Capturing the ‘demographic dividend’ in emerging market debt

Due to advances in medicine and greater knowledge of how factors such as nutrition impact health, people can look forward to longer lives. Overall, the average population age at a global level is rapidly increasing. However, there is significant variation across regions. For instance, Europe is the oldest continent with an average age of 40, whereas in Africa and South America the populations are still quite young1.

Many emerging markets have a younger average population, which has a number of key advantages that are likely to give them greater potential for economic growth going forward. For a region such as Africa, which has a median age of just 18, investing in health and education should benefit from the continent’s huge younger generation and capture the potential economic payoff, referred to as the ‘demographic dividend’.

Another advantage is there is a greater percentage of people of working age, and therefore a larger workforce per capita relative to developed countries. The chart below shows how we are now past the turning point where the percentage of working age population in emerging markets has exceeded that in the developed world – a trend which is only expected to accelerate.

Looking closer at some key emerging markets, the working age population of India is expected to rise to almost 70% between now and 2050, while Nigeria’s is predicted to steadily rise to over 65% by the year 2100.

Source: United Nations as at December 2019

Potential benefits for fixed income investors

We believe that a larger working population raises a country’s prospects for economic growth with greater potential for industries to expand. Companies can produce goods in larger numbers, while there is more labour available for key infrastructure projects. We could see this greater potential for growth in younger emerging markets countries start to draw more capital away from ageing developed countries, potentially shifting the global distribution of economic power. An increase in Foreign Direct Investment (FDI) could significantly improve the debt sustainability of emerging markets, potentially increasing their long-term credit quality and stability of bond markets with less reliance on issuing debt to finance development. FDI flows represent a show of confidence and an extended commitment to a country that greatly improve its prospects for growth.

Another key benefit of having a lower average population age is that it is likely to be associated with lower healthcare costs. This gives emerging market countries greater ability to spend their fiscal resources on projects with greater potential to drive their economies forward, with Asia in particular forecast to generate significant growth, as per the chart below.

In addition, an ageing population implies more people claiming pension benefits with fewer to pay income taxes, which may require higher tax levels for the workforce to meet the funding requirements. Avoiding this would give workers in emerging markets a greater proportion of their wages available for consumer spending and to support domestic businesses.

We have started to observe greater demand in areas such as e-commerce, real estate and banking, and believe corporate bonds in these consumer sectors offer attractive long-term value. We expect that strong demand for these sectors should lead to more stable businesses and improving credit quality. Latin American e-commerce companies such as Mercado Libre2 and B2W3 have come to the market in the last six months and the bonds have seen strong demand.

Source: OECD as at December 2020

Another key advantage of having a younger population is that they generally have greater levels of mobility. This makes them more likely to migrate to cities from rural areas in search of better-paying jobs and higher standards of living, and this urbanisation is closely associated with economic development. It helps to produce a more concentrated workforce, while allowing for more efficient uses of energy and resources. This trend is expected to drive the rise of megacities in emerging markets.

Changing demographics are an important part of the macroeconomic environment for investors in emerging markets debt. Better prospects for economic growth can often mean more stable bond markets, less fiscal strain in emerging markets countries and potential new opportunities in the corporate bond market. And as fixed income investors look for returns, we could potentially see interest in emerging market debt grow even faster.