Frontier Markets: Old Acquaintances, New Opportunities

September 13, 2013 • GLOBAL ECONOMY, EMERGING TRENDS, Frontier Markets, Editor’s Choice, Top Investment Destinations, Unprotected Post

By Tomás Guerrero

The emergence of frontier markets is consolidating South-South relations and speeding up the global economic rebalance. Below, Tomás Guerrero describes how, to ensure long-term growth, driven by the combination of abundant natural resources and low labor costs, this set of countries have begun to put in place mechanisms to solve the difficult equation that will be presented in a few decades: the sum of finite recourses plus a demographic boom.

The economic deceleration process that the BRICS are experiencing is the result of the stagnation of advanced economies and the absence of internal reforms that would liberalise the capital markets of these countries. However, this deceleration has helped to discover a set of countries growing near to 10% year-on-year and whose past we are familiar with.1

They constitute the so-called frontier markets. They are countries driven by the combination of abundant natural resources and low labour costs, which are catching the attention and interest of large investors. This can be seen in the following recent facts:

a) MSCI Frontier Market index has risen 13.31% in the first five months of the year, which implies the best beginning since this index was created five years ago. On the contrary, MSCI Emerging Market index has dropped 4.4% for the same period.2
b) Equity funds that specialise in investment and management of the frontier markets’ assets hit a new investment record last May: 2.27 billion dollars.3
c) Up to April 2013, funds classified as frontier funds have received an entry of assets close to 20% as compared with the 8% of the funds known as emergent.4 

There are some who believe that frontier markets only represent an option to diversify large portfolios due to the low correlation of the economies of these markets with the economies of advanced and developing countries.5 However, there are some emerging voices that suggest making  better use of the excellent industrial and trade opportunities that these markets represent.

Frontier markets are countries driven by the combination of abundant natural resources and low labour costs, which are catching the attention and interest of large investors.

Under the name of frontier markets we find a set of heterogeneous countries that, up to a decade ago, were characterised by their instability, limited access and low liquidity. Nowadays, after having experienced a notorious improvement in their fundamentals6and not without risks, these countries are starting to consolidate as a real alternative to developing economies in terms of direct foreign investment. Some of this year’s most profitable markets can be found among these countries such as Vietnam, Nigeria or the UAE.

Three of the most relevant economic phenomena that are taking place in these markets are analysed below so as to conclude with a reflection on the opportunities that these ‘old acquaintances’ represent for the economy of old-Europe and its companies.


Demographic Dividend?

One of the factors that makes us feel optimistic about the frontier markets’ economic future is the demographic factor. Frontier markets are experiencing an unprecedented demographic boom, and its projections, recently published by the United Nations Population Division, describe a hopeful horizon for this set of countries in the next 90 years. For the BRICS, the demographic estimations presented by the United Nations foresee a sustained demographic growth until the year 2050.7 From this year on, a slow descent will begin until reaching, in 2100, similar figures to the ones they have nowadays. However, this does not mean that they will not keep being the most populated set of countries of the planet. China’s one-child policy8 will reduce dramatically its labour force and only India, with more than 1,500 million people, and South Africa, with more than 64 million, will have a positive demographic balance by the year 2100 with respect to the actual figures.

For developed economies, the outlook is even worse. Predictions for the year 2100 show a strong demographic drop in most of the advanced economies, except for the US, France and the UK. These three countries will experience population growth due to the arrival of immigrants from their former colonies –mainly frontier markets– and the high birth rate of different immigrant communities previously settled there. Moreover, the progressive population ageing will increase the dependency rate of these economies, decreasing the percentage of the productive population9 and increasing the proportion of this population using resources without contributing to generate them. In Europe, this ratio will reach a figure close to 76% by the year 2055 which will seriously damage the sustainability of one of the hallmarks of the European project: the Welfare State.

These countries are starting to consolidate as a real alternative to developing economies in terms of direct foreign investment. Some of this year’s most profitable markets can be found among these countries such as Vietnam, Nigeria or the UAE.

