LETTERS OF INTENT - JSE MAGAZINE

LETTERS OF INTENT

Move over BRICS, the MINTs are the trendy acronym. But will they capture the hearts (and wallets) of investors in the same fashion?

LETTERS OF INTENT

Jim O’Neill is at it again. Former chairman of the asset management division of global financial giant Goldman Sachs (before that the company’s chief economist) the man coined the acronym BRIC in 2001 to lump together the fast growing economies of Brazil, Russia, India and China (although he has been quoted in recent times as saying: ‘If I dreamt it up again today, I’d probably just call it ‘C’. China is one and a half times bigger than the rest of them put together’).

The catchy epithet caught on. These were to be the new world leaders – young, dynamic, powerful, surging ahead with unheard of growth rates. The BRIC became the BRICS in 2010 when SA joined –not, it must be added for the record, with O’Neill’s approval. He pooh-poohed Africa’s largest economy’s inclusion, saying it was ‘too small’. (He has become more conciliatory lately though, pointing out that SA was a good entry point to the rest of the continent and could help it grow.)

Now the man is back with the MINTs – Mexico, Indonesia, Nigeria and Turkey. This time, however, even though he is championing their cause, he didn’t invent that acronym (the London-based investment firm Fidelity International did so first, back in 2011).

Writing a column for Bloomberg in November last year O’Neill, now moved on from Goldman Sachs, but still in high demand for his predictive savvy, told readers how he was busy making a four-part series for BBC radio on the MINTs.

‘The BRIC countries are already closely watched. The group I’m studying for this project – let’s call them the MINT economies – deserve no less attention. Mexico, Indonesia, Nigeria and Turkey all have very favourable demographics for at least the next 20 years, and their economic prospects are interesting. Policy makers and thinkers in the MINT countries have often asked me why I left them out of that first classification. Indonesians made the point with particular force. Over the years I’ve become accustomed to being told that the BRIC countries should have been the BRIICs all along, or maybe even the BIICs. Wasn’t Indonesia’s economic potential more compelling than Russia’s?’

The MINTs have some common attributes. They all have large and growing populations: Nigeria (170 million), Indonesia (250 million), Mexico (120 million), Turkey (80 million). O’Neill is most excited by this. ‘That’s key. If you’ve got good demographics that makes things easy.’

All, except Nigeria, are perfectly placed geographically to reap the benefit of large markets nearby (Indonesia and China; Mexico and the US; Turkey and the EU). Three are leading commodity producers, rich in natural resources. Each is the second or, in the case of Indonesia, the third largest economy in its region, while Nigeria ‘rebased’ its GDP in early April and is now Africa’s largest economy – but more of that later.

Here’s another telling point: sometime this year the MINTs will surpass the BRICS in the millionaire stakes. A study released in January by Spear magazine and WealthInsight, a London-based research service, claimed that the MINT countries as a whole will perform better than both the BRICS and the G8 when it comes to creating new millionaires. The MINTs, said WealthInsight, would all rank within the top eight countries worldwide. Indonesia is top among the MINT group with a 22% increase followed by Nigeria (10%), Turkey (8.5%) and Mexico (7%).

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WealthInsight defines ‘millionaire’ as an individual with net assets of $1 million or more, excluding primary residences. Crunching the numbers, Mexico’s 7% gain means 10 150 more millionaires in this year compared to 2013 when the country had 145 000 millionaires.

Speaking to the media, WealthInsight’s analyst Oliver Williams said: ‘There is a new class of wealthy emerging in the MINT countries, which is going to grow very rapidly. This huge wealth surge happening in the MINT countries now mirrors the BRICS 10 or 15 years ago. The only difference is the new Mexican, Indonesian, Nigerian and Turkish millionaire is likely to be much younger due to the demographics of these countries.’

The MINTs, very much like the BRICS, are an odd family. Firstly their economies are completely different. Take Mexico as an example. Blessed with its position south of the US it has benefited from that experience (not to mention extremely market-friendly business reforms) over several decades. Its manufacturing sector is well developed and is becoming increasingly advanced and upmarket.

Turkey, on the other hand, which also has a well-developed manufacturing sector, concentrates on low-end products. Nigeria and Indonesia by contrast have very small manufacturing sectors. Both the latter countries, by the way, have extremely strong resource-driven economies in marked contrast to the other two – Turkey, in particular, which has no resource sector to mention.

