UHY GLOBAL AUGUST 2020 FEATURE JOINING THE CLUB


What are the emerging economies to watch in the 2020s? They call it the ‘7% club’, and the figure has not been chosen at random. National economies that grow at seven percent are likely to double in size every decade, and if you make it into this exclusive club you might be on the fast track to a very bright future. Or that, at least, is the theory. The 7% club is not real, of course. There are no perks of membership, no club outings, and no seat at the top table. The club is the invention of international banking group Standard Chartered, who coined the term to categorise a group of economies that it thinks will boast particularly impressive growth rates over the coming decade. As we all know, forecasts can quickly fall victim to events, and never more so than now. The Covid-19 outbreak has rendered economic crystal ball gazing an especially hazardous pastime. But Standard Chartered’s research, released last year, may still have value. Almost every country on earth is likely to miss growth targets in 2020. But if the 7% club members’ fundamentals are sound, they could still be on course for rapid growth over the remaining years of the decade. There is good reason to hope they are. As Standard Chartered researchers Madhur Jha and David Mann say, “faster growth not only helps to lift people more quickly out of absolute poverty, but is also usually accompanied by better health and education, as well as a wider range of – and better access to – goods and services.” BRICS AND PIECES The 7% club is not the only high growth club in town, however. Economists are forever trying to predict where the lightning of fast and sustained growth is likely to strike next, so they can better advise clients looking for new and lucrative investment opportunities. The most famous example is the BRICS group, an acronym coined by Goldman Sachs economist Jon O’Neill in 2001 to cover Brazil, Russia, India and China, with South Africa added later. BRICS highlighted the economies best placed to surge in the early years of the 20th century. In 2005 the BRICS researchers introduced the ‘Next 11’, a group of countries they believed would develop more slowly, but were on course to become world economic powers, nonetheless. South Korea, Mexico and Vietnam were all on the list, and South Korea has certainly lived up to expectations. Other forecasts have included African nations like Nigeria and Ethiopia. So, are these predictions of economic take-off accurate? Vietnam is regularly touted as an emerging economy to watch, and growth of well over 6% has been sustained for a number of years. Standard Chartered believes manufacturing and growth led by foreign direct investment (FDI) is likely to continue drive its economy. Thanh Nguyen, partner at UHY’s member firm in Vietnam, UHY Auditing & Consulting Co Ltd, agrees that the country has the fundamentals in place to remain a beneficiary of sizable quantities of foreign investment in the coming years. “There are many reasons for Vietnam to be an FDI hotspot, such as its strategic geographical location, young and cost-effective labour force, the transition of FDI from China and other countries, and an enormous market with large purchasing power potential,” he says. FDI creates jobs and wealth, and while it is far from the only factor behind sustained growth, it is often an important one. The 7% club research agrees with Thanh that Vietnam could benefit from redirected FDI as investors cool on China, where growth has slowed considerably after years of spectacular economic expansion. NEW ASIAN TIGERS? If the forecasts are right, South-East Asia as a whole is likely to attract significant FDI in the coming years. Like Vietnam, the Philippines is a current contender for Standard Chartered’s high growth club, and is reported to have “the potential to move into the 7% club with greater infrastructure investment and an increased focus on developing the under-tapped tourism sector.” The Philippines is currently third in the region for GDP, 0.5% above the regional average. Michael Aguirre, managing partner, UHY M.L. Aguirre & Co. CPAs, Philippines, also believes the fundamentals are in place to attract an increasing share of FDI. “The growth and the projection rests on the country’s sound macroeconomic fundamentals, a steady growth in the labour market composed of a young population, continued investment in infrastructure, and the enactment of investment focused legislation, which includes incentives for foreign ownership, tax reforms, and improving the ease of doing business,” he explains. In these two South-East Asian cases the 7% club research appears, at the moment at least, to be right on track. But there are no guarantees. In 2010 Standard Chartered identified Nigeria as a potential 7% club member, and the country remains the third largest host economy for FDI in Africa, behind Egypt and Ethiopia. Lawrence Etukakpan, head of business development, UHY Maaji, Nigeria, believes the country has clear advantages when it comes to attracting FDI. “Nigeria has traditionally attracted a significant amount of