The United Nations’ predictions for the frontier markets totally differ from the predictions considered up to now and they manifest the enormous potential of this heterogeneous set of countries. In 2100, the frontier markets’ population will double the present –exceeding 2,000 million people– and will overtake the OECD’s countries populations by 500 million. This demographic boom will be led by the development of both Asian and African frontier markets. On one hand, as an example of the Asian development, there is Pakistan that will by the year 2100 have become the seventh biggest country of the world, with 236 million people. On the other hand, in 2100 with a population of 1,000 million people, Nigeria will not only surpass the population of the whole European continent but it will also become the third most populated country after India and China. Some other countries such as Zambia, with 124 million in 2100, Bangladesh, with 182 million, or Kenya with 160 million, will also play a decisive part.

This demographic growth represents both an opportunity and a challenge for frontier markets. It is an opportunity because the high demographic-growth rate can be seen as a demographic dividend, that is, labour force10 could have a higher growing pace than the population depending on this labour force and, then, the economic resources invested in the country’s development would be released. Furthermore, increase of labour force and market consumers may seem attractive for multinationals from developed and developing economies and it may also help stimulate the arrival of companies which would help diversify and modernise the productive network of these countries.

However, this phenomenon also represents an important challenge for frontier markets. The demographic boom offers the possibility of economic improvement but does not assure it.  The rise of competition regarding resources and the demand of more and better social services and institutions may drift into new social conflicts or even the recrudescence of the existing ones and, hence, an intensification in political instability which may hamper economic development.

Will the governors of these countries be able to manage all tensions derived from demographic growth? Will they be able to make it profitable? It seems so, up to now.

In 2100, the frontier markets’ population will double the present – exceeding 2,000 million people – and will overtake the OECD’s countries populations by 500 million.

Fleeing from the curse: Frontier Markets’ Sovereign Wealth Funds

Frontier markets are countries with an abundance of natural resources. Estimations indicate that, at present, these countries gather 41% of the world’s oil reserves and 26% of the natural gas reserves as well as a high percentage of the world’s metal reserves such as gold or copper. As a result, the exploitation of these resources –favoured by the upward tendency of the commodity prices– has become the economic driving force of these countries.

Countries with strong natural resource supplies theoretically have an advantage when it comes to fast economic growth. This could be due to their ability to use the obtained income to set up the moderniser ‘Big Push’. But an excessive dependency on natural resources –which is currently yielding great results to frontier markets11–, severely endangers the economic growth of these countries in the long term.

In order to reduce the exposure to the commodities boom and to avoid all the problems derived from the so-called ‘abundance paradox’, frontier markets have already begun to hoard sovereign wealth funds. The aim is to develop an inter-generational model which will allow future generations to enjoy the benefits that the, now abundant, raw materials are giving to present-day generations.

The main five objectives that the governments of the frontier market’s countries are trying to pursue with these state investment tools –whose risk-tolerance is higher than the traditional Central Banks’– are:

a) To obtain long-term profits from current account surpluses arising from the exploitation of natural resources.

b) To reduce inflationary pressure stemming from the budget surplus.

c) To avoid the effects of the so-called ‘Dutch disease’, the loss of competitiveness of other sectors in the economy (with respect to the extractive export industries) as a result of the appreciation of the national currency.

d) To diversify and restructure the country’s economy, investing in high-tech industry and knowledge-intensive services.

e) To develop a model of inter-generational solidarity that allows the generations to come to enjoy the wealth that finite natural resources are bringing to present-day generations.

Frontier markets have already begun to hoard sovereign wealth funds.The aim is to develop an inter-generational model which will allow future generations to enjoy the benefits that the, now abundant, raw materials are giving to present-day generations.

