Kenter, Greg 13/03/2015

Analysis and Comparison of the Risks Involved from Investing in the MINT Countries

Introduction

Since the globalization of investment, financial minds have been trying to look for more lucrative ways to spend their money other than investing in proven developed countries. Jim O’Neill, an American economist, famously constructed the now-famous acronym, BRIC, in 2001 (BBC, 2014). This well-known economic term stands for a list of developing countries on the brink of becoming major world economic powers – Brazil, Russia, India, and China. The collective rise of these countries has been specifically examined by economists due to each nation’s strong demographic base, large gross domestic product (GDP) output, and projected longevity (BBC, 2014).

But as the world’s economy drew further economic statistics and certain projections became more certain, a new class of countries now rises to the forefront as the “new emerging economic giants” (Figure 1)(BBC, 2014). This group was, dubbed by O’Neill, the very man who coined BRIC, to be called the MINTs – Mexico, Indonesia, Nigeria, and Turkey. With the transitional friction of the BRICs, such as China pivoting its economy to a consumer-based operation and Russia and Brazil experiencing a “slowdown in commodity trading [hitting these] markets dependent on commodity exports,” this leaves the door wide open for the next generation of emerging markets (Williams, 2014). A great wealth of new investment opportunities has now found the ear of investors around the world, and the MINTs are at the head of the discussion.

Investing in emerging markets has certain mathematical possibilities that make them incredibly attractive options. They, for the most part, “exhibit high economic growth rates, higher expected returns, and diversified benefits” (Pinkasovitch, 2014). These emerging market options also have certain demographic information consistent with one another, particularly in their populations of their major cities. Each one of the BRIC and MINT countries has one (or several) major cities listed in the top 25 most populated metropolitan areas in the world (Figure 2)(WorldAtlas, 2015). Large movements to the urban centers are expected to account for a “consumer class” of city folk with over four billion members worldwide, “two billion of which will be in emerging market cities” (Dobbs, Remes, Schaer, 2012). These cities are projected to account for “nearly $25 trillion [injected] into the global economy through a combination of consumption and investment in physical capital” (Dobbs, Remes, Schaer, 2012). The rapid growth of these cities can come across as a proverbial siren’s song to an eager investor.

According to many economists, however, there are many risks that are involved and understood with buying into these kinds of markets, and the MINTs are no exception. These risks range from the threat of political instability to spikes and valleys in foreign exchange rates, from the absence of domestic security exchange

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policies to difficulties in raising capital within the developing country’s borders (Pinkasovitch, 2014).

This paper analyzes the aforementioned risks of investing in the MINT countries.

Mexico

Overview

In recent years, Mexico has been one of the best-performing Latin-American markets. Tom Smith, manager of a large investment firm called the Neptune Latin America Fund, states that he expects Mexico’s markets to maintain its current state of dominance and to continue to rise in the world’s economic ranks. The current state of the country, Smith claims, will be stimulated by “[continued] progression on the reform front, with education, telecommunication, financial, fiscal, and electoral reforms all approved” (Williams, 2014). “While not all reforms are positive for all sectors,” he continues, “telecommunication reforms look to increase competition, and fiscal reform includes additional taxes on soft drinks and junk food – the complete package should lift Mexico’s potential GDP growth rates” (Williams, 2014).

As a key of an emerging market in today’s financial climate is the movement to large metropolitan areas, Mexico’s capital, Mexico City, shows high levels in urban advancement. The country’s largest city and economic base, Mexico City is home for nearly 19.5 million people and continues to show signs of population intake from surrounding areas (WorldAtlas, 2015). According to the city’s official website, 21.8% of the country’s GDP comes from Mexico City. This massive output level has elevated Mexico City’s ranking as the “eighth-richest urban agglomeration in the world after Tokyo, New York, Los Angeles, Chicago, Paris, London and Osaka” (Mexico City, 2015). The city is a national hub for Mexico’s largest financial institutions, with the local Citigroup branch compiling “three times as much revenue than all 16 of Citigroup’s branches in the rest of Latin America” (Mexico City, 2015).

