Issue20 by Alternative Emerging Investor

RENMINBI EXCHANGE RATE

PROSPECTS FOR EMERGING ECONOMIES IN 2017

â&#x20AC;&#x2039;CITIES OF THE FUTURE 1

Letter from the Editor

Managing Editor Nate Suppaiah Public Relations Director Tiffany Joy Swenson Editorial Contributions CEIC Real Assets Adviser Euromonitor International Privcap Institutional Investing in Infrastructure Asia Briefing FocusEconomics Design Arman Srsa Contact info@aeinvestor.com | (202) 905-0378 2017Alternative Emerging Investor. No statement in this magazine is to be construed as a recommendation for or against any particular investments. Neither this publication nor any part of it may be reproduced in any form or by any means without prior consent of Alternative Emerging Investor.

CONTENTS

Issue 20 – April 2017

09 17 COMMODITIES

The Coming U.S. – China Agri-War

FUNDS

09 11 14

INFRASTRUCTURE

Advent: Back in Argentina Advent Remains Bullish on Latin America The Chilean DC System

India in the Dark

Contents

26 31 MACROECONOMICS

19 22 26

The BEPS Action Plan in China and Hong Kong What are the Prospects for Emerging Economies in 2017?

29 31

26 PRIVATE EQUITY

Renminbi Exchange Rate Thailand in 2017: a Changing Investment Landscape

Is it PE’s Time to Tango in Argentina?

Cities of the Future: Fastest Growing ‘Megacities to be’ are in India

Commodities EMIA

The Coming U.S.-China Agri-War

Chinese investments in Africa awill have major implications for U.S. farmers and investors ✍✍Serge Pustelnik Many Americans are unaware about the impending global

agricultural war between the United States and Asian markets that will likely put many U.S. farmers out of business and send food commodities prices spiraling down as early as 2017.

recently started an agricultural analysis for the nonprofit organization New Market Labs. In my research I noticed a disturbing trend that has substantial ramifications for our food prices, U.S. farmers and the U.S. economy as a whole.

China is buying land throughout Africa and investing heavily in production and manufacturing of emerging markets. The Chinese government is also training locals on how to grow food crops that they are currently buying from U.S. farmers. When these farms in Afri-

ca are completed, they will create new market competition for U.S. farmers who currently rely heavily on China for agricultural profits. What exactly is this war being fought over? Soybeans and China’s demand for more.

Commodities

China was once an exporter of soybeans but began importing from the United States in the mid-1990s. With its growing population, conflicts with northern farmers, and a humid climate, China has been unable to fill the demand and has since turned to other markets. The United States is the largest agriculture exporter in the world, relying almost entirely on the Chinese market. Currently, 80 percent of all U.S. soybean exports go to

Asia. OECD reports show that soybeans are the number one agricultural export by U.S. dollar, totaling $24 billion in exports in 2014. This represents a â&#x20AC;&#x153;soybean bubbleâ&#x20AC;? â&#x20AC;&#x201D; a 560 percent increase in exports from $2.5 billion in the early 2000s. Chinese soybean demand is so significant in the United States that it represents a whopping 60 percent of all U.S. soybean exports. In other words, China is contributing $14.6 billion to U.S. agricultural sector.

China is investing in Africa because it is ideal for soybean production. It has plenty of land, inexpensive labor, and infrastructure is being developed at a galloping pace. As early as next year, Chinese investors will begin to reap the benefits of their investments into Africa and will start to shift their imports to closer ports with cheaper prices. The demand for U.S. soybeans will drop significantly when this happens, not only because Afri7

EMIA Commodities can soybeans are cheaper, but also because their farms are closer and supply lines shorter and under more Chinese control. To export from Africa, production costs will be roughly 50 percent cheaper, so U.S. consumers can expect a 30 percent to 40 percent drop in food commodity prices within the next three to five years. Soybean prices should become more volatile as this unfolds and U.S. farmers will have to adapt quickly. Small farms are going to have a much more difficult time adapting to this change than corporate farms. U.S. investors also cannot overlook Africa as an excellent potential investment.

About the Author

Serge Pustelnik is a strategic adviser to the New Markets Lab, a nonprofit organization working on commercial legal and regulatory reform in developing markets. Real Assets Adviser is the first and only publication dedicated to providing actionable information on the real assets class. The magazine provides thoughtful, cutting-edge analysis, helping advisers make informed decisions to diversify clients’ portfolios, provide long-term income and hedge against inflation. Real Assets Adviser covers the entire spectrum of real assets, including real estate, infrastructure, energy and commodities/precious metals.

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Funds

ADVENT: BACK IN ARGENTINA With Patrice Etlin Of Advent International David Snow, Privcap: We’re joined today by Patrice Etlin of Advent International. Patrice, welcome to Privcap. Thanks for being here.

Snow: Is your firm starting to look at Argentina now? If so, what led to the new interest?

not so much because of the macro. Actually, bad macro for us has been an opportunity to find good deals and do good transactions. But, with the Kirchner government in place, we were facing issues of rule of law, control of capitals, changing tax regulations on our companies, unions. It was a very complex and complicated situation; [with] a lot of political interference in the market.

Etlin: We have [had] an office in Buenos Aires in Argentina for 17 years. We started back in 1996—it was our first office in the region— and we left Argentina five years ago,

With the new government in place, the Macri Administration, [being] very business friendly—it’s a superb team in place, particularly on the economic ministry and plan-

Patrice Etlin, Advent International: It’s a pleasure.

ning. With that, we see an administration that is much more business friendly, open and wanting to attract institutional, international investment like us to the country. Valuations are low, so our challenge there is to be able to find large companies writing the $150- or $200-million checks. We see those opportunities [with] more infrastructure, energy related, which we don’t do so much, so that’s why we’re spending time. We have capped the Argentine team inside our other offices—in São Paulo, Mexico and Bogota—and that team has been spending time on the ground there.

Funds EMIA Snow: What sectors are of greatest interest? Etlin: We are moving in retail; we’re looking at some consumer retail opportunities right now there. Also, there’s a very interesting financial service opportunity around payments actually going on there in the market. And healthcare has been very strong for us. We own two pharma companies in Argentina and we have a long track record of knowing management teams and a good story around healthcare in Argentina. So, that’s been also a big focus for us. Snow: Are you considering opening an office there? Etlin: Eventually. We will during LAPEF VI, which is our current fund we are investing in the region. We intend to have one or two deals out of Argentina. If that develops, yes, maybe we will come back and open an office.

