USMCA) includes provisions that target a number of sectors in Mexico’s economy, although as survey respondents point out, they may well become a long-term positive for its trade with the US.

The automotive sector is one target. The ‘rules of origin’ for the car industry have changed, both in terms of the location of parts and rules around the price of labour in the supply chain. Largely focussed on vehicle assembly in Mexico, the new rules have raised the local content requirement from 62.5% to 75% by value. The automotive sector will not find this onerous. Similarly, the demand of a base level of $16 an hour for workers for 45% of the value of the automotive supply chain will be not too difficult to achieve for the more sophisticated component suppliers. It appears that the supply chains that stretch from central Mexico to Ontario are fairly secure.

A second sector targeted is e-commerce. Here the bar for ‘duty-free’ e-retail purchases has been raised as high as $115. Presumably this will result in greater cross border e-retail trade.

US-China – is a trade war coming?

Trade tensions between the US and China risk a 10.4% fall in volumes, according to survey respondents


How much are US-China trade volumes likely to change in 2019 as a result of ongoing trade tensions?

 

In addition to survey respondents’ clearly pessimistic outlook, there are several indicators which may point to how events will unfold and which indicate potential fallout for both sides.

Firstly, in late 2018, China started to report numbers that indicate sectors of its economy are being affected by the tensions. Retail sales growth in November 2018 was at its lowest rate in 15 years, while factory orders were at their lowest level in three years. In addition, there is anecdotal evidence that demand for labour in manufacturing and export hubs in coastal regions in China is falling. This comes while China’s economy has been slowing anyway.

 

56.1% say South East Asian markets stand to benefit from ongoing US-China trade tensions


How will South East Asian countries be affected by US-China trade tensions?

 

Indeed, this is a perspective reinforced by the strong performance of South East Asia’s major emerging markets – Indonesia, Malaysia, Vietnam, Thailand and the Philippines – in the 2019 Index. Three are positioned inside the top 10 overall, while Thailand and the Philippines also make the top 20 in this year’s ranking. However, it is in the international logistics opportunities sub-Index where the real strength and potential of these markets to benefit from ongoing trade disruption lies.

Malaysia though is perhaps best placed to benefit from a prolonged US-China trade war and as an alternative source of manufactured goods and imports. The country’s international trade and industry ministry deputy secretary-general, Norazman Ayob, recently commented that US-China trade tensions provide the country with opportunities to increase exports and attract investments. Should a drawn out trade war ensue, Malaysia stands to benefit from import substitution in commodity groups including integrated electronic circuits, communications equipment and liquefied natural gas.

China’s Belt & Road Initiative

41.4% of survey respondents predict Belt & Road investments will better equip emerging markets to trade and grow


How will Chinese BRI investment leave emerging markets?

 

Still, 63.9% of survey respondent expect the Belt & Road Initiative to spur growth in China and boost trade with its neighbours


How will China be affected by the Belt and Road Initiative?

 

Survey respondents, on the whole, are bullish about the positive impact BRI infrastructure development will have for China, its neighbours and the countries in which investments are being made. Infrastructure is and remains a key enabler of economic activity, with poor infrastructure restricting logistics providers from transporting goods predictably and efficiently, holding back the development of formal logistics provision in emerging markets.

BRI projects have not all progressed smoothly, however, and construction on others has been suspended. This includes the East Coast Rail Link (ECRL) in Malaysia, for example, set to link the South China Sea with port infrastructure on the west coast of the country, after costs spiralled. In Sri Lanka, meanwhile, Beijing acquired a 99-year lease to the port and 15,000 acres surrounding it, in return for forgiving some of the billions of dollars owed to China for its construction.

Emerging Market e-commerce

Nearly half (44.9%) of those surveyed think the Chinese e-commerce will continue to grow faster than India’s online retail market


How do you assess the growth prospects of the Chinese and Indian e-commerce markets?

 

Cross-border express and the management of e-fulfilment centres are the most significant emerging market e-commerce opportunities


Which segments of logistics does e-commerce in emerging markets offer the best opportunities for foreign logistics providers?

 

47.4% of survey respondents expect more outsourcing of e-fulfilment in emerging markets, while 60.0% expect more outsourcing of last mile delivery


What approach to logistics will online retailers and e-commerce platforms take over the next 10 years in emerging markets?

Emerging Markets with the Most Potential

Which of the following countries do you believe have the MOST potential to grow as logistics markets in the next five years?

Rank Country Yoy Change
1 India 1
2 China -1
3 Vietname
4 Brazil
5 Indonesia
6 UAE
7 Russia 2
8 Saudi Arabia 3
9 Mexico -2
10 Malaysia 2
11 South Africa 2
12 Turkey -2
13 Thailand 1
14 Egypt 3
15 Bangladesh 5
16 Nigeria -3
17 Iran -9
18 Pakistan
19 Ethiopia 3
20 Philippines -5

 

74.8% of respondents think Iran’s near-term potential as a logistics market has been diminished by sanction imposed by the US.


