Strategy Note / Global

Frontier-Emerging Equity Monthly, December: Fund manager despair in focus

As well as our review of the month-to-date in frontier and emerging markets, we focus on the feedback from c80 meetings we have conducted with public equity fund managers globally in the past couple of months. 

Most Viewed See all latest

This publication is being distributed by Tellimer solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not cons...

Full Tellimer disclaimers
Strategy Note / Global

Correlation of EM and FM equities with Developed Markets, US$ and Commodities

  • Developed markets: Historically EM much more correlated with DM than FM, but the gap narrowed sharply in the last year
  • US$: Historically EM (fairly stable FX in heavyweights China, Korea, Taiwan) less correlated than FM ex-GCC or LatAm
  • Commodities: Recently large EM more correlated with commodities, FM might go the other way as oil countries exit or fade
Hasnain Malik @
Tellimer Research
11 June 2020

We calculated correlations between a range of emerging (EM) and frontier (FEM, FM ex-GCC and GCC) equity indices and global commodity prices (S&P GSCI), oil price (Brent), the inverse of the US$, and developed market equities (MSCI World) over time periods ranging from the last 10 years to the last year.

Some of the data surprised us because it did not consistently support accepted wisdom (eg EM performance goes hand-in-hand with a weak US$ or large EM markets, which import commodities, should move in an opposite direction to commodity prices).

Our observations from the data and our attempts to explain them are below.

Correlation with Developed Markets (DM)

  • All parts of EM and FM exhibit high positive correlation with DM in the last year (ranging from 0.7 for the GCC to 0.95 for EM).

  • Positive correlation with DM has increased for most of EM and FM over time (eg FM ex-GCC and FEM exhibited close to zero correlation on a 10-year view, but 0.8 over the last year).

  • Positive correlation with DM over longer time periods is much higher in EM and Asia (ex-Japan) than elsewhere.

One of the original promises of fund management in EM, and, subsequently, FM, was low correlation with developed markets.

EM more than FM, historically – Increasing maturity of the asset class might explain the difference between high correlation with DM (over all time periods) for EM whereas low correlation for FM and FEM. EM was already a very well established asset class ten years ago, given the MSCI EM index was launched back in 2001, whereas MSCI FM and FEM were launched in 2007 and 2008, respectively.

Both EM and FM, more recently – More recently, the high correlation of all EM and FM indices with DM might be explained by fundamental and technical factors. Fundamentally, the drivers for the largest stocks in all indices may be increasingly overlapping global ones. The increasing shift in US foreign policy to disconnect its trade links with China and, potentially, inhibit capital flows to China may disrupt this trend. China and HK account for almost 40% of the EM index. (See Active investing in EM equity after Covid-19: A final chance against passive). Technically, the rise of passive funds across equity asset classes may mean that overall liquidity flows into equities have become the prime driver across all equity assets.

The shift of the marginal investor to locals

With the large cuts in domestic deposit rates and, in the smaller EM and FM asset classes, the collapse of dedicated foreign assets under management, the marginal driver of equity markets may shift from the foreign institutional investor to local high net worth and local institutional investors. Although these investors tend to be driven by global trends, the increasing relative attractiveness of local equities (relative to bank deposits and government securities) may reduce the correlation with DM.

Correlation with US$ (inverse)

  • Putting to one side the last year (when all equity indices have been highly correlated with each other, as discussed above), over longer time periods, FEM, FM ex-GCC, LatAm and Africa have generally exhibited higher positive correlation with the US$ (inverse) than EM.

  • Nevertheless, EM is significantly more correlated with the US$ (inverse) over the last 5 years than over the last 10 years.

  • The GCC (which is essentially a fixed US$-pegged region, with unchanged FX rates over the last decade) has not exhibited significant negative correlation to the US$ (inverse).

The EM veteran's mantra – An oft-repeated mantra among veteran EM investors is that a weak US$ is necessary for EM (or FM) to perform well; in other words, EM and FM should exhibit high positive correlation with the inverse of the broad trade-weighted US$ index. (See The Dollar leads Emerging Markets equities: The veteran's mantra). The correlation data here does not consistently support this.

