Succeeding in the CIVETS

Succeeding in the CIVETS

With many developed countries facing economic stagnation, developing countries are being targeted as some of the markets most likely to deliver sustained growth. Learn about the latest cluster to be branded as engines of global growth.

By Elliot Wilson and Ben Schiller

Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa are destined to be a group others want to join. The Economist Intelligence Unit (EIU) coined the term “CIVETS” in 2009 to refer to this group of emerging economies ranked in a tier below the powerhouse BRIC nations (Brazil, Russia, India and China). So far they have not disappointed. The EIU forecasts annual growth rates averaging 4.9% for the CIVETS countries over the next two decades compared with a lacklustre 1.8% for the rich G7 nations.

One hallmark of a CIVETS member is a growing population that is young, technologically sophisticated, consumption-driven and skills-hungry. The median age is 27; in Egypt it is just 24. By comparison, the median ages in the US and UK are 37 and 40, respectively.

Widely spread around the world, the CIVETS countries are not a formal grouping, nor do they have any shared political identity. But they do share a number of similarities: Their economies are perceived to have relatively sophisticated financial systems and not to be over-reliant on any one industrial sector.

CIVETS countries differ widely politically, but their geopolitical importance is already evident. Turkey, straddling Asia and Europe, is inching toward EU membership, while Egypt has been pivotal in the Arab Spring movement, which is upending assumptions about, and the status quo in, the Arab world.

Indonesia is a commodities powerhouse and is seen as diplomatically important thanks to its massive Muslim population. And South Africa is exercising influence through export of its novel corporate governance requirements; these are helping shape the work to drive business sustainability by the International Integrated Reporting Council.

Their economies are currently growing at an average of more than 6% a year, with Turkey in the vanguard. These are the types of markets that growth-hungry capital investors and multinational corporations dream of, each boasting an emerging middle class ready and willing to consume mid- and up-market products, with governments that want to improve infrastructure, broaden their industrial base, attract higher levels of foreign investment and increase exports. HSBC Global Asset Management launched the first CIVETS investment fund in 2011. But doing business with the CIVETS countries also poses problems. Regard for professional codes of ethics is not firmly entrenched. Regulatory enforcement, too, is often weak, and the overall business environment and governance structures are frequently at odds with Western norms.

Moreover, economic growth can expose chronic skill shortages. With half the population under age 27, most of the CIVETS nations will find that upskilling the mass of their citizens is a daunting task. Whether it can be achieved will be important in shaping their long-term success.

Colombia


The third-most populous country in Latin America, after Brazil and Mexico, Colombia is already a key target for foreign investment. Colombia’s recent history of drug-cartel violence should no longer be a bar. The country now has a stable economy (GDP hit $435 billion in 2010), growing at just short of 5% a year.

Mining, machinery, and corporate and engineering training (particularly in the energy sector) are expanding fast. So are renewable energy, infrastructure, environmental consultancy work and water treatment.

Notes Mike Sutton, head of international trading at the Medellin-based investment fund Bolsa y Renta: “Growth was stunted for years, but the government regained control of the country’s affairs in the middle of the last decade. Since then, foreign direct investment has increased substantially and is probably where it should have been if there hadn’t been any violence.”

According to the US State Department, between 2002 and 2008, homicides in Colombia decreased by 44%; kidnappings by 88%; terrorist attacks by 79%; and attacks on the country’s infrastructure by 60%. Nevertheless, the perception of violence remains a sticking point.

But the country offers huge opportunities. In October 2011, the US followed the EU in sealing a free-trade agreement with Colombia. The office of the US Trade Representative forecasts that, when implemented, the US-Colombia agreement will open up significant opportunities in Colombia’s $166 billion services market. Key US products will gain immediate duty-free access, including almost all agricultural exports, construction equipment, aircraft and parts, auto parts, information technology equipment, and medical and scientific equipment. The pact also enhances safeguards for intellectual property.

Energy firms such as BP and Exxon have profited from the sale of oil and gas; London-listed SABMiller created the country’s largest brewer after buying Bavaria; Chinese telecom equipment maker Huawei has targeted Colombia as a growth market. India’s Hero MotoCorp is the biggest seller of motorcycles in Colombia.

