In spite of Mexico-US tensions, I expect further growth of the country's economy, which will be provided by increasing industrial production. The Mexican peso's depreciation will push the external demand for Mexican products, which in turn will make a positive impact on local manufacturing production and exports. Also mining production will continue to support total industrial production growth, as well as construction activity will continue to expand. In sum, my positive outlook on Mexico's economy reflects sustainable growth in the mid-term.
After rapid increase in real GDP at the end of 2017 (+3.3% in 2016 vs +7.3% in 2017), supported by government stimulus measures and credit guarantees, as well as political pressure on banks to provide a loans and improved export competitiveness, I expect that in 2018 the Turkey's economic growth will slow down to 4%. This slowdown will reflect the impact of tax boost, higher interest rates, tightening of global liquidity against the backdrop of weaker Turkish Lira, increased inherent instability and higher inflation. As a result all planned government measures to increase employment and investment, will be fully blocked by these negative factors. In addition, foreign capital inflows will be offset by political instability in line with the transition to a presidential system of government, domestic financial vulnerability and lower interest rate in comparison with the developed economies.
In near-term perspective, I assume Vietnam will continue to benefit from economy growth driven by export growth, inflows of foreign direct investment and high level of labor force (coupled with low unemployment rate). Real weakening of Vietnam's Dong (due to lower nominal rate and lower inflation) is additional support for export growth. Nevertheless, I assume that there are risks that worth to be noted: 1) Export: (a) low diversification (20% of all Vietnam's export is Samsung's Vietnam-based manufacturing plants), (b) threat of protectionism and declining of global trade. 2) Public debt rapid growth (~65% of GDP). Planned measures to lower the growth rate of public debt will lead to lower lower government spending (particularly, on infrastructure projects). 3) Private debt rapid growth. In long-term perspectives there is a risk of worsening situation in banking system (current level of bad debts ~5%). 4) Demographic: rapidly aging population (therefore, there is a need to implement a long-term program for productivity increasing)
Relations with the US, Mexico's dominant trade and investment partner, will continue to be foreign-policy priority for the country. I think that tension will persist, due to Donald Trump's determination to build a border wall and tighten restrictions on immigration, as well as his rigid position on trade. In addition, I see continuous risk in NAFTA negotiations, which are accompanied by disagreements. In my view uncertainty over NAFTA and Mexico's presidential elections will weaken business and consumer confidence in short-term, resulting in slowdown of capital inflows. Also I don't expect that education and other reforms implemented over the last years will reach their potential, due to weakness of government institutions. Weak public investment, significant dependence on import and high level of poverty (almost 50% of the population) will also impede economic growth. Therefore I have negative outlook for the economic development of Mexico.
My negative outlook on Indonesia's economy reflects the ongoing deficit in merchandise trade balance, which will keep on during 2018-2022. The negative trend of trade balance will be formed by higher commodity prices, as well as Indonesia's strong demand for imported capital goods. The main Indonesia's exports will continue to be natural resources, which will be under pressure due to widening of tariffs on goods imported to the US and possibility of slowdown in China's economic growth. As a result, the trade surplus will not be enough to cover the solid deficit on the primary income account, which I expect to widen to 2022. This also reflects repatriation of funds by foreign firms, as well as an increase in borrowing costs related to Indonesia's large external bond debt, due to higher US interest rates.
I expect further growth of Indonesia's economy, which will be accompanied by real GDP growth of 5.1% per year in 2018-2022. Growth in private consumption will remain strong and especially will be supported by election-related spending in 2019, as populist government measures for supporting household consumption. According to my forecast, the government's efforts to increase the inflow of private investments (domestic and foreign) in infrastructure and manufacturing will ensure capital raising in the mid-term. As a result, gross fixed investment will increase by 5.6% on average in 2018-2022.
In the near-term, I assume that Korean economy will be able to show relatively high growth rate (~3% in 2018-19) as a result of export growth (especially, in semiconductor industry) and fiscal stimulus (through government expenses increasing). In the long term, economic outlook is hazy as it relies on the possibility to solve fundamental economic problems (high level of unemployment, population ageing, high power of large enterprises called chaebol and low level of competitiveness), as well as on external political factors (negative - USA might withdraw from free-trade agreement, positive - possible recovery of relationship with North Korea).
In 2017 foreign investments in Mexico fell due to uncertainty relating to USA commitments to NAFTA. This will result in poor growth of GDP for 2018. This goes together with domestic policy uncertainty remains until presidential election on 1st July 2018. After, I would suggest that we may expect pro-American president thus we may expect positive shifts in policy (mainly renegotiation of NAFTA with the USA). Growth in Mexico seems to be moderately higher in 2019 and 2020, at 2.5-2.7 percent per annum but this year 2018 - poor 1.0% - 1.9%
As emerging economy Turkey offers the best investment case in terms of growth and downside risk in oil-linked shares. Due to positive dynamic in world oil prices as I estimate to be limited to 70 USD per barrel for 2018 year
Turkey offers a good growth potential in terms of GDP for the next two years 2018-2019 with the real rate 5% as a minimum. This is driven by governmental fiscal stimulus and the increase of export. And I read many analysts bet on strong growth dynamics of Turkish economy. Main factors are oil price growth (export), internal consumption strengthening and attraction of new foreign investments, these drivers seem to continue feeding up the economy growth, although the increase might slow down to more moderate levels in mid-term. The growth in internal consumption is also base on the clear reduction dynamic of unemployment rate. Also, many tourists are coming back (e.g. from Russia) which makes businesses to be more optimistic for near future