Jim O'Neill is at it again. Eleven years after creating the
BRIC concept (Brazil, Russia, India and China), the Goldman
Sachs economist has named the MIST nations Mexico,
Indonesia, South Korea and Turkey as the next most
promising emerging markets.
|Question: Is MIST worthy
of the hype?
The numbers are self-evident. MIST represents the four
biggest markets in the bank's N11 equity fund. But are their
investment frameworks and legal regimes advanced enough to
support an influx of foreign investment? To find out,
IFLR polled emerging markets-focussed lawyers with
experience in the MIST countries.
The results reveal a distinction between economists and
lawyers' views on growth markets. As one London partner
concludes: "Lawyers think with a little more common sense."
Respondents agree that Turkey is the most accurate
inclusion. With solid growth since 2003, it has overcome
concerns about government stability and has continued to thrive
through the downturn. "It's been decoupled from the world
economy over the past few years," one respondent says. Bank
regulations were strengthened following the country's liquidity
crisis in 2000, meaning it had financial controls in place when
the global financial crisis hit. This and the recent overhaul
of its Civil Code are examples of the regulatory responsiveness
that will continue Turkey's economic momentum. Importantly,
market participants seem equally receptive to change. "There
are many conglomerates run by their founders, and there is a
lot of interest among these to divest businesses, westernise
their structures and bring in foreign capital," notes a London
The next most worthy inclusion is South Korea. Following the
1997 Asian financial crisis, it opened up to financial (as
opposed to just strategic) investors, and liberalised its
capital market and real estate rules. "It has been doing fairly
well in terms of balancing its historical and natural tendency
to be closed off, and realising it must open itself up to
foreign investment if it wants to continue its growth," says
one former Seoul-based partner. "It has recognised it can't be
the hermit kingdom."
But the legacy of the government repeatedly blocking Lone
Star's sale of Korea Exchange Bank will be felt for some time.
The sale by the US private equity firm was eventually approved,
but its six-year tussle with local tax authorities fuelled the
country's reputation for draconian prosecution of its tax laws.
On the whole though, it earns its place in the acronym. "It and
Turkey are still not necessarily the easiest places to do
business, but they are a little further ahead of the other
two," says a New York partner.
One respondent disagrees with the country's inclusion on the
grounds it is already a first world country. "I think Korea is
on par with Japan in terms of sophistication," according to one
partner. "I think it could be offensive to call it an emerging
Capital markets is an area where Turkey has an edge over
South Korea. "Turkey is a bit unique in that it has a strong
domestic stock exchange," a New York partner says. "South
Korea, and Mexico as well, tend to list overseas."
Importantly, it seems domestic listings volume is one of two
barometers for predicting sustainable economic growth. "To
attract and retain investors, it is important that they are
comfortable enough with the local exchanges even if they
aren't the gold-plate-standard of the money centres," says the
former Seoul partner.
This is particularly true given emerging market businesses
tend to list in one of the major three financial centres. "Some
think the world is continuing to shift, whereby investors will
get used to listings on local exchanges, but that is not
necessarily the case," says a respondent. A buoyant local
exchange is unusual for an emerging market. But it could be the
most important infrastructure for continued economic
Another indicator is the presence of foreign banks and law
firms. "They try to hit the next wave at the beginning of the
cycle," observes one partner. Since South Korea opened to
international law firms twelve months ago, nearly 20 have
opened Seoul offices. Istanbul has around 15 international
firms. Mexico City, on the other hand, has only a handful.
Indonesia has an established exchange, which attracts a good
number of listings. There is some hesitancy over the
enforcement of its corporate governance standards, but
investors are generally comfortable placing their money there.
Taken as a whole, however, the country's investment framework
is not considered advanced enough to be part of the next BRIC.
Projects are still a major driver of the country's growth, and
it needs greater business and financial sophistication.
One respondent describes the country as suffering from
classic emerging market syndrome: "It's a difficult place to do
business because of the social framework, bureaucracy and local
advisors' lack of sophistication. The local law isn't the
However the weakest link in MIST is Mexico. The majority of
foreign operations come from the US and Canada pursuant to the
North American Free Trade Agreement. The perceived high levels
of crime and corruption in the country has kept the rest of the
"Mexico has a good legal system, and some promise, but it is
a real problem child," one respondent says. "Criminality and
corruption has made doing business there extremely unattractive
for foreigners." The vast majority of respondents think Mexico
should be dropped; and there is a clear contender for its
replacement. "I really think Nigeria is missing. It's a major
place for external investment; and not just from an oil and gas
perspective," says one US partner. Other respondents also named
Nigeria as a glaring omission.