Economic frontiers are nations that are developing but are only now attracting investment capital. Investment capital may have been slowed due to political constraints, such as former Soviet republics that did not allow foreign investing until the early 1990s. Other economic frontiers did not have the institutions that investors could rely upon, whether this was due to a corrupt government or simply a lack of banking infrastructure beyond the local money lender.
Frontier markets are seeing strong growth despite the global economic slow down. Nations like Croatia are growing as their citizens continue to increase their consumptions in an effort to catch up with the traditional members of the European Union. Frontier markets are also growing as local investing opportunities expand. Small businesses learn formal accounting rules, banks adopt investment banking and laws adapt to a global market. Investors, be they wealthy individuals or banks, can now invest in businesses and create investment funds. The shift from government guaranteed pensions to private savings and investment for retirement further fuels investment growth, as money that was confiscated by the government goes into the market and grows private businesses instead. Pension plans that relied upon money in to make payments to pensioners now invest in the stock market and in productive assets, improving returns for retirees while helping the private sector grow.
Investing in frontier markets does pose challenges. There are few investments for the available funds, since few businesses have the necessary level of financial reporting and transparency for investors. Laws can also hinder investment options for outsiders. For example, Croatia’s large pension fund Raiffeisenbank Austria PLC Zagreb contains 31% of the nation’s market and holds over one and a half billion Euros in assets. Yet Croatian law limits 80% of its holdings to Croatia, limiting its ability to invest outside of Croatia. It is also hindered by Croatian law mandating that half of its assets be government bonds; this archaic requirement can be considered a stealth tax, forcing investors to give the Croatian government part of their money and subsidize the government’s debt.
Raiffeisenbank Austria PLC Zagreb or RMPF can invest up to 20% of its holdings in developed nations, but it is further hobbled by the legal guarantees it must keep with its investors. This forces the investment group to remain conservative while it creatively finds ways to guarantee returns even in bad years. The RMPF must search for investment opportunities outside of the few conventional company stocks on the Croatian market to avoid driving up the price of the few shares on the market.
RMPF has managed to return an average return of four to five percent per year, only suffering losses in 2008, the height of the economic downturn. This are impressive returns for an investment fund facing serious limitations due to national law and a global recession that has yet to loosen its grip on the EU.
Other frontier markets continue to register growth as their economies mature, new investment opportunities are created, local populations start to invest and developing nations continue to grow in response to local demand instead of focusing on exports. Investing news reports will show that the frontier markets in the developing world will continue to grow even as the developed world suffers its malaise and debt deleveraging.