About the Author

Privcap provides in-depth articles, videos, reports, and events for the private capital markets community. With a loyal audience of over 10,000 unique monthly visitors comprised of fund managers, institutional investors, service providers and portfolio company executives. Privcap has thousands of programs already in our archive at privcap.com /privcapre.com and dozens of new videos and articles released each month, we connect you with ideas to better shape your decisions and build value for your company.

Funds

ADVENT REMAINS BULLISH ON LATIN AMERICA Advent Remains Bullish on Latin America With Patrice Etlin of Advent International David Snow, Privcap: Today, we’re joined by Patrice Etlin of Advent International. Patrice, welcome to Privcap. Thanks for being here. Patrice Etlin, Advent International: It’s a pleasure. Snow: You are Managing Partner and you are primarily responsible for the Latin American investment program of Advent International. I’d love to hear your views on the market today. Why don’t we start with the biggest market in Latin America for private equity, which is Brazil? You’re based in São Paulo. You have an on-the-ground view of what’s happening in Brazil. It’s in a downturn. What’s different about this downturn in Brazil and what does it mean for private equity?

Etlin: David, we’ve been 20 years in the region now; we celebrated our 20th anniversary this year. And we went through all the different cycles during this period—the end of the ‘90s, 2001, 2002, 2008. Now, the difference here of what we are facing in Brazil, it’s—this recession has been long. We are in the second year into this recession. Then, you couple on top of that a political crisis that ended in the recent impeachment of President Dilma. That combination has been, in a sense, very damaging to the economy and to companies. Snow: I would imagine there are a lot of distressed opportunities to be had in Brazil. Does your firm pursue those types of deals? Have you seen that type of deal flow tick up? Etlin: We don’t look at those kinds of deals, we don’t pursue those, but the amount of companies that came

through the office in these situations—debt to EBIDTA levels that are unsustainable—has grown significantly over the last quarters even. But the other side of the crisis is that it had opened to us the opportunity to look at companies that were not being accessible to us—a high quality of assets by the size of those assets and the situation they are, it is a unique opportunity, in fact. Not only because of the crisis, but also remember that there is a big corruption scandal going on in Brazil involving Petrobras, for instance, and major construction companies. Those companies are so forced to sell assets because of that and those are good assets. Snow: Your firm recently acquired Fortbras, which is a major auto-parts distributor in Brazil. Can you talk about how that deal came about and what your thesis is for its growth? 11

Funds EMIA we are spending time in Peru and even Chile now—we’re actually advancing also in our first Chilean opportunity. We just concluded our first deal in Peru, which is an addon of an existing portfolio company we have out of Colombia: a chemical distributor. Peru is a much smaller market, so we have there a bit of same challenge we are facing in Argentina in the sense of finding large transactions out of Peru. But the Andean region as a whole—and, again, particularly Colombia—has been very interesting for us.

Etlin: We’ve been looking at this sector for a couple of years now and we source many transactions. We were always facing the issue of size of the company we could find. Fortbras is a consolidation of five companies that we are buying at the same time and creating a holding company on top of it to manage those five assets. This is a roughly $10-billion market in Brazil today and the thesis is you had a boom in the selling of new cars in Brazil back in 2006, ’07 and ’08 at the boom of the credit cycle there. The market there was selling close to four million new vehicles or cars per year and transformed Brazil into the third-largest car market in the world. Those cars are now getting out of guarantee from the manufacturers and the customers that bought those cars are sourcing parts and spare 12

parts in distributors, third-party distributors like ours. Our company basically distributes to repair shops directly. A huge portion of our customer base—it’s a company growing double digits in the middle of the crisis. We do a lot of opportunities for add-on and consolidations, so that’s the way we look at this deal. Snow: Moving on around the Latin American region, where are some countries where you’re spending a lot more time and where you see very interesting opportunities? Etlin: We established our presence in Colombia, opening our Bogotá office back in 2011, and it has developed of being a great opportunity for us. We did six transactions there—all successful, large, doing well. We established a great name in the country, seeing a strong pipeline out of there. From Colombia,

The other big market, of course, is Mexico. We are in Mexico since 1996 or so—20 years in Mexico. Out of Mexico, we cover the Caribbean region and Central America. We’ve done deals in Puerto Rico and the Dominican Republic. In Mexico—actually, when you look at the outlook of the economy, this year is probably the best market in the region. [It is] very linked to what’s going on in the U.S., very sensitive to the U.S. election, of course. Snow: When looking at companies based in places like Peru and Colombia, how important is the idea of taking the business across borders and building revenue by taking a local champion and making it more of a regional champion? Etlin: It is not the main thesis of our deals in general. We’ve done that. We’ve built Latin American platforms. We’ve done that, as we speak, in chemical distribution.

Funds Snow: What do you sense is the sentiment of your investors, or investors generally in private equity, about the Latin American region? Etlin: Brazil is the elephant in the room in terms of size, in terms of the number of managers and large managers that were developed and in business in Brazil over the last years. There was massive fundraising, record fundraising, for Brazil in 2010 and ’11. Close to $10 billion was raised there and a lot of that money was raised into local funds that put the money to work at the peak of Brazil in terms of valuation, but also appreciation of the Real. Of course, in general, that performance was poor. Some of those mangers are out of business and investors lost a significant amount in those cases. So, there is a concern or questioning around what is next for Brazil. In terms of when they look at Mexico, it’s always this view that that market should be a larger market in terms of PE activity. It is a second economy in the region, but when you see the number of transactions compared to other markets, it is still very poorly penetrated in terms of PE activity there. Snow: Why do you think that is? Is it just a much strong family business culture in Mexico? Etlin: That’s a good point. It’s a more concentrated economy. You

have big oligopolies there. You have one guy that controls 40% of the market cap of the stock market there: Carlos Slim. The type of concentration, you don’t see in other economies in the region—a big influence of the families, a lot of transactions between them. It is a more difficult market to penetrate, yeah. Snow: Final question for you. What do you think about when you are thinking about being bullish about the long-term prospects of private equity in Latin America? What facts or trends do you follow that make you feel bullish as an investor? Etlin: When you look at long term, we will always have volatility. I

think that’s the first point also to be clear about the region. If an investor is looking for stable growth, predictability, that’s not Latin America. But, when you look at those markets, you have a middle class that is still expanding. You have consumers avid for new service, new products in the long terms. Credit should be more affordable, and that will again bring additional consumption, industrialization and huge opportunities on the infrastructure side with private equity returns because there is so much on-tap demand there. [There’s] so much need that you can find growth on those infrastructure assets different than what you see in developed markets like here.

