Is MIST the next BRIC?

Author: Danielle Myles | Published: 25 Sep 2012
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Question: Is MIST worthy of the hype?
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.

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 partner.

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 market."

Two barometers

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 growth.

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 best."

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 world away.

"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.