Uneven correlation in EM – The largest country components of EM in the last decade are China-HK, Taiwan and Korea (collectively increasingly from 40% to 62% in this time) and their FX rates have fluctuated in a narrow range (minus 5% to plus 10%). This compares to smaller country constituents (eg India, Brazil, South Africa, Russia which, collectively, have shrunk from 36% to 20% of the EM index), where FX rates have moved in a much wider range (with depreciation over the last decade of between 40% and 65%).

Consistent correlation in FM ex-GCC – The FM index has included countries which, prior to hefty devaluation, enjoyed large weights in the index; eg Argentina was c25% of FM at the start of 2018 prior to its cumulative 75% devaluation over the following 3 years, and Nigeria was c10% of FM at the start of 2016 prior to its cumulative 50% devaluation over the following 5 years. With less stable (devaluing) FX rates in some of its largest countries, it is perhaps unsurprising that FM has exhibited high positive correlation with the US$ inverse.

The curious case of the GCC – In the GCC, positive correlation with the US$ inverse is very low, but the lack of consistently negative correlation is more interesting. This implies that investors have paid much more attention to factors such as oil price, index change-related flows, and regional geopolitical risk, rather than rewarding the currency peg (ie it does not appear that the GCC has been rewarded for lower risk FX rate). Given the pressures resulting from the low oil price outlook on growth, sovereign wealth and, ultimately, currency pegs, the era when GCC markets might have been expected to be negatively correlated with the US$ inverse has likely passed in any event. (See GCC blockade 3 years on: Qatar is best for those who doubt the GCC can diversify and Saudi and GCC currencies: Drop the pegs while FX reserves still comfortable?).

Correlation with Commodity and Oil prices

The S&P Commodity Price Index is made up as follows: 44% crude oil, 18% other oil and gas fuels, 16% agricultural outputs (wheat, corn, soybeans, cotton, etc), 11% industrial metals (aluminium, copper, etc), 7% livestock (cattle, hogs), and 4% precious metals (gold, silver).

  • Positive correlation across EM and FM is higher, over more time periods, with commodity prices than with DM or US$ inverse.

  • Positive correlation with oil, specifically, is highest in LatAm and FM (both the GCC and ex-GCC parts).

Recently, large EM correlation despite being commodity importers – While the four largest countries in EM (China-HK, Korea, Taiwan, and India, which have collectively grown from 57% to 70% over the last five years) are not commodity exporters, the index has exhibited high positive correlation with the commodity index over the last five years. This is perhaps because, with all thoughts of the commodity super-cycle now banished, commodities have returned to a more coincident global cyclical demand indicator and the large EM countries, particularly China-HK, Korea and Taiwan, have, over this last five years been driven mainly by the global demand for their manufacturing exports. Perhaps this changes if China becomes driven increasingly by domestic consumption, as opposed to exports.

FM correlated with commodities, but that should change as oil export bias goes – The FM index has been dominated by oil exporters since inception (ranging from c80% in 2012 to c50% currently). Therefore the high positive correlation with oil price exhibited historically is unsurprising. However, the oil-exporter bias of FM is about to change materially in H2 20, with the exit of Kuwait (about a 25% weight). This follows the exits of the UAE and Qatar in mid-2014 (at the start of 2014 they collectively accounted for over 30% of the index) and the fall in the weight of Nigeria since the start of 2014 (when it accounted for close to 15%). The collective weight in FM of Vietnam, Morocco, Kenya, Romania, Iceland, and Bangladesh should be around 60% soon.

Read more
Sovereign Analysis / Global

IMF 2019 Annual Meetings – Trip report

Stuart Culverhouse @
Tellimer Research
5 November 2019

We attended the October 2019 Annual Meetings in Washington, DC, where we met with IMF mission chiefs, their teams, and other senior officials from the IMF and the official sector. We wish to thank all our hosts for their time and for the constructive and open nature of discussions, which were valuable to us and to our clients attending these meetings.

This report is the opportunity to relate some of the points that came out of those meetings and to update our views on selected sovereigns. 

Specifically, we cover here 15 countries. We stress the views in this report are our own and not necessarily those of IMF staff or country officials; they reflect our interpretation of the issues discussed in our respective meetings.

Read more
Strategy Note / Global

Corruption: The ugly truth for EM and ESG investors

  • Corruption causes economic inefficiency, tax revenue loss, lower retention of and investment in all forms of capital
  • But link between corruption and low growth not easily provable, let alone link between corruption and investment returns
  • And often anti-corruption measures target opponents, cause paralysis more than positive reform (Pakistan an exception)
Hasnain Malik @
Tellimer Research
7 July 2020

Does corruption bother you?