Also the MINTs come with problems. Some common to them all, some unique. Extreme inequality is one of the universals. According to the World Bank, Mexico’s poverty levels have stayed almost the same in the last two decades (53.1% of people lived in poverty in 1992 compared to 52.3% two years ago). Then is there is political unrest (Turkey and Nigeria) and Indonesia struggling last year as part of the infamous ‘Fragile Five’ with a ballooning current accounts deficit and a crumbling currency. Ditto Turkey in regards to the latter. While in Mexico entrenched, rampant organised crime is showing in some unusual ways.

The MINTs come with problems. Some common to them all, some unique. Extreme inequality is one of the universals

An example – the price of limes. The country is the world’s biggest producer and the fruit is a staple part of the Mexican diet (think guacamole and margaritas).

Yet Bloomberg reports that lime prices have risen by an astonishing 200% from December last year to March. They now fetch around 80 pesos a kilo ($6.10). That’s more than the daily minimum wage in the country. The reason? Simple – organised gangs have branched out from drugs to fruit. Gunmen openly man roadblocks in the Michoacán state, the main lime farming area, and at the point of an AK47 extract a ‘toll’ from farmers per truckload. That price then gets passed up along the supply chain.

Another constant in all four MINTs is corruption. All score very poorly in Transparency International’s annual Corruption Perceptions Index. The latest index has Nigeria ranked at 144, Indonesia at 114, Mexico at 106 and Turkey at 53 out of 177 countries.

Not that this has O’Neill concerned. Writing for the BBC magazine he said he had ‘many interesting discussions about it [corruption] in each country’.

‘In Nigeria, Central Bank governor Lamido Sanusi [since suspended by President Goodluck Jonathan] argued that corruption rarely prevents economic development – and that the growth of the economy, accompanied by improvements in education, will lead to better governance and greater transparency.

‘Such views are important to listen to, as an alternative to our often simplistic western way of thinking. For many credible people in the MINT countries, corruption is a consequence of their weak past, not a cause of a weak future, and certainly not the number one challenge. It falls way down a list compared with the costs of energy and the breadth of its availability and, of course, infrastructure.

‘Here is an amazing statistic. About 170 million people in Nigeria share about the same amount of power that is used by about 1.5 million people in the UK. Almost every business has to generate its own power. The costs are enormous. I reckon Nigeria could grow at 10 to 12% by sorting out this problem alone. That would double the size of its economy in six or seven years.’

Nigeria, in particular among the MINTs, has been a ‘sweet spot’ for investors in the last few years. Back in 2011, Fidelity International singled it out for attention.

‘Countries such as Nigeria offer good diversi-fication and low correlation to other more established emerging markets. I find some of the most interesting opportunities in the consumer-related sectors.

‘The banks in Nigeria are now highly regulated, well capitalised and set to benefit from the penetration tailwind that exists with one of the lowest levels of retail credit penetration in emerging markets,’ said Nick Price, a Fidelity analyst.

It has been pointed out even with minimal reform Nigeria is still growing by about 7% a year. In early April, for the first time since 1990, it rebased its GDP to include previously uncounted industries such as IT, music, telecoms, Nollywood film production and airlines. It said GDP for 2013 totalled 80.3 trillion naira ($509.9 billion). SA had a 2013 GDP of $370.3 billion. However, per capita SA’s GDP is three times larger than Nigeria’s.

O’Neill’s enthusiasm for the MINTs has been met with some caution from other commentators.Writing in Forbes, columnist Chris Wright said: ‘But beyond all of this is the broader point of whether being the next BRICS is a good thing anyway.

‘O’Neill, of course, is painting an economic picture that will take shape over decades and generations; his observations should be seen in that very long-term light.’ The Telegraph went so far as to say ‘the MINTs suck’.

But as other observers have identified, the MINTs (and the BRICS) are indications of the way the world’s economic balance of power has tipped towards emerging countries and that the energy of these dynamic groupings is creating huge possibilities.

It’s best to let O’Neill have the last words: ‘I can smell the possibility of a MINT club already.’

By John Rossouw
Image: David Maclennan