About the Author

The Chilean DC System Funds EMIA

The Latin American country’s pension funds are moving into real assets ✍✍Michael Underhill In 1981 José Piñera created Chile’s defined contribution scheme as social security minister when Chile was under the military dictatorship of Augusto Pinochet. The system required employees to set aside 10 percent of their income, and by doing this it provided a huge boost for savings, investment, employment and growth. In fact, the World Bank has held out Chile’s defined contribution system

as the platinum standard. It was so well respected that 30 other countries in Latin America copied the Chilean retirement model. Investments drove Chile’s nascent capital markets to the extent that pension funds, known as AFPs, now exceed $176 billion, or around 70 percent of GDP. Unfortunately, there have been some struggles recently as savings rates

have plummeted with the informal economy, which has led to some participants skipping payments. Add to that the lack of competition among private retirement program providers that leads to oligopolies and higher fees for participants. In 2008, the first round of pension reform was implemented by President Michelle Bachelet in an effort to move toward a more “hybrid system.” Reforms

Funds included requiring companies to contribute 5 percent of workers’ pay to the solidarity fund, the introduction of a state-run AFP to increase competition, and measures to keep fund managers’ commissions under control. Recently protesters took to the streets demanding pension reform or elimination, as they have seen their income stream “dry up” over the years. Income dried up due to excessive fees charged by the AFP providers and diminished returns from the capital markets. The good news is that Chile has the benefit of very little debt, unlike many other countries in the world today, and on Oct. 13, 2016, President Bachelet signed a law allowing pension funds, for the first time, to invest directly in closely held companies, buy shares of infrastructure concessions and invest in real estate. The law will take effect in October 2017, pending regulatory approval. Officially, the great land grab has started as pensions in Chile are discussing how best to access infra-

structure and real estate investment opportunities. Chilean pensioners join institutional investors worldwide, who have charged into the category, causing listed real assets to soar by 325 percent from 2009 to 2014, according to eVestment Alliance. That pace includes a doubling of investment in commodities, a quadrupling of investment in U.S. REITs, and surging growth in global listed infrastructure, master limited partnerships and multi-strategy real asset funds. Chilean AFPs, inspired by positive returns, bet heavily on U.S. equity products, while at the same time unloading positions in emerging-market bond funds on the heels of the surprise Trump victory in the U.S. presidential election. In fact, a recent Cerulli report found the following regarding Latin American investment trends: “Looking at actual allocations by local mutual funds to cross-bor-

der vehicles, we come up with just USD 11 billion in allocations to cross-border funds and ETFs, just a tiny slice of total industry AUM of roughly USD 1.1 trillion. Brazil lags behind Chile and Mexico, despite the mutual fund industry having hundreds of billions more in overall assets. “Looking more closely at the cross-border investments in each of the three countries, ETFs garner the bulk of the allocations from local managers in Chile and Mexico, while in Brazil, many local firms have allocated to proprietary funds domiciled in offshore financial centers or tax havens. In Chile, the mutual fund managers show a slight bias to passive strategies, allocating roughly USD 2.5 billion of their USD 4.4 billion offshore portfolio to global ETFs managed by Vanguard, iShares, State Street, Wisdom Tree and others. Meanwhile, the four active managers with the most mutual fund money — J.P. Morgan, Schroders, Investec and Pioneer — accounted for

Funds just USD 520 million, with another 70 or so firms receiving anywhere from USD 1 million to USD 100 million.” Having spent time in Chile working with banks, insurance companies and even foreign pensions investing directly in infrastructure projects, property and private equity in Chile for a number of years, I can attest that this is a significant step forward in advancing AFP asset allocation toward real assets as a source of income, inflation protection and portfolio diversification. The history of returns for AFPs is quite humbling (as of late) as Chilean pension fund returns averaged 12.3 percent in the 1980s, 10.4 percent in the 1990s, 6.3 percent in the 2000s and just 4.3 percent from 2010 through 2016. The new law taking hold in Chile in October 2017 regarding real asset investment should allow greater flexibility for AFPs to generate the income they need while addressing diversification and long-term return goals.

About the Author

Michael Underhill (munderhill@capinnovations.com) is CIO of Capital Innovations, LLC. Real Assets Adviser is the first and only publication dedicated to providing actionable information on the real assets class. The magazine provides thoughtful, cutting-edge analysis, helping advisers make informed decisions to diversify clients’ portfolios, provide long-term income and hedge against inflation. Real Assets Adviser covers the entire spectrum of real assets, including real estate, infrastructure, energy and commodities/precious metals.

Infrastructure

India in the Dark A big opportunity exists for power infrastructure investments in India ✍✍Salika Khizer

rowing up, my family and I would “vacation” in India. I don’t think my senses will ever forget the sites, the sounds or the smells. We would stay at my grandmother’s house — a house that was built in the 1930s and had an open space architecture, which meant I could walk out of my room and see the smoggy, polluted skies of Bangalore. It was glorious. Not really, of course; sitting in my grandmother’s room watching Oprah on her small black and white TV, mosquitoes would feast on me. Aside from the mosquitoes, it was nice to have a piece of “home” in that odd and foreign country, but those feelings were fleeting because, with no warning, the power would go off. Keep in mind, this happened a few times a day. The entire street — and even streets — would lose electricity throughout the day. It wasn’t too bad in the daytime, but at night, for a child like me, it could be frightening. After the candles were lit and the darkness became only dimness, we would sit for what felt like forever, waiting for the lights to come back on. To many people, this is a once-in-a-year occurrence — maybe a storm or other natural disaster knocks out

power — but in India, even now, it’s more common than not. This leaves a big opportunity for power infrastructure investments in India, as it is critical to keep people out of the dark and fuel the growth of India’s economy. For example, during the summer months there is approximately a more than 42 billion kilowatt hour shortage. At any given time, tens of millions of residents in India live without power. In July 2012, India experienced its worst ever power outage, affecting more than 22 states, stopping trains on tracks and halting doctors and surgeons in the middle of operations. Being the second largest populated country in the world, India is the third largest electricity consumer and producer in the world. As you can imagine, the rapidly growing population will only increase the consumption and demand for electricity. But how can such a large population grow and compete with power outages happening every few hours? Among the many problems India has, the need for electricity is one of the largest. 17

Infrastructure Progress will not come with continued blackouts and interrupted power outages; the speed with which they diminish could be accelerated by internal investment. To date, India has relied heavily on energy imports. As the Economic Times points out, “to limit the dependency on energy imports and contribute in meeting this energy challenge, the government is also laying a lot of emphasis on energy efficiency and demand side management. Efforts are being made to increase supply from renewable sources of energy and promote energy conservation in various consumption sectors through appropriate policy interventions.”

newables superpower by increasing 10 GW of solar annually, with a solar power target of 100 GW by 2022.