I ask the professional institutional investor, not the woke consumer or spiritual guide, in you.

We all say that of course it does but, in practice, is this or should this be the case?

These questions are particularly relevant for emerging markets and ESG investors (in emerging and developed markets).

I struggle with the response to these questions but make the following suggestions in this report:

  1. Corruption does not always inhibit investment returns on the time frames institutional investors are rewarded on, but the negative effects of corruption ultimately catch up with a country (comparing Brazil over two time frames, 2012-19 and 2016-19, show that equity performance can veer in a wildly different direction to corruption metrics);

  2. Measuring corruption, proving the link between corruption and poor economic performance, and identifying what counts as sincere anti-corrupt policies are all problematic (for example: China's corruption scores, since 2012, have improved meaningfully in the World Bank's Control of Corruption index, but barely moved in Transparency International's Corruption Perceptions index; China's poor scores on corruption have not inhibited higher growth more than large emerging market peers; movements in the World Bank measure, since 2000, are in the opposite direction to changes in the rate of economic growth; and most would agree the anti-corruption drive under President Xi Jinping has been motivated at least as much by concentrating power as by cleaning up the political economy); and

  3. ESG investing needs to acknowledge the inconsistency and incompleteness in supposedly objective measures of corruption and, equally importantly, to treat corruption in developed and emerging markets consistently (by acknowledging that illicit financial flows from supposedly corrupt emerging markets end up in supposedly clean developed ones).

How can something so wrong feel so right?

“When you see that money is flowing to those who deal, not in goods, but in favors—when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed” (Ayn Rand, Atlas Shrugged, 1957).

A slow and silent killer

Almost everyone would agree that corruption is a serious negative for a country's investment case because it causes:

  • Economic inefficiency (eg bribes have a much bigger impact than simply making up for low salaries in the public sector, capital is allocated not to the most efficient operators but the most privileged, productivity declines because it is not fairly rewarded, and active rent-seeking increases);

  • Lower tax collection (and usually higher tax rates on incomes and wealth that are officially documented); and

  • Drives capital of all types (human, physical, financial) overseas (whether legally or illicitly) with a relatively small offset in the form of remittances (whether via official or undocumented channels).

Corruption catches up with a country, ultimately

Countries that score poorly in corruption metrics, even where these scores deteriorate, may nonetheless display high economic growth and/or offer institutional investors very high returns on the time frame on which they are rewarded.

The issue of time frame is critical.

Ultimately, high, and worsening, levels of corruption catch up with a country. For investors, it is a question of whether the period before this day of reckoning (the catalyst for which could be civil disruption, currency collapse or flight of hot capital), is long enough to build and exit portfolio positions in an orderly manner.

Consider the example of Brazil compared with large EM peers:

  • 2016-19 out-performance

    • Brazil's Transparency International Corruption Perception Index score fell by 13% between 2016 and 2019. In real terms. GDP did not grow. But the MSCI Brazil equity index increased by 135%.

    • Over the equivalent 2016-19 period, in the seven other largest markets in EM (which make up over 75% of the MSCI EM index), the average change (weighted by GDP) in the corruption index score was a 2% improvement, combined real GDP expanded by almost 25%, but the MSCI EM index was up merely 40%.

  • 2012-19 under-performance

    • Brazil's corruption score fell 19% between 2012 and 2019, real GDP expanded merely 2% and MSCI Brazil decreased over 15%.

    • Over the same time period, the other seven largest markets in EM saw an average change (weighted by GDP) in the corruption index score was a 6% improvement, combined real GDP expanded almost 60% and the MSCI EM was up over 20%.

Of course, being able to predict the exact moment when well-understood vulnerability is exposed is exceedingly difficult (which is why, in my strategy work generally, I tend to focus, instead, on valuations relative to history – this does not help with timing but it indicates what compensation there is for downside risk).

Corruption academics and data: Unclear takeaways

Academic literature on corruption is not as clear-cut as one might expect. No one denies the negative impacts of corruption described above. However, there is plenty of debate over how to measure corruption and its impact on the economy and what anti-corruption policies to deploy in response.

