Are Emerging Market Governments Telling Fibs?

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Written By Hossein Soltani

The problem with investing in emerging markets is that the governments are suspected to be such liars when releasing economic data.

Many countries are vying for a limited amount of international investment, and the temptation of cooking the economic data books must be tempting for many.

Any economic statistics coming out of China, India and Russia is looked at with a jaundiced look of suspicion by the financial markets in Europe and America.

African, Asia and South American governments are also considered unreliable – such as Argentina’s default and subsequent more or less made up financial figures.

India is the latest emerging market to issue fourth quarter economic statistics for 2015.

India is world’s fastest growing economy

The result was a slight slowdown but still an impressive 7.3% increase on the previous 12 months at a time when the rest of the world has stood still or gone into reverse gear.

India is now the world’s fastest growing leading economy based on these numbers.

Schroders’ Emerging Markets Economist, Craig Botham is among thosethat not everything may be as peachy as the Indian government would have everyone believe.

“Looking at the headline numbers is just part of the story,” he said.

“Drilling down into the data reveals the performance in the final quarter of last year was driven by two factors – consumer and government spending. The amount invested was lower and imports were down, which means exports must have contributed to the growth.

“But we are concerned about how accurate the data may be as it is at odds with other indicators.

Why massaged data is a problem

“Industrial production likely grew around 5% year on year in the fourth quarter of 2015 while national accounts data indicates a 12.6% year on year increase in manufacturing gross value in the same period. Based on a composite of higher frequency data we believe growth in GDP to be closer to 5% or 6% than the 7.3% reported.”

So someone may have massaged the figures, but is this necessarily a worry for investors?

If the GDP figures are wrong, then the underlying data has been tampered with, which means no one can rely on the accuracy of any uncorroborated information coming from the government.

The optimistic figures could also influence stock market and currency valuations, meaning some readjustment downwards will follow at some time in the future to correct the markets.