Those investments can’t come soon enough. India needs to spend close to $250 billion in the next few years, in order to provide power to its 1 billion-plus citizens. At a World Economic Forum in New Delhi, India’s power minister, Piyush Goyal, noted that most of the capital needed would have to come from the private sector. And according to Reuters, the Indian government is looking for $100 billion for renewable power investments and $50 billion for transmission and distribution upgrades. Unfortunately, the growing need to power the 40 percent of India’s population that currently lives in the dark will be met by burning coal. However, Goyal confidently expects India to be a re-

But the financing hurdle is high. According to Bloomberg New Energy Finance, $100 billion in asset financing for renewable energy is needed during the next six years.

Similar to anything, India has and will face its challenges in making this vision a reality. The country faces weak infrastructure and unattractive financing options both. “The biggest bottleneck we see is financing,” says Abhishek Jain, senior program lead with the Council on Energy, Environment and Water (CEEW), a New Delhi–based research organization, speaking to the Economic Times. “If financing is achieved, the targets are achievable,” he adds.

At the moment, I have no plans to return to India again, and for many reasons — mosquitoes, poverty, pollution and, of course, power outages. But I hope — for a country that I believe will have a larger population than China sooner rather than later — it will be able to provide more than 1 billion of its residents power. No one should have to live in the dark, literally.

Contributor Biography

Salika Khizer is managing director of Institutional Investing in Infrastructure. Institutional Investing in Infrastructure is a smart and insightful newsletter emailed monthly to members of the global institutional investment community who have investments in infrastructure or are considering the asset class for future commitments. A spin-off product of our annual Institutional Investing in Infrastructure (i3) conference, the i3 publication aggregates and reports news about the transactions, PPPs, fund offerings and commitments, people and more that institutional investors and their advisers need to stay competitive in the market. i3 also delivers in-depth investor and sector profiles, feature articles and interviews with thought leaders and decision makers who are shaping the market.

Macroeconomics

The BEPS Action Plan in China and Hong Kong: Impact Assessment for Foreign Enterprises ✍✍Jake Liddle In October 2016, Hong Kong’s government issued a consultation paper for implementing measures to counter base erosion and profit shifting (BEPS) in the region.

EPS refers to tax planning strategies that exploit discrepancies in tax laws in order to shift profits to jurisdictions where there are lower tax rates, often tax havens. While some methods are illegal, many are not, and can disrupt domestic market competition and undermine taxation systems. Because of their reliance on income tax, BEPS is particular-

ly relevant to developing countries. The Organization for Economic Co-operation and Development (OECD) and G20 countries have formed an ‘inclusive framework’, which implicates over 100 jurisdictions to cooperatively implement the OECD/G20 BEPS package, a tool that provides governments with the means to tackle BEPS on domestic and international levels.

As a key member of the inclusive framework and as an international finance center, Hong Kong indicated its intent to join the OECD scheme in June 2016. The consultation paper highlights the government’s commitment to implementing the BEPS package consistently, marking the start of a potentially long process of aligning its domestic tax system with the latest inter19

Macroeconomics

national tax standards. Hong Kong will do this by revising domestic laws in order to facilitate its smooth implementation, and aims to fully introduce it in the middle of this year. The consultation paper outlines key areas of the BEPS package that will be given priority for implementation, namely: • The transfer pricing regulatory regime; • Transfer pricing documentation and country by country reporting; • Anti-treaty abuse rules in comprehensive double tax agreements (CDTAs); • Multilateral instruments; • Statutory cross border dispute resolution mechanisms; 20

• Spontaneous exchange of information (EOI) regarding tax rulings; and, • Enhancement of the tax credit system. Although Hong Kong will implement the four minimum standards of the OECD BEPS package, and the above priority measures, it will also maintain a simple and low tax regime. BEPS is a more pertinent issue for Hong Kong, as the region is often used as a base and gateway by multinationals to access Mainland China due to its legal autonomy and relative tax freedom.

China Mainland Though not as pressing for the Mainland, it has maintained a pos-

itive approach to the OECD BEPS package, and is an active purveyor of the scheme. China’s particular attention to the BEPS package can be put down to the country’s implementation of the so called tax reform plan, which aims to reform the tax collection and administration system of tax bureaus on both local and state levels. And in 2014, President Xi Jinping pledged support for the inclusive framework and global tax reform. Since, China has hosted the G20 and the OECD Forum on Tax Administration. The State Administration of Taxation (SAT) has been instrumental in implementing BEPS related regulation, translating and publishing all BEPS reports in Chinese, participating in the formulation of the BEPS project, and forming a domestic BEPS task force. Tax laws and treaties

Macroeconomics have been revised by SAT in order for the BEPS package to have optimum effect in China, including regulation pertaining to transfer pricing, anti-avoidance rules, and financial and tax EOI. Thus China’s regulatory environment and tax authorities’ behaviours are changing accordingly.

Impact assessment for investors As a holistic program in itself, the BEPS action plan poses a significant change not only for international tax law, but also for how individual jurisdictions interact

and operate. This applies to both Hong Kong and China, two regions proactively dedicated to implementing the OECDs BEPS package. Thus, it is of key importance for multinational enterprises and investors to take heed of the changes, keep on top of updates to regulation, and, in particular, adjust internal operation to reflect the changes in the international and domestic tax environments. A good way to start this process is to conduct a BEPS impact assessment, so that operation is sufficiently calibrated with the changing tax compliance requirements. Preparations should also be made for wider BEPS plans outside of China and Hong Kong in order to fully comply in the international tax environment.