  • Different measures of corruption can paint very different pictures of the same country: eg Pakistan scores much worse in the Transparency International Corruption Perceptions Index compared with Malaysia but historical illicit financial flows as a percentage of GDP appear to be much lower.

  • The impact of corruption on government tax revenue is not obvious from a sample of data across emerging markets (in the chart below, countries with similar levels of corruption can have very different levels of tax revenue to GDP).

  • Levels of corruption do not clearly correlate with GDP growth; ie similarly corrupt or clean countries can exhibit very different growth (ie other factors may dominate for sustained period, eg population demographics, commodity prices, interest rates, currency).

  • The change in levels of corruption often do not correlate well with GDP growth rates. In the charts below, the trajectory of control of corruption does not always lead or coincide with that of real GDP growth. The prime example is China where low scores on the World Bank's control of corruption index have not inhibited very high growth, a deterioration in its score coincided with an acceleration in growth (2000-08) and an improvement in its score coincided with a deceleration in growth (2010-18).

  • Policies to encourage growth (eg privatisation of state enterprises) may also foster corruption (capture of the privatisation process by vested interests). However, growth itself may be part of the solution for corruption (eg the associated benefit of improvements in education, the broadening of the middle class, competition from new entrants).

“While here is little development without control of corruption, there is also no progress on control of corruption without significant civil society development.” (Mungiu-Pippidi and Hartmann, 2019)

Anti-corruption policies: Permanent reform is rare

In any political economy, emerging or developed, small or large, pluralistic or autocratic, anti-corruption drives rarely deliver permanent positive reform, certainly when compared with the number of times anti-corruption campaigns are publicly announced, and they almost never achieve these gains quickly:

  • Vested interests in corruption (which include geopolitically motivated international powers), which have spent decades reinforcing their patronage networks, can frustrate anti-corruption efforts after even the most egregious public examples, and can reverse previous improvements;

  • Anti-corruption campaigns can be thin veils for political persecution of or political score-settling with opposition politicians;

  • The economic disruption from the resulting paralysis in decision-making by bureacrats and politicians and capital investment decisions by the private sector (with all parties fearful of future scrutiny of the contracts they sign) can erode the political will for a clean-up.

There is nothing unique about a particular country or region in this respect. The emerging markets examples highlighted below are deliberately chosen from a wide spectrum.

  • LatAm democracies

    • The Odebrecht scandal implicated many in the political class across the continent but it is not clear that lasting legal safeguards have been put in place to avoid a repeat. Indeed, part of the defence tactic of those accused under the investigations, such as the Odebrecht one, has been to politicise corruption charges and brand them as part of a broad campaign to discredit and weaken "progressive" leaders (eg Cristina Fernandez in Argentina, Evo Morales in Bolivia, Lula de Silva in Brazil, Rafael Correa in Ecuador).

    • Argentina: The legal momentum behind anti-corruption cases involving former President Cristina Fernandez appears to be weakening following the election of current President Alberto Fernandez (Cristina is the vice president) and the change of leadership he implemented at the head of the anti-corruption office (Crorus).

    • Peru: The vested interests that still dominate the legislature and judiciary, in the face of efforts by President Vizcarra and support of the electorate, have mounted effective opposition to anti-corruption reforms.

  • Africa democracies

    • Kenya: While anti-corruption is a popular message, the actions taken by President Kenyatta in his second term (which include reconciling with elements of the opposition and proposing constitutional reform to weaken the future role of the presidency) likely have much more to do with strengthening his Kieleweke faction relative to Vice President Ruto's Tangatanga faction in the ruling Jubilee coalition as the crunch of the 2022 election (and the succession implied by the two-term limit on Kenyatta).

    • Nigeria: Following two terms under President Jonathan (towards the end of which the well-respected central bank governor was suspended for raising concern over missing oil revenue), the election of President Buhari initially sparked structural reform of governance (moving to a single treasury account, instituting regular public audits of the state oil company, wholesale changes of personnel in the bureaucracy). But this appeared to run out of steam quickly thereafter (and arguably went into reverse under the multi-currency regime, which created unfair competitive advantage for those able to access foreign currency at the strongest rate). Nigeria's Transparency International corruption score in 2019 is very close to what it was prior to Buhari's election win in 2015.

