Emerging market is a loose term, one often used by people who are not entirely comfortable with it but have not found a useful substitute. What substitutes do exist tend to be highly specific and have criticisms of their own, like BRICs or Asian Tigers (or the various other Tigers). The term was originally coined by Antoine van Agtmael in 1981, as a shift away from the third world tag, a replacement term that emphasized forward motion. In general, an emerging market is one transitioning from a developing nation to a developed nation. Obviously this is problematic since every “developing” country is, by implication of the term, transitioning, and for that reason, the emerging term is sometimes used to imply a liminal stage at the end of that transition, a position on the cusp just before becoming “developed.” Emerging markets are sometimes considered to be developing more rapidly than other developing nations, too, particularly since the developing label is sometimes attached to countries engaged in no obvious motion toward the received standard of developedness.
Emerging markets are not necessarily bound by common interest, and may in some cases be competitors, or perceive each other as such. There is no official list, or criteria, of emerging markets, and although there are indices that track groups of emerging markets, those indices should not be considered exclusive.
Emerging markets do not always consider themselves emerging. Russian economists and politicians, for instance, have taken offense at Russia’s economy being called “emerging,” even in light of its recent financial troubles.
Emerging Market Lists
The FTSE maintains two lists of emerging markets. The Advanced Emerging Markets have higher income and more developed infrastructure than the Secondary Emerging Markets. The Advanced Emerging Markets are Brazil, Hungary, Mexico, Poland, South Africa, and Taiwan. While this is clearly a disparate group of countries, with little in common, what they share is some abundance of natural resources (especially Brazil and Mexico) or extensive political and economic history with more developed allies, which gives them an edge, at least a perceived one, over the secondary markets. The Secondary Emerging Markets include Argentina, Chile, China, Colombia, Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, the Philippines, Russia, Thailand, and Turkey.
The FTSE further describes Frontier Markets, which are sometimes called “pre-emerging markets.” A tier down from the secondary markets, Frontier Markets are those developing economies that for one reason or another are considered to have a similar risk and return profile as that of the emerging markets. While the infrastructure and economic environment are not as developed as in developed nations nor, generally, in the emerging markets, Frontier Markets are marked by their general economic and political stability relative to other groups of developing nations. The FTSE Frontier Market list includes Albania, Bahrain, Bangladesh, Bosnia and Herzegovina, Botswana, Bulgaria, Croatia, Cyprus, Estonia, the Ivory Coast, Jordan, Kenya, Lithuania, Macedonia, Mauritania, Nigeria, Oman, Qatar, Romania, Serbia, Slovakia, Slovenia, Sri Lanka, Tunisia, and Vietnam.
Financial services and rating company Standard and Poor’s (S&P’s) coined the Frontier Market term in 1996, and launched two Frontier Market indices in 2007. The Select Frontier Index tracks 30 companies from 11 countries on the list; the Extended Frontier Index tracks 150 companies from all 27 countries on the list.
The S&P’s Frontier Market list includes Bahrain, Bangladesh, Bulgaria, Cambodia, Croatia, Cyprus, Estonia, the Ivory Coast, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Nigeria, Oman, Pakistan, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, the Ukraine, the United Arab Emirates, and Vietnam.
Since S&P’s launch of the Frontier Market indices, Deutsche Bank and Morgan Stanley have adopted their own such indices using largely the same list. Morgan Stanley also maintains an Emerging Market list: Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Iran, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Tunisia, Turkey, and Vietnam. The Economist maintains a list virtually identical to Morgan Stanley’s, adding Hong Kong and two countries Morgan Stanley considers developed rather than emerging: Singapore and Saudi Arabia. (Many would argue that South Korea is a developed nation, and its inclusion in so many Emerging Markets lists is one reason the term is falling out of favor.)
The Emerging Economy Report maintained by the Center for Knowledge Societies (a consulting firm in India) defines emerging markets as those that “are experiencing rapid Informationalization under conditions of limited or partial Industrialization.” Their list emphasizes markets that lagged behind the developed world throughout a significant part of the 20th century, but which are able to take advantage of 21st-century technological opportunities. The Center for Knowledge Societies list includes Brazil, China, Egypt, India, Indonesia, Kenya, and South Africa.
Emerging Market Debt
External debt incurred by the governments of Emerging Market countries is called Emerging Market Debt (EMD) and is a potential source of investment, such as in the funds promoted by van Agtmael when he coined the Emerging Markets term. Specifically, EMD refers to the bonds issued by such governments, or any securities derived from other debts of those governments. Such bonds are usually low rated: bonds are rated by groups like S&P from (in increasing order of quality) D (debts that are in default), CC, CCC, B, BB, BBB, A, AA, AAA, with +s and –s for further distinction. Anything below BBB– is considered “below investment grade,” sometimes called “speculative grade” since such bonds are traditionally the province of more aggressive investors. Because of the high risk indicated by low ratings, bonds with a speculative grade rating at the time of issuing are popularly known as junk bonds. Most EMD bonds are rated as junk bonds; some may reach BBB, or in rare cases A. As with other bonds, the ratings of EMD bonds fluctuate after issuance.
