Citigroup looks to bury the BRIC and N-11 labels in a recent research piece that indentifies rather ‘3G countries’, i.e. those currently holding the most promise as ‘global growth generators’ over the next four decades.  To this end, Brazil, Russia and South Africa among others get bumped to tier 2 status while eleven others are more elevated per the weighted index of six growth drivers (domestic savings/investment, demographics, health, institutions and policy, and trade openness), a testament in part admittedly to just how low a real per capita GDP base they currently sit at.  To that end, the authors reiterate, “it is possible to have high growth without high returns to investment and high returns to investment without high growth.”

“Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam are our 3G countries.  All of these countries are poor today and have decades of catch-up growth to look forward to.  Some of them (Nigeria, Mongolia, Iraq and Indonesia) also have large natural resource endowments that we hope will be more beneficial than they so often have been in the past. Iraq is recovering from numerous wars.  All but China have favourable demographics.”

Mongolia, for one, is seemingly everyone’s favorite emerging market du jour (or even, in fact, “the only game in town”) given its vast and untapped reserves of raw materials coupled with China’s insatiable appetite and proximity, as well as the MSE’s 121 percent rise in local currency terms in 2010 (the world’s top performer is also up 95.6% YTD in 2011).  Moreover, the recent LSE pact may not only create added liquidity–the FT noted in January that ‘in Ulan Bator, traders are already buzzing about the idea of a 24-hour exchange linked with London traders that could boost liquidity in the market’–but, per Eurasia Capital, also form the foundation for the further and much-needed development of domestic capital markets.  Said development can’t come soon enough according to some pundits.  Bloomberg noted Friday that the tugrik (MNT, pictured) has gained 15.4 percent against the dollar since Jan. 1 last year and 19.2 percent versus the euro, testament to the fact that the “art” of managing currency flows, per central bank Deputy Gov. N. Zoljargal, has [hitherto] been a study in futility.  As the MNT broke the 1300 level last year, for example, interventions lead to continued appreciation.  Eurasia notes, that 40% of foreign exchange holdings (which have increased 250x in the past 12 months) in the banking system are short-term deposits that are seeking to ‘benefit from short-term fluctuations [appreciation]’ of MNT.  This type of short-term investments is raising concerns over the stability of the banking sector when such deposits are withdrawn by the clients.”  A further catalyst comes from fiscal expansion: last year the World Bank warned that the 2011 budget’s “steep increase in government spending, together with a sharp rise in the fiscal deficit to 9.9% of GDP” would compound “existing inflationary pressures from the economic rebound and lack of spare capacity in the economy” and ultimately “add 15% inflation on top of existing inflation of around 10%, which may undermine confidence in the currency.”

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