Despite all of these attractive and lucrative investment avenues, there are a substantial amount of risks associated with Mexico that leave potential financiers hesitant. An easy identification of this risk lies within one of Mexico’s most important exports – oil. Of the country’s many natural resources, oil is a major focal point for the world monetary stage. According to the economic database Business Monitor, sharp decreases in oil prices “could temper investment excitement towards Mexico’s first international oil licensing round” (Business Monitor, 2015). As a top-ten-ranked exporter of oil worldwide, Mexico’s investment opportunities are closely linked to the volatility of oil consumption and prices (Figure 3).

Political Risk

Politically, Mexico faces an uphill climb, carrying its infamous stigmata of governmental corruption with its every mention. The corruption database

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Transparency International ranks Mexico 103rd out of 175 observed nations with a corruption perception index score of a putrid 35 out 100. The report also details that not only is there substantial political disarray in Mexico, but that the government’s response to this blatant problem has been slim, ranking in the 44th percentile worldwide (Transparency International, 2015).

Even with the behind-the-scenes foul play within the Mexican government, there are still many issues occurring in the commonplace that would deter many financiers from investing in Mexico. Reuters economic investigators Robin Emmott and Jason Lange paint a picture of a country held together by high-level business deals executed with drug cartels and blood money. Their 2011 report states that criminal attacks, such as “the beheading of corpses strung from bridges, women and children gunned down at parties and explosives in cars” would “[smear] Mexico’s reputation as a top emerging market for foreign investment…” (Emmott and Lange, 2011). Even with President Barack Obama officially supporting Mexico’s declared war on drug trafficking, not all members of his cabinet seem so optimistic. Former US Secretary of State Hilary Clinton “has compared Mexico to Columbia at the height of its fight against drug smuggling guerrillas in the 1990’s” (Emmott and Lange, 2011).

Financial Risk

Mexico’s interest rate currently sits at about three percent, which has been a fixed rate since June of 2014 (Trading Economics, 2015). The Central Bank of Mexico decided to leave their economic policy unchanged from the summer of 2014 by maintaining this steady three-percent level in October of 2014. This governmental position came to fruition because it was believed at the time that no inflationary pressures are anticipated (Figure 4)(Trading Economics, 2015). This rate is the lowest of the MINTs.

The amount of loans to the private sector in Mexico has reached an all-time high, and will seemingly continue to grow (Figure 5)(Trading Economics, 2015). This signifies a high velocity of money being lent to up and coming businesses by the government as well as those that are already prominent. This progressive government loaning is backed by its stable three percent interest rate to eliminate risks in monetary shock. While this then signifies an increase in the national money supply, inflation rates have actually dropped nearly a full percent from the end of 2014 to early 2015 (Figure 6)(Trading Economics, 2015). Improving the circulation of money within the economy signifies a governmental agenda to facilitate competition while maintaining high monetary velocity.

Summary

Mexico’s financial numbers seem to tell misleading story than that of its political landscape. Its relatively low interest rates and steadily increasing GDP can be attractive numbers for outsiders looking to invest. Combined with an increasing

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level of loans to the private sector and lowered inflation rates, one would be remiss to discount the potential of Mexico based on numbers alone.

While these numbers on the surface seem like an avenue towards an attractive investing option, Mexico’s real problems lie within the political spectrum. Corruption runs rampant, politicians struggle to engage in the enforcement of drug and human trafficking crimes, and powerful allies, such as the United States, have expressed public concerns with the stability of the country’s governmental action. It will be a very long time before the Mexican government can fully recover from its infamous reputation.

Indonesia

Overview

Indonesia has been on verge of major economic breakthrough for many years, even through many internal and external factors have hampered the country’s progress towards its potential. It has shown a consistently growing GDP throughout the last part of the previous decade, but also shows varying growth rates that offset large jumps in the economy (Figure 7, Figure 8)(Trading Economics, 2015). It has been heralded as “one of the best performing investments throughout the world economic crisis that began in 2008”, also being described as “the only economy posting any real economic growth in 2011” (Kuepper, 2014). Indonesia’s strong macroeconomic foundations in certain policies regarding taxation and money supply have also given economists reason to believe that there is still major growth to be done, “even if growth rates were to slow down” (Kuepper, 2014). A solid performance during the 2008 global crisis and ample growing space give Indonesia an interesting edge amongst the emerging markets.

One of the largest economies of Southeast Asia, Indonesia boasts a fervent, youthful population that ranks as the fourth most populated country in the world with around 250 million people recorded in 2014 (Export.gov, 2015). This massive populace is one that the United States economy has taken a particular interest in, as “United States bilateral goods trade with Indonesia exceeded $27 billion in 2013” (Department of State, 2014). Certain private American enterprises, such as Boeing, have already led the investment charge into Indonesia. In 2011, Boeing signed a $22.4 billion deal to bring over 230 commercial airplanes into the country, which is the largest sale in the company’s history (Department of State, 2014).

The economic center of the country is undoubtedly Jakarta, listed as the second most populated city in the world with over 26 million people (WorldAtlas, 2015). Jakarta’s main economic outputs revolve around financial services, trading, and product manufacturing, contributing to the city’s overall wealth and commerce levels. In 2009, the exploits of Jakarta were shown in the 13 percent of the city population that had an income per capita in excess of US $10,000 – translating to roughly 108,000,000 rupiah (Trade Expo: Indonesia, 2015).

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Investing in Indonesia has led economists to realize that many of the risks that present themselves are exclusive to the unique and varied demographic context of this nation. These fairly unique risks manifest themselves in numerous natural disasters that have plagued Indonesia for years. As an immense archipelago of provinces and cities, the country is certainly susceptible to incredible amounts of domestic infrastructural damage caused by tsunamis, active volcanoes, and earthquakes that have claimed thousands of lives and caused millions of dollars worth of collateral damage (Van der Schaar, 2015). Even though some of these disasters can be predicted, little can be done to avoid almost certain loss because of them.

Political Risk

As a country that exhibits an incredibly voiced population, public demonstrations are said to take place nearly daily across Indonesia that protest a variety of issues, ranging from political inadequacy to wage discrimination to social inequalities. The people have been successful in overthrowing political powers in the past, as evidenced by the fall of President Suharto in 1998 due to unrelenting pressure from the people and the sudden upheaval of his supporters. It appears to many outsiders that this form of dismissal would no longer be acceptable in Indonesia’s current system, it is clear that “there is repressed frustration in part of the Indonesian society” (Van der Schaar, 2015). Such a volatile relationship between the government and its people can bring productivity and business down to dangerous levels.

The Indonesian people have also been the victims of radical Islamic groups and other groups dedicated to “bringing [Islam] a larger role in Indonesian society, particularly in politics” (Van der Schaar, 2015). These extremist groups are believed to have connections with Al-Qaeda, the extremist Islamic terrorist group of the Middle-East, and many see this relationship as a toxic barrier to investing in Indonesia.

This tumultuous governmental image manifests itself in a Transparency International rank of 107 out of 175 with an official score of 34 out of 100, signifying a large presence of corruption in Indonesia. The database further ranks Indonesia in the 27th percentile regarding its control of the situation, meaning that government action is believed to have little impact on fixing the political problems at bay (Transparency International, 2015).

Financial Risk

Indonesian GDP has seen its high growth plateau and decline over the past few years, despite having a generally large GDP output compared to the rest of the world. Its GDP growth has shown incredibly volatile projections, showing growth as high as 3.83 percent and as low as -2 percent in 2014 alone (Figure 7, Figure 8)

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(Trading Economics, 2015). Within the last three years, the Indonesian rupiah has “dropped below 12,000 to the US dollar in November 2013, making it the year’s worst performer among the Asian currencies” (Global Business Guide, 2014).

However, there may be an overall plan to this decrease in GDP output. The interest rate, currently sitting at 7.5 percent, was set at a level that would theoretically “stabilize consumer prices” amidst the commotion behind the explosive exchange rate. The combination of the interest rate and exchange rate suggest that the government “seems happy to trade in a few basis points of GDP growth in exchange for a more balanced current account”, specifically aiming to “reduce import demand [by] making imported goods and services less affordable for Indonesian firms and consumers, while higher borrowing costs constrain domestic demand by tightening credit conditions” (Global Business Guide, 2014). This generalized look at the Indonesian economic plan is actually praised by certain economists, as these steps “should improve investor confidence in Indonesia’s economy as a whole”.

Summary

Indonesia’s political climate, combined with its gargantuan economic outputs, portrays an incredibly unpredictable projection. The corrupt nature of the country’s leadership cannot be overlooked when looking to invest in this nation, even though many of the policies enacted show an ability to adapt under incredibly repressive odds. Many of the political problems that Indonesia faces stem from the combination of angry public demonstrations and radicalized religious groups constantly fighting for influence regarding the direction of the country. With more ways to circulate voices of citizens, it seems that in this perspective, Indonesia has every risk of imploding into further social civil conflict, so much to the point of risking macroeconomic stasis.

Financially, the interest rate and exchange rate levels, while inconsistent with those countries that are more developed, seem to reveal that Indonesia is working itself out of an economic hole, and is looking towards strong domestic growth. With this inward approach to the economy, the government can focus on the increase in money liquidity within the country. With high interest rates and higher exchange rates, the government sees that sacrificing GDP output growth will help shrink the current trade account deficit by increasing prices of imported goods. It is a bold long-term strategy that would have potentially extreme payoffs, but could lead to massive loss at the same time.

Nigeria

Overview

Nigeria, even as an emerging market, is a country with immense economic influence in Africa. It is the largest economy of the continent, with a nominal GDP of roughly $524 billion, surpassing the South African economic progression in 2014 (Figure 9).

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From 1990 to 2010, the country’s economy experienced an 89 percent increase “after the federal constitutional republic rebased its GDP” (Africa Ranker, 2015). With such strong yields from foreign direct investment, an average growth rate of roughly 7 percent suggests “Nigeria’s economy may well be doubling in size every ten years” (Khan, 2012).

Another important reason for Nigeria’s economic progress is its steadily growing population. As Africa’s most populated nation, it is home to about 117 million people and continues to show growth. This group is split between the north and the south, with a predominantly Muslim community in the north juxtaposed against the major Christian communities of the south, which undoubtedly has lead to serious internal conflict. The population continues to grow at such rates that would rank Nigeria as the fourth most populated country by 2050 (Khan, 2012). Its most important economic city is Lagos, home to over 10 million people and the location of the Nigerian Stock Exchange (Shapiro, 2014).

Nigeria is considered to be a “resource-rich” country with strong reserves in oil that make it a formidable worldwide player in the oil market. Oil is a major part of the country’s GDP, contributing close to 14 percent overall. Despite this dominance in one industry, Nigeria also has interests in a wide variety of other “social demands for infrastructure”, such as energy, education, national defense security, agriculture, health care, modern consumer goods, and even a Nigerian presence in filmmaking (Shapiro, 2015). These industrial advances have led to some staggering returns via foreign direct investment. Specific returns, according to increases in these industrial sectors, have recently reached as high as 50 percent which make Nigeria “one of the world’s best performing markets – and ripe for investors who want to bet on further gains” (Levisohn, 2013).

Political Risk

The Nigerian government has garnered a reputation around the world (as well as amongst its own people) as an organization that portrays steady levels of corruption and lack of freedom for citizens to invest. The government has adopted, according to economists, a “pay to play scheme”, in which the citizens must adhere to large central payments in order to compete in the country’s markets (Shapiro, 2014). Transparency International ranks Nigeria’s corruption at an abysmal 136th out of 175, with a corruption index score of 27 out of 100. It also concludes that Nigeria has taken little to no steps in the curbing of this corruption, with a control of corruption score in the 16th percentile (Transparency International, 2015).

Much of the country’s political problems stem from the demographic divide between the northern Muslims and the southern Christians. In recent events, there has been a strong negative presence of terrorist groups, most notably “Boko Haram”, a well-known extremist Sunni-Islamic brotherhood. Actions that stem from these groups, such as the recent mass kidnappings of over 300 elementary school girls in the Christian south, “have raised serious concerns about living in Nigeria or

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conducting business there” (Shapiro, 2014). Other groups, such as the “Movement for the Emancipation of Niger Delta”, have publicly voiced agendas to continue violence throughout the country (Levisohn, 2013). This moral vigilantism has been an unfortunate staple of many African regions, and the continued application of these acts inhibits the government’s abilities for serious corruption management even further.