EMD bonds have become more common since 1989, when in the wake of widespread Latin American debt crises, U.S. Secretary of the Treasury Nicholas Brady proposed a plan to convert bonds issued by friendly developing nations into dollar-denominated bonds, i.e. bonds redeemable in American dollars instead of the currencies of these fragile economies. Commercial banks holding debts from developing countries were allowed to exchange those debts for such bonds. In the process, the nominal outstanding debt obligation could be reduced, in exchange for the original creditor being protected from exposure to risk. The Treasury Department helped to oversee this process, which essentially renegotiated debts between debtor governments and creditor banks, ostensibly to the benefit of both. Restructuring was highly flexible, and generally involved collateralizing the restructured principal with special 30year dollar-denominated bonds issued by Treasury for this purpose. These so-called Brady bonds were more highly-rated than most EMD bonds are today, with their interest payments sometimes guaranteed by high rated securities held by the Federal Reserve.
Types of Brady bonds included discount bonds, which were guaranteed and issued with market-rate coupons, but which had been discounted from the original value of the debt; this was especially common as many commercial banks wanted out of investment in developing/emerging markets altogether, and were willing to reduce the amount of the original debt out of the belief that if they did not take advantage of the opportunities of the Brady plan, they might never recoup that debt at all. Par bonds were issued at the original value of the loan, but with a below-market rate coupon. There were also front-loaded interest reduction and debt-conversion bonds.
The original Brady bonds were issued to collateralize debt obligations from the governments of Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Mexico, Morocco, Nigeria, the Philippines, Poland, and Uruguay. Though the program ended in the 1990s after dealing with the fallout of those initial Latin American crises, the creation of the Brady bonds standardized and facilitated the secondary market for EMD bonds. Notably, several of these emerging markets have since paid off the debts the Brady bonds represented. Mexico was the first to do so, in 2003; Brazil, the Philippines, Colombia, and Venezuela have all done likewise (the latter two having joined the Brady program later in the process). Many EMD bonds are available as part of mutual funds.
Newly Industrialized Countries
There is a fair bit of overlap, conceptually and geographically, between “emerging” or “frontier” markets, and the classification of “newly industrialized countries.” Both share a liminal, or threshold, quality: they describe something going on right now more than something that has been achieved. Like emerging markets, newly industrialized countries have pulled ahead of other developing nations. Specifically, they have done so because of their advances in industrialization, which generally leads to rapid economic growth, an improvement in the balance of trade, and a significant increase in exports and export incomes. Newly industrialized countries do not always enjoy the political and social stability necessary to be considered emerging markets, however: the rapid industrialization can disrupt rural, agrarian societies, which in turn can lead to political uncertainty during a period of adjustment.
Generally speaking, the newly industrialized countries are considered to be Brazil, China, India, Malaysia, Mexico, the Philippines, South Africa, Thailand, and Turkey. Egypt and Indonesia are often included, and advocates of the usefulness of the BRICs designation include Russia by implication. The newly industrialized nations have such diverse histories and heritages that, like emerging markets, they should no longer be considered a homogeneous group. China and Russia, for instance, have a history of communism to contend with—still in force but modified in China’s case, and in the recent past in Russia’s. India and Mexico, on the other hand, have long histories of democracy and struggles with imperialist powers.
- Lado Beridze, Economics of Emerging Markets (Nova Science, 2008);
- Sebastian Edwards and Márcio Gomes Pinto Garcia, Financial Markets Volatility and Performance in Emerging Markets. A National Bureau of Economic Research Conference Report (University of Chicago Press, 2008);
- International Finance in Emerging Markets Issues, Welfare Economics Analyses and Policy Implications (Gardners, 2008);
- Harinder Kohli, Growth and Development in Emerging Market Economies: International Private Capital Flows, Financial Markets and Globalization (Sage, 2008);
- Damian Miller, Selling Solar: The Diffusion of Renewable Energy in Emerging Markets (Earthscan, 2008);
- Kamel Rouibah, Omar Khalil, and Aboul Ella Hassanien, Emerging Markets and E-Commerce in Developing Economies (Information Science Reference, 2009);
- Karl P. Sauvant, Kristin Mendoza, and Ince Irmak, The Rise of Transnational Corporations From Emerging Markets: Threat or Opportunity? (Edward Elgar, 2008);
- Antoine W. van Agtmael, The Emerging Markets Century: How a New Breed of World-Class Companies is Overtaking the World (Simon & Schuster, 2008).
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