While the global economic situation remains stormy, British companies are charting a course for new trading partners, as Kathryn Hopkins discovers
As policymakers fail to come up with a solution to the eurozone debt crisis and worries grow over the health of the US economy, UK businesses have to think outside the box and look towards different markets.
British companies would usually turn to the likes of Brazil and China, but as the two emerging market economies show signs of slowing down, it is now more important than ever to consider doing business with less obvious trading partners.
The opening up of markets, such as Mongolia, has presented exciting opportunities for British businesses to capitalise on new markets. The International Monetary Fund (IMF) predicts that the resource-rich country will grow by a staggering 15.7 per cent next year, while Kazakhstan, another nation not short of natural resources, will enjoy growth of 5.7 per cent.
Mongolia’s ten biggest mines contain enough metal and coal to make all of its 2.7 million inhabitants millionaires and US investment bank Goldman Sachs earlier this year placed a bet on the country’s growth potential, taking a 4.8 per cent stake in its oldest bank.
Kazakhstan, meanwhile, holds the Caspian Sea’s largest recoverable oil reserves and produced 1.75 million barrels of oil a day in 2011.
Two other countries – Indonesia and Mexico – are also markets worth considering. The IMF predicted they will see growth of 6.3 per cent and 3.5 per cent respectively next year. Mexico has an impressive network of free trade agreements, while Indonesia has gone through a remarkable transformation from an authoritarian regime to one of the freest societies in South-East Asia.
There are pros and cons of doing business with each of them, however. While there are many opportunities in Mongolia, there are concerns that it is becoming an increasingly difficult place for foreign companies to do business. This summer, its government passed a law to limit foreign investment, which means that deals now need to get special approval.
Joe Blenkinsopp, deputy global head of political risk at XL Group, says while there is value to be had in looking further afield at countries like Mongolia, businesses much keep their wits about them.
“UK companies need to be astute when seeking opportunities in Mongolia,” he says. “Engineering services are required, but companies need to be aware that resource nationalism poses a considerable risk to UK companies operating there. It is essential to have well-structured and defined contracts in place.”
It is now more important than ever to consider doing business with less obvious trading partners
In Kazakhstan, the government’s plans for significant infrastructure development offer key opportunities for UK businesses too, but the country continues to face a number of challenges. These include increasing wealth gaps and a vulnerable banking sector, which was hit hard during the global financial crisis. It has also slid to 120 out of 182 countries in Transparency International’s Corruption Perception Index (CPI), down from 105 in 2010.
There are many opportunities in Indonesia, especially after its government last month signed a bilateral trade and investment agreement with the UK, focusing on the infrastructure, defence and education sectors. The ambition is to double bilateral trade between the UK and Indonesia from just under $3 billion in 2010 to $6 billion in 2015, and UK companies are being encouraged by the British government to look at this market.
However, companies should be aware that there are high rates of informality and some Indonesian companies often start operations without being formally registered. UK Trade & Investment advises British companies to deal only with formally registered businesses and says its team in Jakarta can help to check. It also warns that, while Indonesia rose to 100 in Transparency International’s CPI last year from 110, corruption remains a regular feature of business life.
Elsewhere, Mexico’s economy is driven by oil and gas. It has a large consumer market and a growing middle class, which presents opportunities for British companies.
Its strategic location, between the United States and Latin America, also gives it the potential to act as a springboard into the region. All this, however, is set against a backdrop of the fight against organised crime, drug trafficking and politically motivated violence.
“Mexico is certainly pro-business and this, coupled with an improving legal and investment framework, is promising. However, the trading environment is challenged by drug cartels and criminal activity,” says Mr Blenkinsopp of XL Group.