About the Author

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asean@ dezshira.com or visit www. dezshira.com.

Macroeconomics

What are the prospects for Emerging Economies in 2017?

Emerging markets started 2016 on a weak note, with concerns over falling commodity prices and China’s slowing economy weighing on economic outlook. However, as the year progressed, various factors have led to emergingmarket strength and economic performance was better than initially expected.

fter expanding 4.0% in 2015, emerging economies grew by an estimated 3.9% last year, according to FocusEconomics’ Consensus Forecast. Economic growth was supported in 2016 by improving commodity prices and a broadly stable U.S. dollar. China’s economy proved more robust than initially feared and the recovery now looks to be back on track in Brazil and Russia. But what’s in store for emerging markets this year? Will growth pick up in 2017?

Macroeconomics

Asia | Trade war fears threaten Asia’s economic outlook The economy fared relatively well in East and South Asia (ESA) in 2016 due to resilient growth in China, which was supported by bold policy support and strong private consumption. The ESA region expanded 6.1% in 2016, down from 6.3% in 2015. Meanwhile, the Association of Southeast Asian Nations (ASEAN) managed to accelerate in 2016, despite weak external demand, political events in Malaysia, the Philippines and Thailand, and swings in financial markets. ASEAN grew 4.7% in 2016, up from 4.5% in 2015. This year, all eyes will be on a possible trade war between China and the United States, if President Donald Trump moves forward with his plans to impose a tariff on Chinese imports. A conflict between the world’s two largest economies would have a sizeable impact on Asia given the importance of its external sector. Moreover, improving growth prospects for the U.S. could lead the Federal Reserve to accelerate its tightening cycle, fueling volatility in the region’s financial markets. On the upside, the expected fiscal stimulus plan in the United States, coupled with bold government support in China, has the potential to boost global demand, which bodes well for growth in the region.

Price pressures are expected to pick up across Asia this year as a result of the increase in commodity prices, a low base from last year and scheduled changes in administered prices in some economies. While inflation in ESA will increase mildly from 2.4% in 2016 to 2.7% this year, the pick-up in ASEAN will be more pronounced and inflation is expected to rise from 2.3% in 2016 to 3.2% in 2017.

MENA | Higher oil prices promise to boost growth in 2017 Economic activity in the Middle East and North Africa (MENA) region showed surprising resilience in 2016 as stronger dynamics in oil-importing countries and Iran offset a poorer performance among the Gulf Cooperation Council (GCC) countries. Oil-importing nations benefited from low commodity prices and accommodative monetary policies in the region, while Iran benefited from its reintegration into the global economy. Conversely, harsh austerity measures due to the fall in oil revenues dragged on growth among the GCC economies. MENA expanded 2.7% in 2016, down from 2.6% in 2015. This year, growth will remain subdued as the positive impact of the rise in oil prices among crude-ex-

tracting countries will be partially offset by lower production as a result of the implementation of the Organization of the Petroleum Exporting Countries’ (OPEC) 30 November agreement. Moreover, the region’s economic outlook will be negatively affected by widespread security risks in the region, spillovers from the rivalry between Iran and Saudi Arabia and the as yet unclear economic and geopolitical policies of President-elect Donald Trump. Against this backdrop, our panel of analysts foresees the MENA region expanding 2.6% in 2017. There will be some exceptions to MENA’s gloomy growth prospects. Iran will continue to expand at a healthy rate due to higher oil revenues and rising foreign investment, following years of tough economic sanctions. The Moroccan economy will recover sharply from last year’s dismal performance due to severe weather conditions. Among the GCC countries, growth in Qatar will accelerate notably this year as the country is benefiting from its diversified economy.

Eastern Europe | Growth set for slight pick-up in 2017 Recovering commodities prices and better prospects for the Russian economy should support a 23

Macroeconomics return to growth in the Commonwealth of Independent States (CIS) region this year. However, growth is expected to remain weak amid monetary tightening in the U.S. and ongoing geopolitical risks. GDP is seen growing 1.4%, after falling 0.3% in 2016. Economic activity should pick up moderately in Central & Eastern Europe (CEE), where a rebound in investment and an improving labor market are seen fueling GDP growth of 3.0% in 2017. Meanwhile, South-Eastern Europe’s (SEE) outlook will depend on security concerns and the political situation in Turkey as well as the ongoing debt saga in Greece. GDP in SEE is seen expanding 2.7%. Inflation stabilized towards the end of 2016 in the CIS region and our analysts see it remaining broadly contained over the course of 2017. Inflation is expected to end the year at 5.5% in 2017. For CEE, price pressures are seen rising as the effect of low oil prices wanes and our analysts project average inflation of 1.5%. SEE will see average inflation of 5.2%. Economic conditions are set to improve across the region this year, and all three regions within Eastern Europe should see faster growth rates. Politics, both domestic and external, will heavily influence Eastern Europe’s growth trajectory this year. In CIS, Russia stands to benefit from new U.S. 24

President Donald Trump and could see an ease in trade sanctions this year, bolstering the economy’s recovery. Meanwhile, political developments in the European Union will factor into CEE’s outlook, as member countries tackle Brexit and heightened uncertainty within the Union. For SEE, political tensions in Turkey will remain at the forefront.

"The rebound in 2017 will largely be driven by Argentina and Brazil, which are projected to emerge from recession."

