The Economic M3: More Than Just Alliteration

Mongolia, Mozambique, and Myanmar share much in common. All possess enormous untapped natural resources, experienced recent turns from communism to democracy, border at least one nation belonging to the BRIC (Brazil, Russia, India, China) or CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) economic blocs, and currently demonstrate remarkable economic growth. M3, as investors are calling the alliterative trifecta, is quickly becoming the next emerging market cluster. Mongolian-based Silk Road Management, which coined “M3” in 2012, established the first fund ever to be focused on Mongolia, Myanmar, and Mozambique, aiming to profit from these three “resource-rich frontier markets” with legitimate optimism.

Each country has enormous potential to mine itself into prosperity. Mongolia is home to 10 percent of global coal reserves and ranks twelfth in the world’s holdings of proven copper. In total, the country may possess roughly $1 trillion of untapped minerals, earning the moniker “Minegolia.” This $1 trillion would account for over 30 percent of gross domestic output in the foreseeable future. Mozambique has significant amounts of aluminum and coal as well as $400 billion worth of natural gas deposits. Its national currency, the metical, was the best performing currency in 2012, as foreign direct investment hit a record $5.2 billion, of which 83 percent went into gas and mining. Finally, Myanmar—a mineral repository—annually exports $1.75 billion in jade and provides 90 percent of the world’s ruby supply. It further accounts for 80 percent of the world’s teak wood and reportedly has 23 trillion cubic feet of natural gas.

Given the numbers, it is easy to be optimistic about the M3’s future market performance. Mongolia’s economy is expected to top 12 percent annual growth in 2013, according to the IMF, while Mozambique and Myanmar are forecasted at 7 percent and 6.7 percent, respectively. Silk Road Management claims that all three will be among the world’s top five fastest growing countries in the next decade.

Of course, prudence is needed to avoid overhyping yet another economic bloc. In the early 2000’s, Goldman Sachs’s Jim O’Neill broadcasted the rise of BRIC, which he now admits has become little more than the big “C” due to Chinese growth. Then in 2010 came HSBC’s CIVETS. Despite great publicity, the CIVETS fund ultimately closed in July of this year; however, the following graph clearly shows M3 is outshining yesterday’s acronyms.

Graph

The graph, compiled from World Bank data, illustrates M3’s annual GDP growth rate as more than double that of the BRIC and CIVETS groupings. Political turmoil in Egypt and Turkey, combined with current account balance issues in Indonesia, India, and Vietnam, has lowered the CIVETS’s 2013 growth to 4 percent on average. BRIC countries are seeing a slowdown of commodity windfalls, especially for Brazil and Russia, while China and India are attempting to pivot to internal, consumption-based growth. BRIC growth will average slightly over 4 percent in 2013, while the M3 collectively may achieve a blistering 9.5 percent. Yet the real challenge for all M3 countries will be equitably profiting from their assets with only nascent democracies in place.

Mozambique, Mongolia, and Myanmar are all leaving behind somber histories of communism and civil war. Mozambique’s fifteen-year civil war between the Marxist FRELIMO regime and anti-communist RENAMO rebels left nearly 1 million dead between 1977 and 1992. Recent saber-rattling between these two forces further threatens to upend the brokered peace and economic growth. Myanmar (formerly Burma) experienced a similar battle with the Soviet-inspired military junta for 50 years. While free elections and the release of activist Aung San Suu Kyi in 2010 have turned a page in Myanmar’s history, tension still permeates the country’s Muslim and Buddhist communities. Mongolia also had its share of communist troubles. In spite of its 1990 democratic revolution, the Stalin-Choibalsan purges that cost 30,000 lives have certainly left an indelible mark on the country.

It is clear that the M3 nations face a lot of political headwind. No country is fully able to sever itself from a bloody history without residual effects, and Mozambique, Mongolia, and Myanmar face additional populist sentiments and growing pains that could derail economic progress. Their heavy dependence on resource exports, especially to China, is susceptible to a decline in global commodity demand. Inflation, the curse of most resource-based economies, is especially rampant in Mongolia and Mozambique, inciting political attempts to ameliorate the higher costs through large government redistributions. Private investment contracts for minerals have also been put on hold, canceled, or renegotiated in each country. Hoping to squeeze out additional foreign funds, government overreach has dampened investor enthusiasm across the M3.

It may be too early to tell if the M3 will become high-performance economies like the Asian Tigers or simply be another overly optimistic agglomeration of letters. Uncertainty in terms of political stability and rule of law makes these three countries questionable investment choices, but profits may indeed arise if investors can tolerate some hefty risk.