Logistics executives expect a stronger year for emerging markets

1/31/2018

Logistics executives are optimistic and share the IMF’s view that 2018 will be a stronger year for emerging markets despite its prediction that China’s economy will slow slightly in 2018, according to a new survey of more than 500 global logistics industry executives.

The survey findings are part of the 2018 Agility Emerging Markets Logistics Index, an annual ranking of the world’s 50 leading emerging markets as measured by size, economic strength, infrastructure, transport connections and business climate. Supply chain and logistics executives worldwide shared their views of the 2018 global economic outlook, prospects for emerging markets, key growth drivers and trends affecting emerging markets countries.

Nearly two-thirds (65.1%) say the IMF’s 4.8% emerging markets growth forecast is “about right.” Last year, a significant minority (42.8%) said the IMF was being too optimistic in forecasting 2017 emerging markets growth of 4.6%.

Optimism about emerging markets is especially notable because the IMF predicts that China’s economy – the most dominant among emerging markets – will slow slightly in 2018.

Transport Intelligence (Ti), a leading analysis and research firm for the logistics industry, compiled the Index. John Manners-Bell, chief executive of Ti, said: “Emerging markets enjoyed favourable market conditions in 2017 with trade growth the healthiest in years. However, there are many storylines yet to fully unfold, such as China’s debt, the renegotiation of NAFTA and ongoing political and economic transition in the Middle East. While the going looks good for now, there are numerous challenges on the horizon.”

In other highlights form the survey, supply chain professionals are baffled by the Trump administration’s high-stakes brinkmanship over NAFTA and cannot agree on who will win and lose in renegotiations. Logistics executives were split on whether an updated agreement would help Mexico (24.3%); hurt Mexico (21.8%); or leave trade broadly unchanged (25.7%). The original agreement, widely credited with generating growth in the United States, Canada and Mexico since it went into effect in 1994, has been derided by President Trump as the “worst deal ever made.” U.S. negotiators have taken a hard line in renegotiating talks.

Industry executives see poor governance (40.78%) as the biggest obstacle to growth in Brazil, but a larger percentage (29.13% vs. 21.1% a year ago) blame outright corruption.

India’s Goods & Services Tax unification and other economic reforms have been greeted favorably by the logistics industry. The percentage of professionals who said their companies are now considering investment in India jumped from 22.8% a year ago to 37.4% in the latest survey.

Infrastructure is playing a larger role in the industry’s view of Sub-Saharan Africa. A much larger percentage of supply chain professionals (21.4% vs. 15.2% a year earlier) identified rapid infrastructure development as a significant driver in African growth. A greater percentage (16.7% vs. 12.2%) said poor connectivity and links between economic centres was one Africa’s biggest challenges. Finally, industry executives cited poor infrastructure as Africa’s biggest supply chain risk, ahead of corruption, government instability and terrorism.

Few in the logistics industry see reason to worry the UK’s departure from the European Union will damage emerging markets economies, even though Brexit will force the UK to negotiate its own trade agreements with non-EU countries. Nearly 45% of executives say emerging markets will be unaffected; 25.4% said emerging markets stand to gain from Brexit.

The findings represent something of a turnaround in sentiment. A year ago, 69% of executives surveyed said they worried that the UK’s Brexit vote and breakdown of regional and global trade talks signalled a retreat from free trade.

“The big worry a year ago was that the Brexit vote and U.S. election results represented a desire to pull back from free trade and that an anti-trade backlash would hurt emerging markets economies,” said Essa Al-Saleh, CEO of Agility Global Integrated Logistics. “Those concerns have waned, especially when it comes to Brexit.”

Among the other key highlights of the survey and index, in volume terms, air freight and ocean freight lanes from the EU to Turkey were among the fastest-growing emerging markets trade lanes in 2017. Automotive assembly locations in Turkey continue to be critical to the strategies of European vehicle makers.  

However, Turkey slipped one place to No. 10 in the Index, despite blistering 11% growth in the third quarter of 2017. Turkey is still recovering from the after effects of a failed coup in 2016, when the economy shrank nearly 1%. International economists warn that Turkey needs to raise interest rates to control inflation and avoid overheating. 

In the 50-country Index rankings, Russia climbed three spots to No. 7 after years of declining performance brought about low energy prices, capital flight and U.S. economic sanctions. Russia’s economy stabilized and showed modest growth in 2017 after a wave of corporate cost-cutting, banking industry consolidation and economic reform. Russia also benefitted from Saudi-led efforts to persuade major oil producers to rein in production.

Kazakhstan slumped six places to No. 20 in the Index, despite increased oil production that helped lift growth and release of a long-term national development blueprint that emphasizes high-tech and green industries, along with diversification from commodities.

China and India top the 2018 rankings and put more distance between themselves and No. 3 UAE in the Index, a broad gauge of emerging markets’ competitiveness. Brazil, struggling to emerge from political turmoil and its worst recession in a century, slips two places to No. 9.

Industry executives can’t agree on the future of the North American Free Trade Agreement, which has come under intense criticism from the Trump administration. The United States, Mexico and Canada are in negotiations aimed at updating the agreement. Logistics executives surveyed were sharply split about whether a new pact would help Mexico (24.3%); hurt Mexico (21.8%); or leave trade unchanged (25.7%).

Egypt surges six spots to No. 14 -- the largest jump by any country in the 2018 Index – and rockets up 26 places to No. 21 in the separate category ranking countries’ business conditions, or Market Compatibility. Bangladesh (No. 23) and Uruguay (No. 25) both leapfrogged four spots in the overall rankings.

Nigeria, Africa’s largest economy, tumbled to No. 31 from No. 24 a year ago. In spite of its potential, Nigeria ranks next-to-last in infrastructure and transport connections, or Market Connectedness, and 46th in business climate. Also falling: Venezuela slumped to No. 48, and ranked dead last in Market Size and Growth Attractiveness; Kazakhstan fell six places despite a resumption in economic growth and announcement of a long-term development blueprint.

Gulf countries continue to dominate the top of the rankings when it comes to emerging markets business conditions. UAE, Qatar, Oman and Bahrain outpaced all other countries. Saudi Arabia was No. 8; Kuwait was No. 16. Gulf countries also rank toward the top in quality of infrastructure and transport connections: UAE (1), Bahrain (5), Oman (6), Saudi Arabia (7) and Qatar (8) were top performers.

Fifty-five percent of executives surveyed say small and medium-sized businesses – those with fewer than 250 employees – will benefit most from emerging markets growth. Twenty-six percent said large companies would be the biggest beneficiaries.

India and China are the logistics industry’s favorite investment destinations, but Vietnam leads a second group that includes UAE, Brazil and Indonesia.

Algeria, Ukraine and Ethiopia made big improvements in business conditions. The business climate deteriorated in Sri Lanka, Cambodia, Tanzania, Lebanon and the Philippines.

The percentage of supply chain executives whose companies are considering investment in India jumped to 37.4% from 22.8% a year ago, following the rollout of India’s Goods & Services Tax unification and other reforms.

The countries improving their infrastructure and transport connections most were India, Indonesia, Turkey, Egypt, Iran, Pakistan, Argentina and Bangladesh. Infrastructure and transport rankings fell for Kazakhstan, Sri Lanka, Colombia, Brazil, Thailand and Kuwait.