Emerging Focus: Sell-off in Emerging Market Economies Impacts Consumer Demand

Key points

• Currencies, stocks and bonds in many EMEs suffered a massive sell-off in June 2013, on the back of the possibility that the US Federal Reserve could stop its quantitative easing programme by the end of 2013. This reversed the trend of ‘hot’ money pouring into EMEs and dramatically weakened several currencies against the US dollar creating volatility in the financial and external sectors;
• Many currencies witnessed an unprecedented dip in their currency values against the US dollar. For example, The Mexican peso registered its largest monthly decline in two years in June 2013 dropping by 5.3% in nominal terms. The Indian rupee reached Rs59.5 per US$ in July 2013, its weakest level ever, and the South African rand stood at R10.2 per US$, a level achieved for the first time since October 2002;
• With inflation reaching new highs in economies like Brazil, Mexico, South Africa and Turkey, central banks across EMEs are tightening their monetary policy measures to prevent the plunge in their currencies and protect their domestic economies. While India stepped up intervention in their foreign exchange markets, Turkey announced a series of measures to attract capital inflows and Brazil increased its key interest rates;
• Consumer and business confidence in many EMEs is falling to new lows, thanks to the deteriorating economic outlook; rising inflation; and interest rates dampening consumer demand. Consumers are impacted by high costs of food, as well as higher financing costs for purchasing consumer durables;
• EMEs, however, offer the biggest consumer market potential for marketers across a range of consumer products and services. Over the 2013-2020 period, total consumer expenditure in 25 key EMEs is forecast to grow by 44.8% in US$ real terms compared to 14.6% real growth forecast in developed economies.

Exchange Rate in Selected EMEs: January 2012-July 2013

Source: Euromonitor International from national statistics, International Monetary Fund (IMF), International Financial Statistics (IFS)

Note:  A higher index value indicates a weaker currency against the US dollar

Sell-off across EMEs

• The massive sell-off of currencies, bonds and stocks across EMEs since June 2013 is creating excessive volatility in the external environment and financial markets of EMEs. Since mid-2013, EMEs have suffered from steep capital outflows with some analysts comparing it to levels seen during the financial crisis in 2008;
• Weakening currencies against the US dollar and the poor performance of stocks in EMEs are the two immediate effects of this massive sell-off. For example, the Mexican peso registered its largest monthly decline in two years in June 2013 dropping by 5.3% in nominal terms. The Indian rupee reached Rs59.5 per US$ in July 2013, its highest level ever, and the South African rand stood at R10.2 per US$, a level achieved for the first time after October 2002;
• Emerging Asia was most affected by the sell-off thanks to the slowdown in China’s economy. For example, the S&P Asia 50 CME index dropped by 6.6% month-on-month (m-o-m) in absolute terms by the end of June 2013. China’s Shanghai Stock Exchange Composite Index witnessed a monthly decline of over 13.0% in absolute terms by the end of June 2013, while Indonesia’s Jakarta Stock Exchange Composite Index saw a monthly drop of almost 6.0% in absolute terms during the same period;
• This triggered a wave of monetary tightening measures by central banks across EMEs. These measures are aimed at injecting lost liquidity in the economies, limiting the plunge in the in their currencies and protecting domestic economies against rising inflation. Brazil and Indonesia both resorted to interest rate hikes between June and July 2013, while other economies like Turkey and India announced a series of new measures to attract capital.

Dampening impact on consumer demand

The massive sell-off in EMEs can negatively impact consumer demand in the short term:

