Financial Projections in Emerging Markets

Introduction

Emerging markets present tremendous opportunities to investors as their growth prospects are much higher than mature economies.

However, emerging markets also present valuation challenges to analysts as their stock markets may have lower liquidity, financial disclosure requirements can be low, and political situations can be unstable.

Making Nominal and Real Financial Projections in Emerging Markets

Financial projections in emerging markets can be quite challenging for analysts because exchange rates, inflation, and interest rate changes can all move significantly in short time periods.

Examples:

• Inflation can cause analysts to over-estimate real revenue growth.
• Interest rate and inflation movements can cause distort solvency ratios because debt may be at current costs but assets are likely shown at historical costs.

The following steps can be taken to make financial projections for emerging market firms: