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Emerging Market Outlook 2014

Emerging markets will continue to be the growth engines of the global economy in the coming year, making it crucial to avoid generalisations about these economies in order to accurately guide investment decisions.

“We are operating in a brand new economic landscape driven by emerging economies who are the global giants of tomorrow. These economies are young, hungry, nimble and not afraid to take risks,” Adrian Saville, Chief Investment Officer Cannon Asset Managers told the recent Economic Outlook conference hosted by the Gordon Institute of Business Science in Johannesburg.

Factors such as innovation, the quality of institutions, openness, savings and investments, demographics and macroeconomic management will distinguish the leaders from the also-rans.

Director for the Centre for Dynamic Markets at GIBS, Dr Lyal White, explained that the newly launched Dynamic Market Index (DMI), which measures the dynamism of 133 countries over a six-year period from 2006 to 2012 is a tool to differentiate these markets.

This period was one of adjustment for many in the global economy, with the financial crisis and Arab Spring resulting in many structural alterations.

The DMI can be considered an empirical measurement to avoid the generalisations that surround the unfamiliarity of emerging markets – often lumped into groupings of acronyms such as BRICs, MINTs and CEMENTs– even though the individual countries have little or no shared features.

It is important to remember that not all dynamic markets are equal, Saville explained: “Some will make mistakes, some will lose their way and not all will succeed. There will also be some surprises from the more developed markets, such as Estonia and South Korea, who continue to compete head on with the emerging markets.”

While dynamic or emerging markets are known for their ‘restless energy,’ the index used five pillars to empirically measure these markets against each other. These factors question just how open and connected the market is; red tape; socio-political stability; the justice system; macroeconomic management and human capital.

The findings allow for the markets to be categorized according to Dynamic, Catch-up, Static and Adynamic markets.

Catch-up markets, or those with high dynamism coming off a low base, can be considered as the most interesting White explained.

The fact that the majority of these catch up markets are in Africa, populated by countries such as Rwanda, Ivory Coast, Cameroon Burundi, Uganda and Angola, is consistent with the forecast that Sub-Saharan Africa is likely to become the fastest growing region in the world in the forthcoming year, toppling Asia as the top performer in the global economy.

“Our findings support the theory of Sub Saharan Africa rising. Africa’s story is not just about commodity cycles, as most of the catch up nations have undergone structural change,” White said.

The Middle East and Central Asia were also found to be top performing regions: “The Middle East has geo-strategic relevance and has positioned itself as a connector for the global economy, that continues to grow and build on its competitive performance,” White said. Countries such as Oman, Qatar and Saudi Arabia were among the top 10 Catch Up markets.

Central Asia was a surprising prospect with better than expected performance from Azerbaijan, Kazakhstan, Albania, Georgia and Tajikistan.

Many of the countries in Sub Saharan Africa that are considered to be leading dynamic markets are also leaders in innovation, such as Kenya, with its ICT hub for East Africa.

CEO of Future Advisory Herman Singh said innovation in Africa could be considered as “innovating within constraints to solve Africa’s problems.”

Areas for opportunity on the continent are in infrastructure projects, mobile and financial services, recycling, agricultural and grant funding. “All these industries are low cost, have low barriers to entry as well as high labour intensity,” Singh said.

 ICT innovation in Africa is also accelerating, with hubs or innovation zones being created to facilitate many innovations in the mobile arena. Growth areas include micropayments, mobile banking and mobile news reporting, as many African citizens still only have connection to the internet through mobile devices.

“Innovation and economic growth in Africa can often be considered to be ‘asset light’ as there is a lack of infrastructure and physical assets. But, there are subtle changes, people are better off and the economies are growing,” Singh said.

Africa’s attitude to innovation can be likened to that of a small company: it is highly innovative, agile and able to deal with high levels of risk.

More developed markets demonstrate a lack of innovation and are intolerant of change. Saville explained that these characteristics place developed markets on the back foot when competing in the current global economy: “The massive debts accumulated by the developed world over the last 40 years can’t be paid off in full and won’t be paid. It is only a matter of time until they will default. The rich world is in the midst of tough times, which began in 2007 and could last for the next ten to twenty years.

According to the DMI, South Africa ranked in 109th position of all 133 countries. South Africa is considered to be a Static Market – coming off a high base with low dynamism.

While most of global economic growth is centered in Africa, South Africa’s trade with the continent is very limited – the country has to increase its trade links with the rest of Africa or risk becoming a laggard among the emerging economies.

“While we have been obsessing with the BRIC nations (Brazil, India, Russia and China) for the last 10 years these countries, with the exception of China, have been some of the poorest performers in the emerging market world,” White explained.

“As the BRICS were declining in dynamism there was a second tier coming to the fore. We have looked past the fastest growing region in the world – Sub Saharan Africa and operate as if our neighbours don’t exist,” White said. 

Saville said: “South Africa has performed better than developed economies, but not as well as dynamic markets. In order to ensure it doesn’t become an ‘also ran,’ 3% GDP growth just isn’t enough.”

South Africa has experienced jobless growth in its most dangerous form, Saville explained. “Income inequality continues to increase, while social inclusion is pivotal to sustained economic growth, a feature that has eluded the South African economy. Higher economic growth has to be inclusive or it is dangerous.”

While large firms dominate the country’s industrial structure, it is small firms that create jobs. “The South African economy has experienced a steady erosion of competitiveness through a lack of productivity. The thought of a ‘Silver Bullet’ to fix our economy, such as a weaker rand or low interest rates, is just a myth,” he said.

An opening up of trade and general economic openness is the quickest way to ensure South Africa improves its score on the Dynamic Market Index. “An increased flow of capital and information and even the movement of people will all contribute to lift South Africa’s global connectedness and competitiveness,” Saville said.

“Sub Saharan Africa displays the lowest level of integration of any region in the world, but it is rising the fastest. We are finally starting to find each other.”

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