On the basis of the Capapé & Guerrero (2013)12 analysis of the nature and definitions of sovereign wealth funds 13 (which would exclude funds controlled by the Central Bank –such as the Botswana Pula Fund–, funds that restrict their investments to national markets –such as the Investment Corporation of Dubai–, funds used as stabilisation funds –such as the Ghana Stabilisation Fund–, and public companies with large investment portfolios –such as Sonangol), frontier markets are home to 19 sovereign wealth funds that manage assets worth over 1 trillion dollars.14

Sovereign wealth funds implementation does not guarantee a better management of the profits made out of the exploitation of natural resources. This improvement can only be achieved by the design of a good corporate government –isolating the activity of the fund from opportunistic decisions– and by providing the institution with first-class experts and practices. Success or failure of the frontier markets’ funds will depend on the implementation of these recommendations and the ones gathered in Principios de Santiago.15It will also determine the possibility of a continuous economic growth of these countries in the long term.


Frontier Markets as Tech Hubs

Along with the conformation and setting up of the sovereign wealth funds, frontier markets have already started to display a series of investments focused to motivate and promote the development of innovation and technology sectors.

In this process, two frontier markets (one from Africa and another one from the Middle East) appear to have taken the lead.16


Kenya: From iHub to Silicon Savannah

A little over two years ago, and thanks to funding by Hivos and Omidyar Network, we saw the rise in Nairobi of what would be the first tech hub in Kenya: iHub. Since that moment, iHub, which started out offering free internet access and specialist forums for entrepreneurs, has been expanding continuously, becoming a benchmark for tech hubs in Africa; it has more than 10,000 members, over 150 incubated companies, and the backing of multinationals such as Intel, Google and Samsung.

iHub, which started out offering free internet access and specialist forums for entrepreneurs in Kenya, has become a benchmark for tech hubs in Africa.

iHub turned out to be just the beginning of things to come. Nevertheless, as a result of its creation, a series of publicly and privately funded areas were set up with the aim of deepening Kenya’s commitment to upgrade its production sector. Due to this public-private cooperation, several successful projects were released, such as the startup incubator, NaiLab, and the research and entrepreneurship institute, @ilabAfrica –inaugurated in 2011– followed by the startup accelerator, 88mph –in 2012– and the proposal to build a technology city which has been dubbed Africa’s Silicon Valley: Silicon Savannah.

This tech-city project, planned to be carried out in four phases –the last of which is expected to be completed in 2030– will be built on a 2,000-hectare site in the city of Konza (a settlement 160 km from Nairobi). In order to do so, almost $14,500 million will be mobilised (from which only 5% will be provided by the government led by President Mwai Kibaki). The Kenyan government hopes that this ambitious project will make the country become a benchmark for the production and distribution of technological components in Africa, creating two hundred thousand jobs in the ICT sector, and positioning Kenya as a tech hub of world renown.


Jordan: Making a Virtue out of Necessity

Not only was the Arab Spring, which brought about the downfall of the vast majority of Maghreb’s dictators, the result of the citizens’ revolution, but it was also the triumph of a revolution that had begun years before which silently paved the way for the wave of protests to spread at breakneck speed: the technological revolution.

If it was basically private initiatives what had promoted and provided funding for the construction of the centres in Kenya, in Jordan it was the institutions of the Hashemite Kingdom who decided to transform their capital, Amman, into a benchmark tech hub for the Arab world and, therefore, into the main Pan-Arab competitor of Israel’s tech hub, Silicon Wadi.

One might think that the technology epicentre of the Arab world would be a city like Doha, Riyadh or Abu Dhabi as they are the catalysts of the progress in the Middle East and the main magnets for FDI. However, it was the decisions made by Jordan’s King Abdullah II to re-launch the country’s economy –characterised by its lack of natural resources and strong energy dependence– what positioned Jordan as the tech hub of the Arab countries.

As it seems, these decisions are succeeding: the latest International Telecommunication Union data indicate that Jordan currently hosts three quarters of all Arabic content online. Moreover, the Queen Rania Center for Entrepreneurship (QRCE) –launched in 2004– and the startup accelerator Oasis500 –launched in 2010 and located on a site that was built to be the headquarters of the Jordanian Army– indicate that Yahoo’s acquisition of the Jordan-based startup, Maktoob, for $80 million is unlikely to be the last.