  • South Asia democracies

    • Bangladesh: The use of anti-corruption as a means to persecute and weaken those politicians sitting in the opposition precedes the post-2009 era of the de facto one-party state under the Awami League (ie the Bangladesh National Party and, during periods of martial law, the Army, has also used this tactic).

    • Sri Lanka: Former President Sirisena won the election in 2015 on an anti-corruption platform (following a decade under the Rajapaksa presidency that saw transitions from civil war, to peace and macroeconomic relaunch, to increasing authoritarianism and crony-capitalism). Yet, within two years, both the central bank governor and the finance minister were accused of corruption. Sri Lanka's Transparency International corruption score hardly changed between 2015 and 2019.

  • Asia one-party states

    • China: The 2012-16 anti-corruption program under President Xi Jinping was one part of the effort to consolidate support among allies and remove potential dissenters and rivals (eg Bo Xilai) in advance of the Communist Party Congress of 2017;

    • Vietnam: When anti-corruption actions are made public (usually in the form of corporate scandal), they are often the result of a decisive victory for one faction over another within the communist party.

  • GCC monarchies

    • Saudi: Anti-corruption actions post-2015 fit into a broader pattern of elimination of dissent and concentration of power under the Crown Prince;

    • Kuwait: Anti-corruption scrutiny in parliament invariably masks an underlying conflict between populist MPs (subject to re-election) and cabinet ministers (appointed, and often re-appointed, by the Emir);

  • Military-dominated democracies

    • Egypt, Pakistan, Thailand: In each of these three political economies, the military persists as the dominant domestic political institution (and, in the case of Egypt, the dominant economic power). Civilian governments are generally junior partners in the military-civilian relationship. Anti-corruption measures have been used repeatedly as a means to discipline or weaken the junior civilian partner (and certainly applied much more publicly to civilian politicians than to military personnel).

    • Egypt: Following the 2011 'Arab Spring', the break of up of the National Democratic Party of Hosni Mubarak and its associated commercial interests, which increasingly encroached on military-aligned commercial interests, included a witch-hunt of former government officials and private sector corporate leaders under the banner of anti-corruption. Egypt's Transparency International corruption score improved 15% between 2012 and 2014, before retracing all of that improvement by 2017 (it subsequently improved 10% by 2019).

    • Pakistan: The national accountability drive under former President Musharraf following the military coup of 1999 briefly targeted civilian political leaders and their associated corporate interests but this was noticeably softened as Musharraf transitioned from the leader of a military coup to something more closely resembling a president (in the process, reconciling with increasing portion of the established civilian political class), and entirely abandoned by 2007 (crystallised by his attempt to pass a corruption amnesty for the established civilian political and bureaucratic elite, the National Reconciliation Ordinance).

    • Thailand: Thaksin Shinawatra (PM from 2001-06) and Yingluck Shinawatra (PM from 2011-14) were both effectively removed from office in military coups, both opted for exile and both were convicted of abuse of power in absentia. Underlying these events was the schism in Thai politics that persists to the current day between political forces closer to the army, the monarchy, and the southern urban middle class (the "yellow shirts") and those closer to the urban working class, the north and north eastern farmer class (the "red shirts"). Thailand's Transparency International corruption scores have barely changed since 2012.

  • Wider Europe

    • Georgia: Even in widely applauded cases of anti-corruption policies, the risk of back-sliding remains. Georgia is a good example of the vulnerability of reform gains. The transition of power from United National Movement (led by Saakashvili) to Georgian Dream (led by Ivanishvili) in 2012 was followed by anti-corruption reforms but those have given way recently to concerns that one version of state capture has given way to another. Georgia's Transparency International corruption score improved almost 20% between 2013 and 2018 before slipping by 5% in 2019. It remains to be seen whether constitutional reform agreed in 2020 will better secure the gains of the early years under Georgian Dream.

Pakistan exceptionalism

Our positive investment thesis on Pakistan is built on a view that a generational improvement in governance is underway, military-civilian relations are sustainably stable, infrastructure is undergoing an upgrade under CPEC (albeit expensively), relations with India cannot get worse because of the nuclear deterrent, FX rate valuation is fair and equity valuations are very cheap. The risks are that Covid-19 proves too big an economic shock and the succession to PM Imran Khan is uncertain.

