The “fragile five” of the emerging countries have been at the centre of attention for EM investors since last summer, predominantly because of their weak external position relative to other emerging economies. The concept of export performance, which estimates exports growth relative to foreign demand in volume terms and is also used as proxy for export market shares (in a global, zero-sum world), may shed some light on the prospects for these countries on the fundamental subject of their fragility.
As in most emerging markets, export performance in the fragile five has risen in general in the last decade. To understand what drives a change in global market shares, one should examine the components of the index. Export performance is directly influenced by two factors: export volumes and their attractiveness, measured by demand from foreign markets (an aggregate index of the export markets).
Specifically, when export volumes exceed expected demand from abroad, the exporter’s relative market share increases. If supply is not rising fast enough, performance declines.
Despite an overall increase in export performance in the fragile five, the individual stories are quite different. While the total increase is driven by Asia, primarily India, performance was nearly unchanged in Turkey and actually declined in Brazil and South Africa. A look at the components explains why: export volumes in India have risen far more steadily than in the other countries during the recovery and are expected to remain very strong for a while.
India enjoys particularly strong export performance also because demand from abroad has been relatively more muted. In Indonesia, the strong recovery in export volume (until two years ago) was accompanied by a solid rise in demand, which was dominated by Asia, while in Brazil, the strong foreign demand has consistently surpassed local production, which explains the decline in performance.
In South Africa, export volumes have declined in the past few years, due to a strong negative effect from terms of trade (driven by the unique structure of the country’s export basket, which is concentrated in basic metals). Turkey is an interesting case: export markets’ demand has risen the least, likely due to the very large dependence on orders from the euro area (38% of its export market). Turkey’s export market composition is in general the least diversified, with nearly 70% captured by the euro area and MENA relative to the other four.
Typically, there is a strong relationship between export market shares and export competitiveness, measured by REER. Indeed, REER was found significant in explaining changes in export performance for Brazil, India and Indonesia, albeit not necessarily in Turkey and South Africa. Since 2006, the REER in the fragile five has been on a downward trajectory (on average), apart from a short episode in the post-financial crisis period, a supportive environment for increasing export market shares.
The depreciation trend in the fragile five REER since 2011 has been associated with a correction in the import/export volume ratio, especially during 2013, although the connectivity has somewhat decreased relative to before 2011. The very recent price adjustment has not affected the correction process in the ratio of imports to exports volumes as of yet, but it may provide some indication of an upcoming slowdown of this process.
Export performance in the fragile five is expected to continue improving this year. What could this potentially mean for these countries? A simple regression model we developed for each of the five explains more than 30% (and up to 80% in Brazil) of the changes in current accounts (% of GDP), using a combination of export performance and foreign demand. Using our economists’ projections of import and export volumes throughout 2015, which are key inputs in our export performance projections, we extract model predictions for current accounts.
The recent improvement in Asia and South Africa should prove sustainable, while in Brazil, we expect it gradually to lose steam over the next two years. In Turkey, solely based on the export performance analysis, the current account seems likely to deteriorate. However, other factors influencing the trade environment, which are not directly addressed by the model presented here, are expected to take place; the improvement in the outlook of Turkey’s main trading partners, combined with reduced domestic demand, should help narrow the trade deficit.
In South Africa, while exports are not expected to surge, our economists look for import compression to advance the rebalancing process further. A more supportive environment for export volumes growth (for the most part), as predicted by the overall improvement in export performance, unsurprisingly supports a better current accounts outlook, which should, ceteris paribus, provide additional tailwind to the already supportive carry environment. These seem particularly attractive for EM in general, despite the recent price adjustment, and the fragile five are no exception