Indonesia


Indonesia should, in many respects, be a BRIC nation. The nation of islands is home to 245 million people, boasts a $1.1 trillion economy that grew 6% in 2010 and is on track, the World Bank predicts, to expand by 6.5% in 2012 and 2013.

This, says Will Fletcher, head of marketing finance at an international tobacco company in Indonesia, proves the buoyancy of the local economy. “There’s a large amount of wealth held by a small number of people, so the potential for that to trickle down to other areas and other people is massive,” he adds.

To be sure, the country lags behind many others in welcoming foreign investments. Foreign firms importing any of 500 types of goods into the country, from footwear and toys to textiles and electronic products, need to register as a foreign “PMA” corporation first. Add to that the expense of a luxury tax and import duties. Several sectors, notably fuel, lubricants and shipping, are inaccessible to foreign companies.

But there are many reasons to do business here. Indonesia may rank 129th in the World Bank’s Doing Business 2012 report, but it scores higher for protecting investors, trading across borders and dealing with construction permits. A middle class that numbered under 2 million in 2004 is on track to hit 150 million in 2014.

Inevitably, consumer goods — from Research In Motion’s BlackBerrys and Apple’s iPhones, to Piaggio and Vespa scooters — sell like hotcakes here. Unilever is the country’s leading fast-moving consumer goods firm. Indonesia is Facebook’s second-largest market (the US is the largest), and No. 3 globally in Twitter users. Key growth markets (if permits can be secured) include infrastructure, from ports to railways, life sciences (health-care equipment sales are booming as incomes rise), mining, financial services, toiletries and the creative-and-media space.

Fletcher recommends Western nationals have “an open mind” when working in the country. “If you start taking a Western company’s idea of process and you try and apply that immediately to the local company environment, you will start to see major bottlenecks.”

Vietnam


Vietnam is smaller than the other CIVETS countries in economic terms (though its $277 billion GDP is growing at 7% a year) and has yet to make the transition to full democracy.

Christopher Palmer, head of emerging markets at Henderson Global Investors, describes it as “one of the worst places to do business, anywhere”. Bureaucracy, corruption and poor infrastructure can make this a treacherous place to get things done. Defence equipment and shipping are out of bounds for foreign companies, and the textiles and energy sectors can only be entered via a joint venture with a local partner. Vietnam ranks 166th in the World Bank’s Doing Business 2012 report when it comes to protecting investors.

But success stories do exist. The financial services market is opening rapidly – Citi, HSBC and Standard Chartered are all here in force. Vietnam is desperate to develop its “soft skills”, creating opportunities for mid- to high-end hotel chains, management and intellectual property consultancy, as well as IT and outsourcing.

Consumer goods are also a key to success. Low-end mobile phones sell well here, as do Indian and Japanese scooters. Vietnam is becoming a key market for US agriculture, helping to secure up to 28,000 American jobs, according to the US Department of Agriculture.

Growth will come from industries such as science and technology, hydrology, renewable energy, advertising, marketing and English-language skills, but also in more basic industries. With China fast becoming more expensive for textile and apparel work, the likes of Spain’s Inditex, owner of the Zara brand, and American clothing chain Guess are moving production to Vietnam.

Ang Yue Lai, FCMA, CGMA, who has worked in the country for eight years, says Vietnam’s strengths are its large low-cost labour force and sizeable domestic market, though he worries about overheating and currency weakness. “Vietnam has developed more rapidly than the government can handle or control, and this is having a negative effect. In the long term, growth will depend on how the government controls inflation, interest rates and currency stability.”

Egypt


At the end of 2011, the prospects for a stable Egyptian democracy were still uncertain following the revolution that toppled Hosni Mubarak’s regime, and that uncertainty was felt throughout the economy last year.

Egypt’s economy, worth about $500 billion in 2010, is likely to have slowed if not contracted in 2011, whereas forecasts before the revolution estimated GDP growth of more than 5%. Meanwhile, inflation is on the rise and ratings agencies have downgraded the nation’s debt.

“You need a democratic system for better governance and accountability, but this has delayed economic progress,” says Shady Makary, ACMA, CGMA, finance director, Africa and the Middle East, at global consumer goods group Unilever. “It’s going to be another year or two before things are stabilised.” Still, he is broadly optimistic. “We think 2012 will be crucial. We will have a new president, a new parliament and a new constitution.”