Another risky factor to understand with Nigeria is the complexity of its overall law system. There are several different law systems in place relative to the specific regions of the country, including English common laws, Islamic laws, and fundamental tribal laws that create a constant struggle of authority within the state. There are even some customs that operate under rulings from foreign powers. The Foreign Corrupt Practices Act of the United States and the United Kingdom Bribery Act have been able to exercise jurisdiction in Nigeria, “subjecting both government officials and individuals from commercial enterprises, to criminal sanctions for misconduct over cross-border bribery and kickback schemes taking place in Nigeria” (Shapiro, 2014). With the assumptions of various forms of law, there can be little doubt of disorganization and economic difficulty when problems become political.

Financial Risk

Nigeria’s massive market gains can mislead from the steep financial risks that plague its economy. The country’s Lagos-based stock market, Nigeria’s largest, trades stocks “far less often than those in large emerging markets”, and shows high signs of volatility even with lower trade velocity (Levisohn, 2013). Its interest rate now sits at 13 percent, up one percent from the last three years, which is the second highest amongst the MINT countries (Figure 10). There have been questions regarding the employment and wages of Nigerian citizens with more foreign cash inflows. The level of poverty among the growing population opens the door for more leakage in transactions and transporting costs to people in positions of social authority (Shapiro, 2014).

Much of the financial risk involved with Nigeria revolves around the naira, the Nigerian unit of currency, experiencing too much volatility too quickly. Investor bubbles – situations that exhibit “rising demands for foreign exchange and lack of adjustment” – are at the mercy of both the naira remaining stable and the assurance that investors will not withdraw their funds out of fear of losing. This is an emerging market that seems to undergo constant internal crashes, but in doing so “can be crucial in shaking systems out, forcing governments and businesses to return to basics” (Cowan, 2013). This is clearly far from the consistency that would attract a regular risk-averse investor, but the 8.5 percent increase in the MSCI Frontier Markets Index certainly has some itching to tap into the potential gains (Cowan, 2013).

Summary

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Nigeria’s long-term projections indicate a very strong positioning in the world market, and all but guarantee its dominance of the African economy. A steadily growing population and increasing middle class will lead the country to infrastructural advances and more modernized approaches to civil situations. However, an inexplicably corrupt government combined with a complex and varied set of legal jurisdiction makes political advances towards economic prosperity difficult. The internal conflict of the Nigerians themselves inhibits the faith in investing even more, with constant strife between radical religious groups. This particular case of political opacity is nigh unmatched.

Financially, the country’s economy hangs on the ever-changing value of the naira and foreign investors must cautiously accept the dangers of operating within investor bubbles. While the returns seem too good to be true in some cases, there is a wide array of cogs in the system that can bring Nigeria back to a rebuilding state. Higher interest rates and a relatively steady level of inflation have kept the naira under somewhat steady boundaries, and with a country as unpredictable as Nigeria, it appears that it is used to handling crises based on fairly extensive practice (Trading Economics, 2015).

Turkey

Overview

Turkey has been the target of investor interest for many years due to its fortunate proximity to powerful European and Middle Eastern economic powers, steady financial growth, slowing inflation, and gradually modernizing society. Like the other MINT countries, it boasts a large population of youthful, skilled workers and one of the largest and significant cities in history, Istanbul, as its economic control center. It has experienced significant gains in national purchasing power, and even has a strategic customs agreement with the European Union, which adds value to its advantageous location (Edgerley, 2013).

Some interpretations of Turkey portray the nation’s economy not only as one of emergence but one of recovery. In the 1980’s and 1990’s, Turkey experienced high volatility as “periodic shocks caused sharp swings in GDP growth”, and has also had to dig itself out of the financial crises of the early 2000’s (Boland, 2012). Additionally, Turkey has had to rely on its neighboring partners for economic assistance, namely the EU, and consequently has suffered when they undergo slumps. Despite these obstacles, the company still is considered at the forefront of many investment opportunities for prospective companies.