Improving governance, where anti-corruption investigations, disclosures and enforcement are key elements, is a very bold call in the context of the arguments presented above. With such scepticism over how sincere and how effective anti-corruption agendas are in general, including military-dominated democracies, why the exceptional outlook for Pakistan? Three factors drive this.

  1. Deep state: The military-intelligence deep state in Pakistan remains dominant in Pakistan's political economy but its priorities have had to change (for its own survival as much as that of the country): the US is not a reliable financial or diplomatic supporter (from a Pakistan perspective, China can partially replace financial flows but cannot match the export potential of the US), the integrity of Pakistan was at risk without the restoration of law and order, state assets have withered to such a degree that they have become liabilities, and sustainable gains in security and a path to sovereign financial independence is not possible without improving the economy. Anti-corruption is an essential part of both the security and economic challenges.

  2. Grassroots politics: The Pakistan Tehreek Insaf (PTI) party, led by PM Imran Khan, has grown into a nationwide party with a diverse support base over two and half decades. While it just as reliant on cooperative relations with the military-intelligence deep state as every other precedent civilian government, it is not a recent political construction of convenience. Its value to the military-intelligence deep state is that it provides the most likely partner in tackling corruption and improving governance (because of the links with corrupt, vested interest networks with the previously dominant political parties – Nawaz Sharif's PMLN, Asif Zardari's PPP and Altaf Hussein's MQM – that are now likely in permanent decline).

  3. International relations: China is now the international geopolitical partner of Pakistan. Unlike historical partners, the US and Saudi Arabia, there is an overlapping interest in the geographic integrity and economic progress of all of Pakistan. This is not out of altruism; China needs security across all provinces in Pakistan for its own physical supply routes. The coordination of rebel Mujahideen forces during the Soviet-Afghan War for the US or the provision of troops-on-demand and nuclear cover for Saudi, meant those international partners cared most about coherent leadership in the Pakistan military-intelligence agencies more than security or economic benefits across all provinces.

This type of positive structural change in governance, driven by the confluence of changes in the deep state, organic grassroots politics and international relations, is not underway anywhere else in the emerging markets universe.

Corruption is another ESG work-in-progress

The growth of environmental, social and governance (ESG) investing as, at least, a successful marketing pitch is undeniable. Whether it is sincerely or consistently implemented as an investment philosophy is a completely separate issue.

Corruption presents a thorny issue for ESG investing because of all of the issues highlighted above (the difficulties in measurement of corruption, its true economic impact and the policies to adopt in response, and the sincerity with which those policies are pursued) and also because of the connection between corruption in emerging markets and developed markets.

The majority (84%) of illicit financial flows from emerging markets are via fraudulent trade invoicing and, in turn, the majority of this trade is with developed economies. According to Global Financial Integrity, illicit financial flows in 2015-16 were equal to 20-30% of total trade between emerging and developed economies.

Do ESG investors discriminate against emerging markets because these markets typically score more poorly in third-party measures of corruption? If most of the gains from this corruption are destined for developed markets then this discrimination is perhaps without merit. Indeed, if a material share of illicit financial flows end up in offshore financial centres then how meaningful are indices of corruption where the governments regulating those offshore centres score so highly (eg Singapore, Switzerland, UK)?

To demonstrate the point, a revisit of the tragi-comedy of the London Anti-Corruption Summit in 2016, hosted by then UK Prime Minister David Cameron, is in order. Summarised in the quotes below are the diplomatic gaffe by Cameron and the response of attending Nigerian officials, including President Muhammadu Buhari, which alluded to the duplicity of financial institutions and real estate owners in developed markets which act as conduits and recipients of illicit financial flows.

“We have got the Nigerians – actually we have got some leaders of some fantastically corrupt countries coming to Britain.” David Cameron, Prime Minster of the UK in conversation with Queen Elizabeth II (May 2016)

“We need an international anti-corruption infrastructure that can monitor trace and facilitate the return of assets to the countries of origin. The repatriation of proven stolen assets should be done without delay or precondition.” Muhammadu Buhari, President of Nigeria (May 2016)

“It takes two to tango. The problem of this country [UK] is in receiving stolen assets, ill-gotten money, and keeping it here, and telling our country that they’re not doing the right thing is not the way to solve the problem.” Chukwuka Utazi, Senator and Chair of Nigeria Parliamentary Committee on Financial Crimes and Corruption (May 2016)

