LONDON, Jan 20 (Reuters) - Frontier market economies have failed to live up to their potential in recent decades, suffering from a sharp slowdown in investment growth while domestic capital markets remained
underdeveloped, the World Bank said on Tuesday.
Examining 56 smaller and riskier emerging economies, the Washington-based lender said in its latest report that average investment growth per person in the 2020s had slowed to 2% — less than half the pace of the previous two decades.
"Excluding a handful of economies that have become investment grade over the past 25 years, frontier markets may well be the biggest disappointment in economic development,” said Indermit Gill, the bank's chief economist.
POPULATION SURGE
Frontier economies are home to a fifth of the world's population but account for just 3.1% of global capital flows and less than 5% of global GDP. Their populations are also expanding rapidly and are expected to increase by 800 million over the next 25 years — more than the rest of the world combined.
Some, such as Rwanda after the 1990s civil war, fast-growing Vietnam and EU members Bulgaria and Romania, have become success stories. But for many others the outlook is gloomy, with economic data and capital flows flashing warning signs.
While frontier markets have made progress in opening their financial systems, domestic currency markets remain underdeveloped, and lending from local banks and financial institutions — crucial for growth — continues to lag more established emerging economies.
Government spending as a share of GDP has risen, but revenues have stayed flat, swelling debt burdens and contributing to a wave of sovereign defaults. Zambia, Ethiopia and Ghana have all defaulted since the pandemic erupted in 2020, all in Africa — a region that hosts more than a third of frontier market economies.
"They need investment, they need, of course, FDI (foreign direct investment), and they need to manage their debt much more effectively given the kind of demographic challenge in many countries," Ayhan Kose, the World Bank's deputy chief economist, told Reuters.
Typical frontier markets now spend about 2.5% of GDP on interest payments — more than emerging markets or other developing economies.
Greater fiscal discipline and pushing ahead with reforms will be key to navigating a backdrop of slower trade growth and weaker commodity prices than 25 years ago, Kose said.
"There was a reform fatigue in some of these economies," said Kose. "You don't see meaningful improvements in institutions, in governance and all of these things add up, and you end up with, you know, much weaker FDI."
(Reporting by Karin Strohecker and Marc Jones. Editing by Mark Potter)