Sub-Saharan Africa | SSA faces political and economic hurdles this year The regional economy is expected to accelerate this year compared to last

year’s dismal expansion. The main sources of growth will be a gradual improvement in global demand and a recovery in commodity prices. The deal between OPEC and non-OPEC members to cut oil output should ease the global supply glut, put upward pressure on oil prices and support the oil-exporting countries in the region. Growth will nevertheless remain subdued on the back of economic and political challenges across the region. Possible violence and instability triggered by upcoming elections, a lack of much-needed structural reforms and the repercussions of Trump’s expected protectionist policies are all factors that are weighing on the growth outlook. In this difficult climate, economic progress will depend to a significant extent on how fast governments can implement reforms aimed at promoting growth, reestablishing macroeconomic stability and enhancing trade links within the region. Our panel of analysts expects SSA to grow 2.9% this year and 3.8% in 2018. The FocusEconomics panel expects Nigeria’s economy—the biggest economy in the region—to rebound in 2017 after last year’s contraction. The recovery, however, is fragile and depends mostly upon policy action by the government. Analysts consider that a further devaluation of the naira is key to attract investment into the economy and support domestic demand. Our panel expects Nigeria’s economy to grow 1.3% this year and 3.0% next year. Downside risks also persist in South

Macroeconomics Africa’s economy—the second biggest economy in the region. Ongoing political scandals, the dire state of the labor market and the potential effect of Trump’s protectionist policies will weigh on growth. On a positive note, a gradual improvement in the world economy and a recovery in commodity prices will support South Africa’s economy. On balance, the FocusEconomics panel expects GDP to expand 1.2% in 2017 and 1.8% in 2018. Central banks in the region will continue to maintain a prudent stance in the trade-off between returning inflation to target and supporting economic activity. The Central Bank of Nigeria will likely ease its monetary policy as the exchange rate market normalizes. Likewise, the South Africa Reserve Bank will opt for accommodative policies this year unless shocks such as a possible downgrade to the country’s credit rating lead to a further weakening of the rand.

Latin America | Risks to growth vary across region Latin America is projected to expand 1.6% this year, after contracting 0.7% in 2016. Compared to other emerging markets, Latin America will undergo a larger turnaround in 2017, with an estimated 2.3 percentage-point upward swing to growth.

The recovery will nevertheless still be somewhat underwhelming and, as 2017 gets underway, increasing risks are casting a shadow on the region’s outlook. Going forward, growth is projected to pick up to 2.5% in 2018. While a positive impulse will come from an improvement in global economic growth—fueled mainly by a stronger U.S. economy—and a gradual recovery in commodity prices, higher U.S. interest rates and uncertainty stemming from changes in U.S. trade and immigration policies have the potential to derail the region’s recovery. The extent to which these factors will impact individual countries varies across Latin America. While domestic factors will continue to dominate the economic performance in most

countries of the region, Mexico and Central America and the Caribbean are by far the most exposed to risks from the U.S. The rebound in 2017 will largely be driven by Argentina and Brazil, which are projected to emerge from recession. The recovery in Argentina is expected to be the more meaningful of the two, with GDP swinging to a 3.0% expansion. Brazil, on the other hand, is seen expanding a tepid 0.7%. The economies of Chile, Colombia and Peru are projected to accelerate in 2017, whereas Mexico’s growth is forecast to deteriorate. It remains to be seen how strong the impact of the U.S. government’s policies will be on the Mexican economy.

About the Author

FocusEconomics is a leading provider of economic analysis and forecasts for 127 countries in Asia, Europe, Africa and the Americas, as well as 33 key commodities. The company, founded in 1999, is supported by an extensive global network of analysts from the world’s most renowned international investment banks and top national financial institutions. Each month, we survey several hundred carefully selected economic experts from the leading banks, think tanks and consultancies to obtain their projections for the main economic indicators and commodities prices. The forecasts are corroborated and analyzed by our in-house team of economists and complemented with brief commentaries on the latest economic trends. Further information is available at www. focus-economics.com.

Macroeconomics

Cities of the Future: Fastest Growing ‘Megacities to be’ are in India ✍✍Fransua Vytautas Razvadauskas (City Analyst – Euromonitor)

Megacities— metropolitans with populations in excess of 10 million inhabitants concentrate significant economic weight in their respective countries. Our Passport Cities database predicts the future Indian megacities of Bangalore, Hyderabad and Chennai to record the fastest rate of real GDP growth over 2016-2030.

he abovementioned cities, whilst still not home to 10 million inhabitants as of 2016, are set to join the ranks of existing megacities some time over the period 2017-2030. This article follows on from the

Strategy Briefing, Cities of the Future: Emerging Market Champions which aims to highlight the increasing competitive nature of developing cities in the global context.

Macroeconomics

Smart City projects imperative to the effective functioning of megacities

Technology driven enterprises steer economic growth For many Indian cities, the engines of economic growth have been their technology industries in IT and software development. Bangalore is often branded as India’s Silicon Valley thanks to its flourishing hightech industries which have helped the city become one of the country’s major hotbeds for outsourcing. As well as accounting for around 35% of India’s IT companies, Bangalore is also home to a large number of educational institutions which

help supply the city with a large number of IT and software development specialists. Hyderabad is following in the footsteps of Bangalore, positioning itself as India’s next major technology and entrepreneurial hub. One of the biggest developments has been T-bub— India’s largest start up ecosystem which opened in 2015 and is set for further expansion by 2018. Finally, Chennai, whilst also having a strong background in IT, is a more evenly balanced economy, with thriving industries in banking, finance and manufacturing. It is often labelled as the ‘Detroit of Asia’ as Chennai accounts for approximately 60% of the country’s automobile exports.

As cities grow in population, a range of urban challenges can make cities the victims of their own success. Overcrowding, high vehicular traffic and air pollution are just some of the hurdles city dwellers stumble upon when existing infrastructures are not upgraded to meet increased population demand. Smart City schemes aim to integrate information communication technology (ICT) and internet of things (IoT) solutions to ensure a city’s efficient functioning. For example, Panasonic is building a new suburb in Tokyo geared towards smart living called ‘Fujisawa Sustainable Smart Town’. The project which is set to be completed by 2018, will contain 1,000 living spaces all with integrated smart capabilities. According to Panasonic, these homes will emit 70% less CO2 compared to 1990 levels and produce up to 30% of its energy from renewable sources. A wide range of other smart initiatives such as air pollution and traffic sensors are being utilised across a vast array ofglobal cities today and will play 27

Macroeconomics

Forecast disposable income and GDP per capita averages in 2030

an important role in the efficient functioning of new and emerging megacities.

Hyderabad and Chennai still playing catch up to existing megacities Chennai and Hyderabad and to a lesser extent Bangalore, will still remain less wealthy compared to the vast majority of existing megacities, despite the investment opportunities their economic growth will bring. For example, Chennai’s GDP per capita in 2030 will still be 34% below that of Delhi’s and around seven times smaller compared to the Chinese megacities of Shen28

zhen and Guangzhou. Investment risk will preside more so in the tier two cities of Chennai and Hyderabad compared to Bangalore or oth-

er major economic centres of the country such as Delhi and Mumbai.

