Frontier markets: potential lands of opportunity for investors, but also not for the faint hearted. Volatility versus great rewards - the perfect plot for global business leaders to dissect at this year’s World Economic Forum in Davos.
Speaking at the prestigious event, President of Kazakhstan, Nursultan Nazarbayev – leader of a frontier market giant – spoke about the huge changes Kazakhstan has undergone to attract foreign interest in recent years.
“Our economy has grown more than twenty times. Ninety billion dollars of international reserves have been accumulated in the country … and attracted foreign investment has reached 300 billion dollars.” He added, “We have created a high-technology stock exchange with shareholders such as The Shanghai Stock Exchange and the American Nasdaq Exchange.”
The Governor of the Astana International Financial Centre (AIFC), Kairat Kelimbetov kicked-off the Davos panel discussion called ‘Those Who Dare Win: Exploring New Frontiers’ emphasising the importance of technology. “The recent development of technologies creates opportunities to leapfrog to a new destination,” said Mr Kelimbetov. “We’ve seen it recently with a leapfrog in mobile payments in East African countries, with WeChat in China and with blockchain in Estonia and Georgia,” he added.
With the current buzz around frontier markets – especially with the predicted opening up of many due to China’s Belt and Road initiative - the highly-acclaimed experts were first asked what the hype is all about.
For leading investor in growth markets, Mustafa Adbel-Wadood (Managing Partner of The Abraaj Group) a long-term view is critical. “It’s compelling to invest in frontier markets. Investing in growth is exciting. There is volatility, yes, but if you look at long-term view and investing in the future … there is definite growth. The rising middle class provides a growing consumer base which is ultimately what is going to drive these economies,” said Mr Adbel-Wadood.
While Carlos Pascual, Senior Vice President for Global Energy at IHS Markit (a global information company), was quick to point out the high risk involved in venturing into unchartered investment territories.
“If you can operate from a base that’s extraordinarily competitive that can bring together technology and human capabilities that are extremely efficient … if you know your market and can get into a broader market, you can do extremely well. It’s a small market, so if you need to get out the risk is very high,” said Mr Pascual.
And for Anna Marrs, CEO, Commercial and Private Banking, Standard Chartered, the frontier investment landscape is varied and a 360˚ view is essential. She cited three important structural trends that Standard Chartered – with its longstanding experience as an emerging market trade bank – has its eye on: China’s ‘Belt and Road’ strategy and the growth of manufacturing jobs outside China; digital transformation; and the importance of a ‘level playing field’.
“Markets are growing and someone is going to make money, but it’s not going to be you if the cards are stacked against you. Can a foreigner be treated well enough to run a successful business?” commented Ms Marrs.
Transparency for investors is crucial and Mustafa Adbel-Wadood believes that people invest in early growth because the opportunity is so strong. But he added, “You want to understand that there’s a commitment to transparency and governance that leads to a level playing field. You don’t want the lack of predictability.” Mr Adbel-Wadood was also keen to highlight that political risks are not a frontier market problem alone, but a global issue, saying, “The financial crisis did not come out of a frontier market.”
Former U.S. diplomat, Carlos Pascual, however, felt that political instability should act as a warning sign. “How does income disparity internally affect the politics and economic prospects of a country? What kind of dissent and tension and expectations does it create in the future? What are your prospects for the future?”
Rwanda is one such country whose prospects for the future were bleak in the 1990s, and yet, it’s turned itself around and is now one of the fastest growing economies in the world. Panellist Claver Gatete, Rwanda’s Minister of Finance and Economic Planning, said making the country a conducive environment for business has been at the heart of its transformation.
“As an eastern African community, initially we used to look at ourselves as individual countries. We used to have individual stock markets. Now we look at ourselves as a region, we provide the same incentives, and all the products coming onto the market can list on either of the markets – this becomes a larger market that becomes more attractive,” he informed the audience. Mr Gatete also emphasised Rwanda’s heavy investment in skills of the future, as an enabler to drive innovation in his country.
And as the panel drew to a close, attention turned once more to exciting opportunities to leapfrog into frontier markets. For SCB’s Ms Marrs, the potential to make a digital change, is an attractive one. She commented, “When it comes to the chance to leapfrog today, markets with less technological infrastructure have a chance to start from scratch.”
But for Mr Adbel-Wadood, changes to regulatory framework in frontier markets can be the biggest enabler. He said, “I think regulatory infrastructure is critical and when we look today at what’s happening with the Astana International Financial Centre, that is enabling an environment that will help raise the level of transparency and give comfort to local and international investors.”
Kazakhstan can indeed provide many lessons for frontier markets that are just starting to shine. The AIFC is the only centre in the region that will operate with a special legal regime which is based on English law and it offers tax breaks for foreign investors. In the words of its President, it’s now got its sights set on entering “the top 30 most developed countries of the world”. Ambition, clearly, is key. But so too is creating a sustainable economy, that puts the welfare of its people at the heart – and the ability to be welcoming and rewarding to foreigners. But above all, its most important message to other emerging economies has to be the importance of good governance, that’s helping it move from being a frontier market to a serious market player.