Israeli trade with emerging markets requires selectivity

Leo Leiderman

Bank Hapoalim's Leo Leiderman and Irit Mozerafi pick the best emerging markets for Israeli trade.

Emerging markets make an important contribution to the global economy. The IMF estimates that emerging markets accounted for 57% of the global economy in 2014, up sharply from 50% in 2012. It is assumed that, in the coming decades, emerging markets relatively rapid growth rates will increase their weight in the global economy to around 70% in 2030. The importance of emerging markets in the global economy is mainly because of their relative size - they account for approximately 85% of the worlds population, more than half of whom live in Asia.

Lower growth rates in world markets, including in emerging markets, are partly expressed in the slowdown in global trade. This naturally has a major effect on the Israeli economy, which is strongly export oriented. Before the crisis, global trade grew by more than 9% a year on average, but has subsequently been much slower: for example, global trade grew by just 3.4% in 2014.

This process hurts the Israeli economy. Israeli exports of goods and services rose by an average of just 1% a year in 2012-2014, compared with 6.5% in 2011. Israeli exports to emerging markets account for about 36% of total exports of goods, similar to emerging markets share of global trade. Israels main export targets among emerging markets are Turkey (5.7%), China (5.3%), Malaysia (2.8%), and India, Russia, and Brazil (2% each). Asian markets, headed by its two giants, China and India, have paramount importance for Israeli export growth in the coming decades.

The eurozone crisis continues

The latest economic developments further hone the differences between different emerging markets, especially Asia compared with all the rest. Viewing emerging markets as a single bloc is no longer possible, and there is high variability between current economic activity and projections for the years ahead between regions and between countries in each region. In general, it can be said that, in the past year, emerging marketing have been adversely affected by the strengthening of the dollar and by expectations of an interest rate hike by the US Federal Reserve. The IMFs 2015 growth forecast for emerging markets is a low 4.3%, far less than the growth rate of 8% in years before the credit crisis.

Fairly robust growth by China and India has strongly affected Asian growth, which is forecast to be 6.6% this year.

Central European economies are still suffering from the ongoing crisis in the eurozone, but lately, they have been favorably affected by the stability in the price of oil, growing demand from Germany, and quantitative easing by the European Central Bank. The regions growth rate is projected to stay at around 3% annually in the next two years.

There has been a sharp slowdown in Latin Americas growth rate in the past few years. Falling commodities prices have negatively affected most countries in the region, which are projected to have zero growth rate this year, after 1.3% growth in 2014.

Although the drop in commodities prices has eased inflationary pressures in emerging markets, and allowed central banks to keep easy monetary policy, but it is liable to weigh on the real economy and on the current account in the balance of payments of commodities exporters, especially in Latin America and Russia.

Turkeys growth rate will pick up

Asias growth rate slowed in recent years, but it is expected to stay stable at 6.6% this year, and the region should show outperform the rest of the world in the medium term. While Chinas growth rate is slowing slightly as it switches to sustainable growth, other countries growth rates are forecast to pick up.

Chinas growth rate has slowed in recent years, and its economy is forecast to growth by 6.7% this year, because of the slowdown in investment. Chinese policy-makers fear overheated credit in the country, so its expansionist policy is expected to be more targeted. In contrast, Indias growth is projected to rise to 7.5% this year. The Indian economy will benefit from recent reforms, a steady rise in investment, and the fall in the global price of oil. Malaysias growth rate is expected to slow to 4.8%, mainly because of worsening terms of trade, but activity in Thailand is expected to improve as the situation in the country clarifies, and its growth rate is forecast to rise to 3.7%. The Philippines growth is forecast to rise to 6.7%, because of the fall in the price of oil.

Turkeys growth slowed in the past two years, but it is assumed that, with the support of low oil prices, private consumption will grow and reduce the current account deficit. Turkeys economy is forecast to grow 3.1% this year and 3.6% in 2016. Hungarys growth rate is projected to slow slightly to 2.7% this year, because of a drop in investment, but Polands growth is projected to rise to 3.5%, supported by domestic demand and the improvement in economic activity by its main trading partners.

Russia, however, is in recession. The slump in the price of oil and sanctions by the West following Russias invasion of Crimea have caused the growth rate to plummet. Russias GDP is forecast to contract by 3% in 2015.

Brazil, like Russia, is in recession. Economic recovery in Brazil is highly dependent on global economic recovery, especially by commodities prices, which are still lower than in the past. Brazils economy is forecast to contract by 1% this year, after negligible growth in 2014. Mexicos growth rate is projected to rise slightly to 2.9% this year, mainly because of the continued improvement in the US economy, its main trading partner. Among the Andean countries (countries with a substantial part of their territory in the Andes Mountains Venezuela, Colombia, Ecuador, Peru, Bolivia, Chile, and Argentina) are predicted to have fairly encouraging growth this year. This growth rate is projected to rise slightly to 3% in Chile and Peru, but Colombias growth rate is expected to slow to 3% because of the drop in the global price of oil.

To sum up, there is no question that, among the different emerging markets regions, Asia seems to be the most promising and interesting for Israeli business. However, it is advisable not to consider the emerging markets world as a single bloc, but to examine each country individually, because in times like these, selectivity is the name of the game.

Leo Leiderman is the chief economist of Bank Hapoalim (TASE: POLI) and Irit Mozerafi is a senior economist in the banks Economic Department

Published by Globes [online], Israel business news - www.globes-online.com - on June 7, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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