About the Author

Euromonitor International is the world’s leading provider for global business intelligence and strategic market analysis. We have more than 40 years of experience publishing international market reports, business reference books and online databases on consumer markets.

Renminbi Exchange Rate

Macroeconomics

China Database Team (CEIC Data)

The volume of Renminbi issued has a highly correlated relationship with Chinaâ&#x20AC;&#x2122;s foreign exchange position. This means that a change in Chinaâ&#x20AC;&#x2122;s foreign exchange position will affect the Renminbi exchange rate considerably. We have chosen to further discuss the topic of the Renminbi exchange rate by analyzing the above data. We hope our readers enjoy the analysis below. China Premium Database + Money and Banking + Banking + Money Market, Interest Rate, Yield and Exchange Rate + Foreign Exchange Market

Macroeconomics

s we have mentioned previously, “Renminbi money supply is closely related to foreign exchange position whereby US dollars constitutes a main part of it.” Now we would like to make use of the ratio of foreign exchange position to reserve money to further elaborate on our view above. • The ratio of foreign exchange position to reserve money stood above 100% in 2012.

•

• •

The average foreign exchange position to reserve money ratio was around 97% during the period between 2013 and 2014. The ratio has dropped to 92% in 2015 and declined further to 71% as of December 2016. Note: As the foreign exchange position to reserve money ratio keeps plunging, Renminbi exchange rate also depreciates dramatically from 6.1 to 6.9.

These two sets of data reveal that as long as the foreign exchange position continues to decline, the Renminbi exchange rate will keep weakening, and vice versa. From this analysis, can we say that foreign exchange reserves are very important? Most importantly, China should retain a significant amount of foreign exchange reserves.

About the Author

Founded in 1992 by a team of expert economists and analysts, CEIC Data provides the most expansive and accurate data insights into both developed and developing economies around the world. A product of Euromoney Institutional Investor, we are now the service of choice for economic and investment research by economists, analysts, investors, corporations, and universities around the world. First and foremost, our products are about people. Our relationships with primary sources in numerous countries around the globe mean that our clients have access to most detailed and credible data in the world. Our experts work tirelessly to ensure that every piece of data is accurate and every client is completely satisfied. We set the standard for providing clients with economic information they can trust that is also easy to access, updated almost instantaneously, and implemented by experts on the ground in each country we work with. We pride ourselves on the quality of our data, the convenience of our databases, and our exceptional customer service. To learn more about CEIC products, please contact James B. Boyko, 212.610.2928 or James.Boyko@ CEICData.com

Macroeconomics Profile

Thailand in 2017: a Changing Investment Landscape ✍✍ Harry Handley 2016 was a challenging year for Thailand, both economically and socially. The death of the much-loved King, His Majesty Bhumibol Adulyadej, clouded a year also blighted by political instability, water shortages, and bearish domestic business sentiment. Although official figures have yet to be released, Thailand’s GDP growth for 2016 is expected to be 3.2 percent, the third lowest in the ASEAN bloc (after Brunei and Singapore).

espite low business confidence from locals, foreign businesses continue to be attracted by Thailand’s strategic position between China and India, access to the ASEAN free trade area, and the incentives offered by the Board of Investment (BOI). 2017 has been touted by some as a pivotal year for the Thai economy and ‘the year of concrete national reform’, with a major election on the horizon, either at the end of 2017 or the beginning of 2018 dependent of the progress of the royal succession. As such, it is important

Macroeconomics

to review the state of the market at present and identify the key factors that may affect foreign businesses, both incumbents and potential entrants, in Thailand in 2017. 2016 import, export, and FDI trends Thailand has become increasingly reliant on exports in recent years, with net exports reaching a record high in 2016. Thailand’s top five trading partners can be seen in the table below. Electronics were the main exported product, making up 14.6 percent of the total. This was followed by automotive goods (13.9 percent), agro-manufacturing products (11.9 percent), petrochemical products (5.8 percent), and electrical appliances (5.4 percent). In terms of imports, mineral fuel and lubricant made up the largest percentage (22 percent). Machinery, equipment, and supplies (19.5 percent), parts of electronic and electrical appliances (11.5 percent), 32

materials of base metal (8.6 percent), and chemicals (5.8 percent) made up the top five. FDI investment applications exceeded the BOI’s targets in 2016, totaling THB 584 billion. Of these applications, 925 projects were approved, bringing total foreign investment of THB 358 billion. 64 percent of the approved applications (594 projects) were for 100 percent foreign-owned projects, the remainder being made up by franchising agreements as well as mergers and acquisitions. Japan was the leading country of origin of FDI into Thailand; 284 projects contributed THB 80 billion of FDI in 2016. The main driver for this is the automotive industry, with Toyota, Isuzu, Nissan, and Honda all having considerable manufacturing and assembly operations in Thailand. The second largest for-

eign investor was China, which contributed THB 54 billion in 106 projects last year. The top five was rounded off by the Netherlands (THB 29 billion), the US (THB 25 billion), and Australia (THB 20 billion). The breakdown of FDI by industry can be seen in the graph below.

2017 outlook Thailand’s GDP growth is expected to remain consistent in 2017, with forecasts ranging from 3-3.6 percent. BMI’s 2017 risk report ranks Thailand the 21st least economically risky market globally and 8thin Asia Pacific, in the short-term. Longer term risk is seen to be slightly higher, demonstrated by a rank of 27th in the world. The overarching risk factor for the Thai economy is political instability. In response to this, the incumbent military gov-

Macroeconomics

ernment has presented an ambitious plan to end this uncertainty and move Thailand towards a high income economy. Thailand 4.0

work; goal is for all Thais to have access to broadband by 2026 Physical infrastructure – including the initiation of construction on the Thai-China high speed rail link

Leading analysts define Thailand 4.0 as ‘a transformed Thailand that maximizes the use of digital technologies in all social-economic activities in order to develop infrastructure, innovation, data, human capital, and other digital resources that will ultimately drive the country towards wealth, stability, and sustainability’. In 2017, there will be four main areas of focus and investment:

Agricultural reform – namely, the ‘Smart Farmer’ project

The digital economy – primarily improving national broadband net-

As part of the Thailand 4.0 promotion, the Commerce Ministry’s

Local economic development – 18 provincial clusters used to target developmental policies, including minimum wage policies

