Foreign direct investment has a large effect on the economy of countries. It can increase production, employment, exports, imports, and economic growth. Over the past five years, emerging markets have seen an increase in foreign capital from investors in search of higher yields. Three popular emerging market countries among foreign investors that have experienced political instabilities in the past month are Brazil, Turkey, and Egypt. The political instability could prove to be detrimental to emerging market financial growth in the short run, but investors should be more worried about the slowing economies of these countries.
Over the past month, Brazil has experienced mass demonstrations over corruption and poor public services, anti-government protests swallowed Taksim Square in Turkey, and Egypt underwent a political revolution, with the military toppling the president. These riots and slower economic growth have decreased the amount of foreign capital that has flown into Brazil and Turkey since the financial crisis in 2007-08. In the last five years foreign investment in Turkey has doubled. Political instability has troubled Egypt the last few years, but the country saw an upswing in foreign investment from a negative 483 million in 2011 to $2.8 billion in 2012. Despite the increase in foreign investment, GDP growth has decreased in these countries recently. In 2011 Turkey saw GDP growth of 8.8%, but in 2012 saw growth of 2.2%. In 2012 Brazil saw GDP growth of 0.9%, down from its 2010 high of 7.5%.
Last week, a survey of economist covering Brazil cut their economic growth forecasts for a seventh consecutive week. Also, it is rumored that the International Monetary Fund may cut global growth forecasts on emerging economies. At a conference in Aix-en-Provence, France, Managing Director Christine Lagarde was quoted saying, “I fear, given what we’re seeing in particular in emerging countries, not the developing and low-income countries but emerging countries, that we will be slightly below that.” Other leading financial institutions such as Citibank and HSBC cut their growth forecasts for emerging economies in 2013.
Expectations that the United States Federal Reserve will begin to wind down its $85 billion monthly bond purchases has helped the US Dollar gain against the Brazilian Real, Turkish Lira, and Egyptian Pound. The Fed’s announcement has urged investors to unwind their positive emerging market bets, causing a broad sell off in all asset classes. Weaker currencies and a negative outlook on stock and bond markets in emerging markets have caused an outflow of foreign capital from Brazil, Turkey, and Egypt. Also, the combination of tapering and sights of protests in two of the leading emerging markets caused sell offs.
Although protests may have a short term effect on emerging markets, investors should pay attention to long term indicators such as foreign direct investment and GDP growth. Investor’s reaction to FED tapering in consideration of emerging markets will ultimately depend on economic growth, not protests. For more information on these countries, visit our Global Insights page.