FDI compared to the African average as a result of our partially privatised economy, comprehensive and advantageous tax system, significant natural resources and low cost of labour,” he says. “The size of the domestic market – Nigeria is the most populous country in Africa – is also important.” DOMESTIC STRESS Despite being one of the most attractive destinations for FDI in Africa, the level of investment in Nigeria has decreased significantly in the last two years. According to the United Nations Conference on Trade and Development (UNCTAD), FDI flows to Nigeria totalled USD 1.9 billion in 2018, compared to USD 3.5 billion in 2017. This is a significant decline and a blow to the Nigerian economy where, in 2018, FDI represented 25.1% of the country's GDP. Lawrence Etukakpan says that domestic issues have become problematic for the economy, including factional violence and insecurity in some areas. “The nation’s infrastructure deficit is another major investment deterrent,” he adds. “The lack of stable power means manufacturers have to rely on expensive alternative energy sources, such as diesel generators, though the government is working hard to address the situation.” Vital elements in every nation’s appeal to foreign investors also include a transparent and fair legal system and a policy of economic liberalisation. Some of the Nigerian government’s attempts at liberalisation have borne fruit, as has its policy of promoting public-private partnerships and strategic alliances with foreign companies. The country has leapt 15 places for ease of doing business in the most recent World Bank report, making it one of the list’s top ten improvers. Although UHY Maaji & Co is working with clients to help them meet the demands of policy and regulation, bureaucratic obstacles remain. Lawrence talks of a ‘challenging investment climate characterised by some stringent government policies, bureaucratic bottlenecks for securing permits, and an unreliable legal framework’. Standard Chartered agrees, saying that “perceptions of a more adverse business environment have not helped growth.” STABILITY AND TRANSPARENCY If Nigeria can meet its challenges, it has the potential to rejoin the 7% club in years to come. And in every country aiming for sustained growth, stable government and a transparent commitment to free trade are key factors. Thanh Nguyen believes Vietnam’s compliance with a number of high-profile free trade agreements (FTAs) has accelerated the speed of governmental reform in the country and pushed a liberalising agenda. “We have about 13 FTAs in place and these – especially the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam FTA – continue to create an impetus for Vietnam to speed up its on-going institutional reform and improve its business environment,” he says. In the Philippines, too, state policy actively encourages FDI. The most recent measures include, in 2018, the Ease of Doing Business and Efficient Government Service Delivery Act, a law that aims to improve the efficiency and transparency of government procedures in regard to business applications. Michael Aguirre believes that, taken together, pro-business legislation is designed to, “attract, promote, and welcome productive FDI investments that significantly contribute to national industrialisation and socioeconomic development.” LOCAL KNOWLEDGE IS KEY Another factor that contributes to growth potential is the existence of a strong professional services sector. Robust professional support networks smooth the path to increased FDI by providing potential investors with the local expertise they need to meet regulatory requirements. “We provide a wide range of services to support foreign firms operating in Vietnam, from the early stages of investment planning, including market entry strategy, to licence applications and subsequently the operating stage,” says Thanh Nguyen. “We deal with all compliance requirements in Vietnam in terms of statutory audit (under both IFRS and VAS, the local accounting standards), internal audit, tax and accounting.” That’s true of UHY in the Philippines and Nigeria too. Indeed, UHY member firms in emerging economies around the world have wide experience in helping foreign investors set up businesses or acquire existing companies, and comply with all local tax, employment and business regulations. They also offer informed advice about local business conditions and opportunities, and will happily work with other UHY member firms from across the network to provide end-to-end accountancy services for cross-border clients. The full effects of the coronavirus pandemic on the short-term fortunes of well-placed emerging economies remains to be seen. Similarly, the recent rise of populist leaders with anti-globalist agendas threatens even the most confident of forecasts. Nevertheless, in the longer term, a young and cost-effective labour force, backed by legislators that actively encourage entrepreneurialism and foreign investment, mean that a number of nations are on course to become truly global economies this decade.


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