TalkingEconomics: Emerging markets run the reform marathon

Reforms can help drive idiosyncratic equity performance in emerging markets, but the process is a marathon, not a sprint. We look at where four different countries find themselves in the race.


Schroders Economics Team

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Indonesia, the next India?

Just as the election of Narendra Modi prompted reform hopes in India, the election of Joko Widodo (“Jokowi”) generated optimism of a turnaround in Indonesian policy.

While there have been disappointments in both countries since their respective elections, we believe the reform-driven gains seen in Indonesia’s stockmarket have greater fundamental support than in India.

In the former, we expect the government to largely deliver on its infrastructure plan where, as in India, there has been a big push to boost investment through reform efforts aimed at encouraging private sector involvement.

Meanwhile, India’s reform story continues to struggle. May’s local elections could shift the balance of power somewhat in the Indian Upper House, and this is the next signal for us to watch.

Absent a favourable result for the ruling party, we would be sorely tempted to write off the prospect of further substantial reforms under Modi.

We should still see incremental gains, and the recapitalisation of the banking sector will prove helpful to cyclical growth, but reform failure could prove damaging to performance in a still crowded equity market.

South Africa, the next Brazil?

Lagging behind Indonesia and India on the reform path are Brazil and South Africa, both currently distracted from economic reform by political turmoil.

In Brazil, the removal of Dilma Rousseff as president looks increasingly likely while the impeachment or resignation of South African president, Jacob Zuma, looks far less probable.

The reform outlook is therefore dimmer in South Africa compared to Brazil, where a new government would likely enact some reform, even if only just sufficient to address the country’s current fiscal problems.

The good news for South Africa is that, unlike Brazil, policy has been reasonably sensible:

  • Currency weakness was permitted in response to external shocks
  • Monetary policy has been tight
  • Fiscal policy has also become tighter

The economy is also outperforming that of Brazil. However, in our view, South Africa is quite likely to follow Brazil’s earlier footsteps in losing its investment grade rating particularly if Zuma clings to power and policymakers do not begin to implement some of their promised reforms.