Read more
Strategy Note / Global

Tourism: 'Staycation' buffer for some (India) more than others (Iceland) in EM

  • To avoid the risk of a quarantine on arrival or on return and with jobs more risky staycations likely become more common
  • Defensive (high domestic, low international tourism contribution to GDP): eg China, India, Philippines, Mexico
  • Vulnerable: eg Croatia, Georgia, Jamaica, Iceland, Mauritius, Maldives, Thailand, Turkey, Saudi, Sri Lanka, Qatar, UAE
Hasnain Malik @
Tellimer Research
8 June 2020

I am thankful because I am still in a job and my family and I are healthy. But, after publishing over a hundred reports in the first five months of the year and spending the last three months cooped with the family, I (we) would like a vacation (hopefully, not from each other).

The risk of an overseas vacation is that we are forced into quarantine either on arrival or on return should we contract Covid-19 or venture to a country where policy is focused on lifting lockdowns, rather than minimising infections (see Death by Covid-19 or starvation: Your Hobbesian Hobson’s choice in poorer EM). This is irrespective of whether tests are offered on arrival (as in Iceland), even if those tests are subsidised. The desire to avoid quarantine as well as the concern that future income has become more uncertain is pointing us towards a 'staycation'.

One of the first reports I wrote on Covid-19 was, in what seems an eternity ago, at the end of January. It discussed the signal for the global tourism industry from the first case of the virus announced in the UAE. (There are now almost 40,000 cases and 276 deaths in a population of about 10mn, the infection curve has not flattened but lockdowns are being lifted, albeit with continuing restrictions on occupancy levels, safety requirements and prohibited in-country travel for all but essential workers into and out of the capital, Abu Dhabi). Below, we extend that analysis, which concentrated on GDP contribution from all tourism, to differentiate exposure to domestic and international tourism.

Exposure to more resilient domestic tourism versus more vulnerable international segment

We segment emerging markets into two categories:

1) Defensive – high domestic tourism contribution (over 5%) to GDP and* low international contribution (under 5%):

  • Africa: Ivory Coast

  • Asia: China, India, the Philippines

  • Wider Europe: none

  • LatAm and Caribbean: Argentina, Mexico, Peru

  • Middle East: none

2) Vulnerable – low domestic tourism contribution (under 5%) to GDP and high international contribution (over 5%):

  • Africa: Botswana, Egypt, Morocco, Mauritius, Tanzania

  • Asia: Maldives, Sri Lanka, Thailand

  • Wider Europe: Bulgaria, Croatia, Estonia, Georgia, Iceland, Slovenia, Turkey

  • LatAm and Caribbean: Barbados, Costa Rica, Jamaica, Panama, Uruguay

  • Middle East: Jordan, Lebanon, Qatar, Saudi, the UAE

If the thesis is that domestic tourism should be more resilient than international tourism, then it is not sufficient to list countries with a high contribution to GDP from domestic tourism because they may suffer much more from the drop in demand from the larger international segment.

Of course, domestic and international tourists are not substitutes

Of course, from an economic growth and balance of payments perspective, domestic 'staycationers' are a poor substitute for visitors from overseas. Typically, their trips are shorter in length, they spend less and they spend almost entirely in local currency.

For example, in the US and Australia, international visitors spend 6x and 7.5x more than domestic tourists. In Vietnam, the average daily spend of international visitors is twice that of domestic travelers. Furthermore, the buffer from what should be more resilient domestic demand is tempered by the restrictions on supply (ie occupancy limits well below maximum as hotels, restaurants and tourist attractions re-open).

Nevertheless, until the world has put Covid-19 behind it, it is better to have the domestic tourist segment than not.

Regional charts comparing domestic and international tourism contribution to GDP

Read more
Strategy Note / Global

China challengers in manufacturing with low cost labour (in one chart)

  • For manufacturing activities not easily replaced by automation or 3D printing, which countries win share from China?
  • Low wages and scale matter most in this segment: We plot wage curve up to China in countries with over 40mn population
  • Labour flexibility, logistics, tariffs, competitive currency, ethics obviously matter as well for manufacturing location
Hasnain Malik @
Tellimer Research
13 July 2020

Related reading

China manufacturing is irreplaceable but India and other Asians can win share

China devaluation another US-China friction and a risk for rival exporters

Read more

3 articles remaining this month. It's free and easy to sign up.