To get more and better use of the amazing business opportunities that these countries offer, many of the European Union countries have a privileged starting line.

A Chance for Europe

The dimension of the three described phenomena illustrates the enormous potential of frontier markets and invites the definition of a strategy to get more and better use of the amazing business opportunities that these countries offer.

To that end, many of the European Union countries have a privileged starting line with respect to the rest of the developed and developing economies. There are trade connections that were established decades ago with many of the, now known as, frontier markets and with some others which will soon become frontier markets too, such as Angola or Cambodia. These connections imply that countries like France, Spain or the United Kingdom continue to be the natural gateway for some frontier markets’ FDI to western economies in general and to European economies in particular.

Therefore, one of the main aims of these European Countries is strengthening bonds with these ‘old acquaintances’ so as to ease the arrival of new investments. The current European asset devaluation represents a great opportunity for large emerging companies from these countries –such as Dangote in Nigeria or Etisalat in UAE–, state-owned enterprises and SWFs to invest into leading companies, establish themselves into the old continent17 and get access to the know-how of these companies. And vice-versa, that is, it represents a great opportunity for European companies too. The outlook of economic growth and the consolidation of large markets with increasing middle-class rates offer an ideal scenario for the establishment of European enterprises. They would compensate the consumption drop that many domestic markets are experiencing and it would allow them to obtain excellent returns in the short, the medium and the long term.

The empowerment of these relations will be an advantage for both sides: on one hand, frontier markets will continue to develop and improve their citizens’ welfare and, on the other hand, European markets will benefit from economic growth and employment creation.

Frontier Markets are the real alternative to Emerging Markets. Shall we take advantage of them?

About the Author

Tomás Guerrero is Researcher at ESADEgeo-Center of Global Economy and Geopolitics of ESADE Business School, specializing in frontier markets, sovereign wealth funds and entrepreneurship.


1. Many of the countries known as frontier markets keep a close economic, politic and social relation with the European countries from whom they depended when they were colonies.

2. MSCI, 2013.

3. Citi, 2013.|

4. Schroders, 2013.

5. Frontier markets present a lower correlation with advanced economies than developing markets: 0.48 vs. 0.74 (Bloomberg Database, 2013).

6. Nowadays, frontier markets are a synonym of equilibrated fiscal balance and of low debt, in both public and private sector with levels lower to 50% (approx.) of GDP and even lower for the OECD, respectively.

7. Near the figure of 3,500 million people.

8. The one-child policy promoted by the Chinese Government will be decisive in the demographic drop that China will begin to experience from the year 2040 approximately.

9. International Organizations define productive population as the part of the population that is between 15 and 64 years-old. (United Nations, 2013).

10. In 2050, Africa will have the highest percentage of labour force (>65%) overcoming Asia (<65%) and Europe (<55%). (Boston Consulting Group, 2013).

11. The countries with the highest-level of development are frontier markets. This is inferred in several updates of IMF’s World Economic Outlook.

12. Capapé, J., & Guerrero, T. (2013). More layers than an onion: Looking for a definition of Sovereign Wealth Fund. The Fletcher School Network for Sovereign Wealth and Global Capital Working Paper, Tufts University, Boston, MA, (forthcoming Summer Bulletin, August 2013).

13. The five criteria needed for a sovereign wealth fund to be considered as such are: a) owned exclusively by a sovereign government; b) comply with the characteristics of an investment fund, not to those of a state-owned company; c) invest nationally and internationally in risk assets; d) investment seeking commercial returns; e) it is not a pension fund with regular cash outflows.

14. 2013 Sovereign Wealth Funds Report, Invest in Spain/ICEX, KPMG and ESADE Business School, (forthcoming, September 2013).

15. Generally Accepted Principles and Practices (GAPP)—Santiago Principles

16. See Guerrero, T. (2013) Frontiers Markets: A World of Opportunities. ESADEgeo Position Paper Nº30.
17. For Spain see Santiso, J. (2013). The Decade of the Multilatinas. Cambridge University Press.


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