Business Development Department has sought Cabinet approval for a new law that will allow individuals to establish a company singlehandedly. This move will formalize around 2.74 million SMEs in Thailand that have previously been set up as ‘sole proprietorships’ without legal separation of company and personal assets. It has yet to be confirmed whether this law will also apply to foreign entrepreneurs; if this is the case, it will ease the process of starting an SME in Thailand and remove a number of barriers for foreign businesspersons. However, it is unclear how this new policy would fit into the guidelines of the current Foreign Business Act, which governs foreign owned enterprises in Thailand. 33

Macroeconomics

BOI incentivized industries

logistics), and community enterprises. Upon approval, entrants in these industries are offered the following tax breaks:

The BOI also has a significant role to play in the realization of Thailand 4.0. As well as investing in human resources to attract the best regional and global talent, the BOI offers significant incentives to foreign entrants in a number of industries. These include ‘S-Curve’ industries (e.g. next-generation automotive, biotechnology, and smart electronics), core technologies (e.g. digital, biofuels, and

•

• • •

Eight year Corporate Income Tax exemption 50 percent tax reduction for five years after the tax holiday Double deduction from the costs of transport, electricity, and water supply 25 percent deduction on the cost of installation or construction of facilities as well as exemption of import duty on raw or essential materials imported

•

for use in production for export Other key industries

Thailand is synonymous with the tourism industry. In 2016, 32.6 million foreign tourists visited Thailand. The flow of tourists was stunted at the end of 2016 by the passing the King, and this will also carry over into 2017 as the official period of mourning continues. However, towards the end of 2017 when the mourning period is over, Thai officials expect to see a boom in the tourism industry once again, with tourist arrivals forecasted to be 37 million. This will

Macroeconomics be boosted by an ever weakening baht, making it cheaper for overseas travelers to visit Thailand. As such, all of the industries related to tourism, including hospitality, food service, and recreational activities will once again be prime targets for potential investors. As mentioned, agricultural reform is one of four focus areas for the Thai government in 2017. Consequently, it is expected that incentives will be put in place for agricultural technology firms who can support the growth and development of this industry and the ‘smart farmer’ project. Finally, Thailand’s membership to the ASEAN economic community and free trade area, and developed infrastructure make it an ideal base for import/export enterprises. The recent introduction of the e-Customs system, an online system that centralizes all customs and licensing procedures, and promotion of export processing zones further reduce the costs of running a cross-border trading operation in Thailand.

Challenges and opportunities The World Bank’s Doing Business Guide ranked Thailand 46th in the world for ease of doing business. Particularly difficult aspects of doing business include starting a business (78th), getting credit (82nd),

and paying taxes (109th). Combine this with the ever-present political instability and a shortage of skilled workers and Thailand begins to appear as a risky and troublesome option for potential investors. However, in order to counteract this, the Thai government and BOI have introduced a number of pro-FDI policies. Recently, restrictions for foreign entrants have been eased in a number of industries, including insurance and commercial banking. There are plans to extend the business license waiver to more service industries. Add to this the strong geographic location of Thailand and the THB 1.4 trillion of planned infrastructure spending, and the future of Thailand as an investment location looks bright. Ultimately, 2017 is being seen as a year of transition for Thailand; the new King Maha Vajiralongkorn will be crowned and the junta government will begin the process of reinstating their own brand of democracy to the nation. The military-written constitution, passed with 60 percent support in a 2016 referendum, suggests that despite the army’s desire for ‘democracy’, their influence will be entrenched in Thai politics regardless of the result of the upcoming election. Consequently, it is expected that investment growth will be tentative throughout the year with many potential entrants holding off to see how the major events later in the year pan out.

About the Author

Private Equity

Is it PE’s Time to Tango in Argentina? The country’s investment market has reopened for business and private equity firms are ready

or 12 years, PE firms waited on the sidelines in Argentina while the nation’s populist presidents called the tune. As first Néstor Kirchner and then Cristina Fernández de Kirchner shackled the free market, deals became virtually impossible. But in December 2015, Argentina elected pro-business president Mauricio Macri and the dance floor finally reopened for private equity. Among the first firms to step up was the Rohatyn Group, which is now looking for middle-market in-

vestments in Argentina. “We have been waiting for the government to change and for a pro-market administration to come into power,” says Gustavo Eiben, the Rohatyn Group’s head of business development for private markets. “There is a great amount of opportunity in Argentina now, due to the lack of investment over the last 10 years.” PE deals in Argentina had become increasingly difficult as the country tossed aside the legal safeguards investors depend on. “You could invest in a company and you never

knew if a month later the government would turn around and say, ‘OK, this is my company now,’” Eiben says. Consequently, PE firms simply did not do deals in Argentina, although some did place offices in the country with an eye to the future. The Rohatyn Group set up an office in Buenos Aires in 2004 and kept tabs on the Argentine market while doing regional deals out of that office. Now that the environment has changed, the firm is moving quick-

Private Equity ly to invest while valuations are attractive. The Rohatyn Group is about to do a deal in the region at an entry multiple of 2.5x—a level of pricing not to be found elsewhere in the region. “Everything is starting to change,” Eiben says. “It’s a tremendous opportunity. Every day we’re talking with two or three new companies. This kind of deal flow is a remarkable development and very refreshing.” The Rohatyn Group is going into several different industries. One is agribusiness, where Argentina has products recognized for quality in international markets and where export taxes on a number of key agricultural commodities were recently canceled by President Macri. Another sector of interest to the Rohatyn Group is natural resources. The firm is looking at companies that service the mining industry, for example. Mining accounts for only about 1 percent of the GDP in Argentina, while Chile pulls 15 percent of its GDP out of the ground. Technology is also attractive, with an active tech scene in Buenos Aires. In 2014, Argentina’s Globant became the first Latin American software company to launch a public offering on the New York Stock Exchange. There are challenges, of course. Inflation is still high, and the currency is uncertain, as is growth. But Eiben does not foresee a return to populist

rule. Meanwhile, he does see competitors entering the market, including Advent and Southern Cross, which are both making moves in Argentina. “We can’t wait too long,” Eiben says. “If we wait too long and we

see the inflation rate go down, we see a stable currency and we see a strong growth rate, then the low valuations we see now are going to skyrocket. So we believe this is the right time to get moving in the country.”

About the Author

Real Estate