Following the imposition of US sanctions, rate Iran’s potential as a near-team (2-3 years) logistics market and investment destination.

 

44.5% of those surveyed are either optimistic or strongly optimistic of Brazil’s potential as a logistics market


How optimistic are you about opportunities in Brazil’s logistics sector over the next five years?

 

Emerging Markets with the Least Potential

Rank Country Yoy Change
1 Syria
2 Iraq
3 Libya
4 Venezuela 1
5 Ethiopia -1
6 Iran 2
7 Papua New Guinea -1
8 Bangladesh -1
9 Bolivia 3
10 Algeria 1
11 Cambodia -1
12 Pakistan 2
13 Belarus 2
14 Egypt -5
15 Ecuador 2
16 Lebanon -2
17 Uganda -1
18 Angola New Entry
19 Colombia 1
20 Argentina 10

 

According to survey results, businesses will continue to steer clear of a number of markets across the Middle East and North Africa region. For the fourth year in a row, Syria tops the list of the least promising countries followed by Iraq and Libya, with all markets in unchanged positions year-on-year. The violent conflict in Syria, now in its seventh year, has all but destroyed the Syrian economy and removed essentially all potential it once held as a logistics market and investment opportunity. In addition, the announcement by the Trump administration to withdraw U.S. troops from the country is creating additional uncertainty and the potential for increased instability in Syria.

The biggest mover in the list was Argentina which climbed 10 places to 20th. The country has seen turmoil in financial markets and a sharp depreciation of the peso, with forecasts that the country will likely remain stuck in recession during 2019. Private consumption and investment remain depressed due to lower real incomes and high interest rates, and unemployment has increased, contributing to Argentina’s lessening appeal. To stem the currency crisis, President Macri sought financial support from the IMF. Whilst the agreement reached with the IMF for a bailout might be good news in the short term, it is unlikely that it will bring the robust economic recovery many international investors are hoping for. As the Wall Street Journal reports, the IMF will only allow the Argentine central bank to support the peso if it falls beyond a certain level, and only by spending a maximum of $150m. Moreover, to remedy its inflation problem, the central bank will be forced to keep the amount of money it issues unchanged and the government will need to drastically reduce its budget deficit.

Emerging Market SMEs


Which size company do you believe will grow fastest in emerging markets over the next five years?


Factors that most inhibits SMEs from participating in cross-border trade

 

However, as evidenced by the survey, no single factor determines SME success in cross-border trade, but there is a combination of internal and external factors that inhibit SMEs from growing internationally. A key enabler of cross-border growth will be the selection of the most appropriate shipping partners. As one of the respondents asserted, when an SME aligns with a logistics provider that has the capabilities to perform cross-border shipping and most importantly, simplifies the shipping, cross-border traffic is not so difficult.

The implications of faster SME growth in emerging markets are significant for LSPs. SME shippers are typically associated with higher margins for forwarders than large shippers. The main reason for this is that larger shippers leverage their greater volume requirements to squeeze forwarders into offering discounts.


Which technological developments will be most important in facilitating emerging markets trade growth over the next 5 years?

 

Utilising technology to modernise customs systems and processes will be the most important factor in facilitating emerging markets trade growth over the next five years, according to survey respondents. This is due to the impact trade facilitation has on competitiveness and its increasing importance in attracting FDI. Border procedures, i.e. those concerning customs clearance and inspection, account for the largest proportion of costs and time associated with imports. Such costs and time delays are more acute among emerging economies than among developed economies.

Automation and Information Technology (IT) are assuming an increasingly important role in modern customs administration. For example, companies across ASEAN (Association of Southeast Asian Nations) are benefitting from smoother regional trade thanks to the digital platform ASEAN Single Window (ASW) that went live in January 2018. Companies handle all cross-border customs documentation through the platform, which expedites cargo clearance and reduces paperwork by enabling the electronic exchange of trade-related documents. The platform was launched in five ASEAN member states: Indonesia, Malaysia, Singapore, Thailand and Vietnam. The goal is to implement the ASW digital system in all 10 ASEAN members by the end of 2019. While the modernisation of customs systems and processes is undoubtedly one of the most important factors in facilitating emerging markets trade growth, the use of technology can also be supported by regulatory reform. This is to ensure that customs administrations do not require paperwork in addition to the electronic submission of customs documentation.

News Release

The survey of more than 500 global logistics and supply chain executives is part of the 2019 Agility Emerging Markets Logistics Index, an annual snapshot of industry sentiment and a ranking of the world’s 50 leading emerging markets by size, business conditions, infrastructure and transport connections.

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