Leading emerging markets move rapidly up World Bank’s PPP GDP and FDI confidence rankings

Leading emerging markets move rapidly up World Bank’s PPP GDP and FDI confidence rankings
The leading emerging markets are starting to overtake the leading develop markets in size in adjusted terms, but they are also starting to compete with them on equal terms for foreign direct investment. / Pawel - Creative Commons Attribution-share alike
By Ben Aris in Berlin April 9, 2024

The world’s leading Emerging Markets (EMs) are moving rapidly up the World Bank’s latest GDP rankings in PPP terms (purchase power parity) as well as the annual foreign direct investment (FDI) confidence ranking, according to management consultancy Kearney, and are starting to directly compete with the world’s leading Developed Markets (DMs).

One of the surprises from the new World Bank data is that it predicts Russia, which is currently the fifth largest economy in the world after overtaking Germany last summer, will overtake Japan this year to become the fourth largest economy, worth $5.9 trillion. That will also push Germany down the ranking even further to seventh place, after Indonesia also overtook Germany in size last year. The Asian country was worth $5.1 trillion at the end of 2023.

Half of the world’s largest economies in PPP terms are from the EMs, although they are not expected to start overtaking the DMs in nominal terms until sometime around 2050.

World bank PPP GDP rankings

The United States kept its top spot in the FDI confidence ranking for the twelfth year in a row, according to Kearney, with an index score of 2,340, but it is in second place in terms of PPP GDP; it was worth $23.7 trillion in 2023.

In nominal terms the US is still the world’s largest economy, worth $28 trillion in 2023, vs China’s nominal GDP value of $18.6 trillion, but the gap between them is closing steadily.

Canada comes second in the FDI confidence ranking and has been in the top five for over a decade, but with an economy only worth $2.4 trillion in 2023 its economy is a tenth the size of that of the US.

Of course, out of the EMs China is the star performer and has already overtaken the US in terms of the size of its economy in PPP terms, worth $33.7 trillion in 2023 – a full $10 trillion more than that of the US. However, it also does well on the FDI ranking, coming in third with an index score of 2,210, only just behind that of Canada.

The next four places in the FDI confidence ranking are all G7 members – the UK, Germany, France and Japan, in that order – before the UAE appears in eighth place with a confidence index score of 2,105.

While Western countries dominate the top ten within the FDI ranking, the picture amongst the World Bank’s GDP ranking is much more heavily weighted towards the EMs. While DMs take up eight out of the top ten places in FDI confidence terms, the EMs make up half of the top ten largest economies in the World Bank’s list.

Indeed, there is very little overlap between the two lists. Kearney only has eight EMs in its top 25 FDI list, whereas two thirds (nine from 15) of the World Bank’s list are EMs.

The relatively few countries that appear on both lists include: China, Mexico, Brazil, India, South Korea and the Kingdom of Saudi Arabia (KSA).

But the most striking difference between the rankings is the rate of changes. China’s FDI ranking has jumped up from seventh place to third in the last year, partly due to its ongoing loosening of capital controls; developed markets like Japan and Germany have been falling down the rankings in the last year due to their difficult economic conditions.

But it is in the PPP economy rankings that the changes are most dramatic. The size of the US economy is predicted to grow from $23.7 trillion to $24.2 trillion by the end of 2024, a gain of 17.5% and one of the best performances amongst the DMs. However, all the other DMs in the World Bank’s list are anticipated to put in more measured growth in single digits in the next year, with Japan (3.6%) and Germany (3.9%) being the most anaemic.

The situation with growth amongst the EMs is totally different, as several of them expected to grow by 40-50% in the next year. China will further its lead over the US with a whopping 49.7% growth this year to reach $35.2 trillion. India will grow by an even faster 50.1% to $17.9 trillion. Indonesia is the emerging powerhouse in Southeast Asia and will put in 35.1% year-on-year growth this year to reach $5.4 trillion. And Turkey is another star performer, predicted to grow by a robust 40.8% to reach $3.9 trillion.

“This year's index highlights a strong inclination towards developed markets, which represent 17 out of the top 25, underscoring investors' confidence in these regions. Nonetheless, emerging markets are carving out their niche, with the United Arab Emirates and Saudi Arabia making notable leaps to eighth and fourteenth places respectively,” Kearney said in a note.

The differences between the two lists highlight the fact that things like the rule of law and property rights in all the DMs are much better developed than in the Ems, so investors continue to favour these markets as “safe.”

However, the fact that half a dozen EMs are now ranked high in the FDI list means that their extraordinary growth is also attractive to investors as booming markets. It is also a testament that three decades on after the failure of the socialist experiment, many of these markets have put in sufficient reforms that they are increasingly becoming “safer” to invest into.

Emerging economies, including China, the UAE, Saudi Arabia, India, Brazil, Mexico, Poland and Argentina, dominate the top ranks of the Kearney’s EM index and eight of these EM markets feature in both the EM and DM rankings.

Regionally, the Americas lead with nine markets on the list, followed by Asia-Pacific with seven, the Middle East and Africa with five, and Europe with four in terms of FDI rankings.

Southeast Asia stands out with Thailand, Malaysia, Indonesia and the Philippines all securing spots in the top 15 amongst the EM FDI confidence rankings.

The FDI index also introduces seven newcomers – Poland, ChileRomania, Peru, Hungary, Uruguay and Oman – as more and more EMs make the transition from being “emerging” to “almost emerged”, with plenty of upside still to go.

As bne IntelliNews reported, this is Russian President Vladimir Putin’s big bet on the Global South Century after dramatically breaking off all ties with the West. He is banking on the hope that the fast growing Global South will sustain Russia’s economy going forward and that Moscow can do without the West’s rich markets and high technology.

Investor sentiment remains buoyant, reports Kearney, with a significant 88% planning to ramp up their FDI in the upcoming three years, marking a 6% increase from the previous year. The importance of FDI to corporate profitability and competitiveness is also on the rise, with 89% of investors, up from 86% in 2023, acknowledging its significance over the next triennium.

However, investors are not immune to the rising geopolitical tensions and the threat of wider war in Europe, the Middle East and Southeast Asia, where tensions continue to rise. In addition, the possibility of former US President Donald Trump getting the keys to the White House in November also bodes a return to protectionist trade policies that will also hamper global investments in an increasingly fractured world.

“Despite the prevailing optimism, investors remain wary of potential headwinds, chiefly geopolitical tensions and stricter regulatory frameworks expected to influence investment strategies in 2024,” Kearney said. “A vast majority, 85%, foresee geopolitical upheavals impacting their investment decisions, prompting a shift towards nearshoring and friendshoring to mitigate these risks. Additionally, the anticipation of a more stringent regulatory landscape across both developed and emerging markets poses a challenge, necessitating a keen eye on evolving industrial policies and trade restrictions, particularly concerning emerging technologies.”

Finally, this year's focus on Artificial Intelligence (AI) reveals its accelerating integration across business operations, with 72% of investors employing AI to a significant or moderate extent. The surge in AI applications spans customer service, process automation and supply chain optimisation. Moreover, a substantial 63% of investors plan to elevate their reliance on AI for investment decision-making, driven by the potential for cost savings and enhanced decision accuracy.

2024 FDI confidence index world rankings

2024 FDI confidence index emerging market rankings

Investors use of AI