• A depreciating currency has a direct impact on a country’s imports, as it is more expensive for consumers to buy the same goods and services. In June 2013, (with the exception of Kazakhstan, Thailand, Peru, Colombia, Turkey and a few EMEs in emerging Eastern Europe) many EMEs witnessed a monthly decline in imports;
• In June 2013, India witnessed the largest dip in imports amongst EMEs, down by 19.3% in US$ terms compared to May 2013 followed by Chile (10.7%), Brazil (10.6%), China (9.3%) and Argentina (8.7%);
• Strong capital outflows and the consequent weakening of currencies have lowered consumer confidence in many EMEs. Rising interest rates increase the cost of borrowing affecting both businesses and consumers. For example, in July 2013, consumer confidence in Brazil hit its lowest level since May 2009, owing to high prices, rising interest rates and a slowing economy. During the same month, vehicle production dipped to its lowest daily rate in five months, due to the slump in demand for cars;
• Many EMEs are plagued with persistently high inflation. This combined with developments in mid-2013 are likely to keep consumer expenditure subdued in 2013. The average consumers expenditure per household in EMEs is forecast to grow annually by 2.8% in 2013 (US$ real terms) compared to the 3.0% year-on-year and 4.0% year-on-year increase in 2012 and 2011 respectively.

Consumer market potential still strong

Despite the short-term challenges, consumer markets in EMEs offer several opportunities in the long term:

• Over the 2013-2020 period, total consumer expenditure in EMEs is forecast to grow by 44.8% in US$ real terms compared to 14.6% real growth forecast in developed economies. This offers a huge potential for marketers across a range of consumer goods and services;
• During this period, Vietnam will witness the fastest growth in consumer spending in EMEs, up by 62.9% in real terms followed by China (62.5%), Kazakhstan (7.1%), Indonesia (6.5%), and Morocco (5.6%). China’s economic growth and rising incomes, along with its large population, will continue to boost consumer spending over the coming years. In Vietnam, the large market size combined with an increasing working age population (aged 15-64) will increase the spending potential of the lower-middle class;
• In the long term, marketers and investors will benefit from the growing middle class and rising disposable income from a low base. This new emerging market consumer is keen to consume and will be first-time buyers for many households, beauty and personal care, telecommunications and financial products. Over the 2013-2020 period, the average annual disposable income per capita in EMEs is forecast to rise by 4.1% in US$ real terms compared to the 1.4% real increase forecast in developed economies;
• Changing consumption patterns of consumers in EMEs from basic goods, such as food, non-alcoholic beverages and housing to discretionary products, will continue to attract investor interest. Discretionary spending in EMEs accounted for only 57.6% of total consumer spending in 2012, compared to 68.3% in developed economies suggesting that a huge potential is yet to be tapped;
• In addition, rapidly changing consumer behaviour in EMEs will continue to create more opportunities for investors. For example, traditional convenient stores are being replaced with hypermarkets and supermarkets. The increasing number of shopping malls in EMEs signifies the increased demand in consumption of retail products like fashion accessories, clothing and home decor products.

Total Consumer Expenditure in 25 Key EMEs, Developed Economies and Selected EMEs: 2013-2020

Source: Euromonitor International from national statistics/UN/OECD

Note:  (1) Data refers to forecasts. (2) Period growth is in fixed US$ constant terms. (3) 25 key EMEs includeArgentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia,
Kazakhstan, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, the UAE, Ukraine, and Vietnam.

Prospects

• EMEs will face sluggish growth in 2013 and 2014, which could have a long-term impact on the world economy. Many EMEs like Turkey, South Africa, Brazil and India are running twin deficits (trade and fiscal), combatting high inflation and facing other macroeconomic instabilities that will put downward pressure on economic growth. The annual average real GDP in EMEs is forecast to grow by 3.8% in 2013, unchanged from the 3.8% real increase witnessed in 2012 before inching up to 4.3% in 2014;
• Decelerating economic growth in China will affect other EMEs, particularly commodity exporters like Brazil, South Africa and Russia, as well as others like Turkey, Ukraine and Hungary. However, although slowing, economic growth in China still remains solid and unlikely to impact the consumer market potential of the country;
• In the short term, consumer demand in EMEs is likely to be subdued thanks to the growing vulnerability in the financial and external sectors. However, these EMEs are still amongst the fastest growing economies in the world, with an increasing working age population making them the key source of consumer demand globally creating a long-term investment potential for marketers of consumer goods and services across sectors.