It remains to be seen how investment-friendly the new government, set to be put in place in mid-2012, will be. But global investors’ hopes are high. Capital is flooding into Egypt from global development banks and well-wishing national governments, both keen to help, and benefit from, a more democratic Egypt.

Egypt will need capital to rebuild its tired infrastructure and expand its financial services base, its health and educational facilities, and chemical and industrial plants, and in developing skills in areas such as life sciences.

The British trade promotion body UK Trade & Investment (UKTI) identifies construction, education and training, energy, engineering, information technology, oil and gas, and retail as sectors likely to see the greatest growth in the future. Tourism, which before the revolution accounted for more than 5% of GDP, will also return.

But in October, the UKTI warned of continued political instability, leading to a questionable investment environment. The agency noted court rulings that re-nationalised three companies that had been privatised under Mubarak.

Once stability returns, however, foreign firms are likely to follow a growth story that’s only just begun.

Turkey


Turkey has a population of more than 70 million and a hefty economy – $1.1 trillion and growing at 8.2% in 2010, making it the world’s 16th-largest economy.

“During the last decade, economic development has been stabilised with controlled inflation and boosted foreign direct investments, initially from the US and the EU, and lately from the Middle East. As a result, Turkey has been less impacted in the economic crisis than neighbouring countries,” says Cem Oztoprak, ACMA, CGMA, head of decision support at Vodafone Telekomunikasyon.

“It’s a large market,” adds Palmer of Henderson Global Investors. “And as a ... European Union candidate, it has lots of legal and institutional structures in place – this is a real positive, though on the downside it’s an economy subject to macroeconomic volatility and boom-bust cycles.”

Although retail spending slowed somewhat in 2011, and saturation is a fear, young people still buy higher-end phones from Apple, Research In Motion and Samsung. Mastercard recently launched its new smartphone-based payment system here. Half the population is under 25, and 62 million own a cellphone.

Energy is a concern. Authorities have sought to privatise the sector for years but overlicensing, corruption and low regulatory standards have hampered this process.

In its Doing Business 2012 report, the World Bank noted that it took 189 days and 24 licensing procedures to build a warehouse, and that businesses faced long delays for construction permits and insolvency decisions.

The new Turkish Commercial Code, to be introduced in July, is designed to protect shareholders’ capital and beef up corporate governance and transparency. But Chris Knowles, chief operating officer at KPMG Turkey, advises investors to wait and see how strictly the law is enforced.

“The issue in Turkey is that sometimes these things are announced, but then there are delays and people change their mind,” he says. “You need to be flexible, because Turkish companies don’t have a history of robust corporate governance or management reporting."

South Africa


South Africa’s economy, at $524 billion and growing at about 3.1% a year, may make it only the third-largest of the CIVETS countries in absolute terms. But a robust stock market, a strong regulatory system and respected political and institutional structures make this an attractive place in which to invest.

South Africa adopted IFRS in 2005. In its 2011 Global Competitiveness Report, the World Economic Forum ranked the country No. 1 in terms of auditing and reporting standards, and fourth of 142 nations for financial market development, thanks to the ease of accessing capital. High-growth sectors include banking, engineering and manufacturing.

There are issues, as in any market. South Africa scores few points for labour market flexibility and labour-employer relations, both of which rank 138th on the World Economic Forum index.

“The labour laws are not attractive for foreign investors,” says Maryvonne Palanduz, FCMA, CGMA, head of retail finance and risk at South Africa-based financial services group Metropolitan Holdings and chair of CIMA’s Southern Africa Regional Board.

Palanduz says the effect of the government’s “transformation” policies, which favour local empowerment, is a lack of knowledge workers.

Then there is the issue of work permits. South Africa allows foreign specialists, from chemical engineers to senior bankers, to work in the country for up to three years. After that, the firm can either transfer the job to a local citizen or apply for an “intra-company work transfer permit” to retain the foreign worker. But such permits are often hard to get.

Yet overall, the nation’s socioeconomic future looks bright. The revamped Companies Act, which took effect in 2011, is designed to enhance transparency and accountability among state-owned and public organisations.

The newly introduced “headquarter company regime” grants tax concessions to foreign-owned, South Africa-based companies.