Political Risk

Turkey’s political sphere has been greatly impacted by the pressing socio-political issues that are specific to its location. The government received international

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skepticism for its support of the infamous Muslim Brotherhood after its removal from Egypt, and is currently under pressure from multiple parties to take action against its extremist neighbor, Isis (Dombey, 2014). Being caught in the crossfire of jihadist radicals gives international powers second thoughts about financing Turkey’s internal projects. Recent protests have also garnered “strong government reaction against anyone associated with [the protests], which has renewed concern about stability in Turkey” (Edgerley, 2013).

Foreign economic entities are also turned off by the complexity of the laws and contingency plans recently passed by the Turkish government. Its own citizens have expressed concerns about the current administration’s “arbitrary decision making” regarding economic policy, with “badly drafted laws and opaque regulations [leaving] the door open to negative judicial decisions” (Edgerley, 2013).

Internally, however, the Turkish government fairs decently compared to the other MINTS according to Transparency International, with a global rank of 64 out of 175 and a corruption index of 45 out of 100. The movement to curb its corruption is ranked in the 58th percentile, signifying more steps taken than all other MINTs (Transparency International, 2015).

Financial Risk

Turkey suffers from many of the same problems that plague the other MINTs. Its stock market exhibits “a relative lack of liquidity” due to a current high number of family-run businesses that do not want to take risks. The static nature of the stock market, combined with the reality of limited participation, portrays an economic oligopoly in which entry to the market is increasingly difficult (Boland, 2012). Economists believe that the market will only be free of its volatility if more long-term foreign direct investment reaches Turkey as opposed to “hot money” ventures (Boland, 2012). In fact, foreign direct investment has experienced a net decline over the last decade, and the encouraging of new investors seems increasingly difficult (Trading Economics, 2015).

Turkey is also at the mercy of the performance of the EU, and shows serious signs of dependence towards its western neighbor. Despite EU membership negotiations, the Turkish market “remains the most volatile in Europe” (Liinaki, 2014). The EU is “by far Turkey’s biggest direct investor”, so there is definitely incentive for the EU to assist Turkey in the wake of certain financial problems (Figure 11)(Dombey, 2014). All told, the EU holds about 45 percent of Turkey’s commercial volume – if the EU tanks, then Turkey will surely feel the brunt of the punishment by virtue of their symbiotic relationship (Gokmen, 2014). Turkey has also shown a high dependence on the importing of energy reserves from the EU and the Middle East (Dombey, 2014). The overall amounts of risk have many economists wondering if Turkey will ever show the promise it once did, and many are skeptical “if it can catapult itself from the world’s 17th largest economy into the top 10 within nine years” (Dombey, 2014).

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Summary

With a jumbled legal system and slight over-dependence on the EU, Turkey’s economy experiences the explosive peaks and valleys consistent with many emerging markets. Its constant surveillance by the international community regarding Isis and other terrorist organizations raises questions about the moral compass of the government itself. As the gateway between the west and the Middle East, political conflict is undoubtedly unsettling.

Financially, Turkey’s lower rates of foreign direct investment contribute to its stalling performance in its Istanbul-based stock market. Its oligarchical market layout constricts the possibilities of investing, but entering is still possible. The risks of the volatile financial scene are more likely, however, to surface with short-term investments instead of long-term investments.

Conclusion

To feel 100 percent certain in an investment in a MINT country is practically a misnomer – there are simply too many risks appearing from countless angles, some more predictable than others. Politically, the MINTs exhibit less-than-transparent governments with relatively high corruption rates and insignificant responses to white-collar crimes. All of the countries operate under the constant threat and risk of cartels, religious fanatics, and terrorist groups that either inhibit investment opportunities or jeopardize their progress once set in motion. Financially, each country poses risks in their respective stock markets and often relies on the economies of their powerful neighbors. But as the risk is high, the rewards can be colossal for those willing to champion these risks. Only time will tell if these countries can harness what makes them powerful surfacing forces – growing and young population rates, growth of major cities, and advances in modern societal infrastructure – and turn their potential into gains.

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