Will emerging markets cope with the challenges of an ageing population?

Marcus Roberts
June 1, 2016
Reproduced with Permission
Demography is Destiny

Population ageing is not just a phenomenon that the developed world must deal with in the 21st century. There is no denying the problem that many developed nations will have to face (and are already facing). By 2050 the percentage of Germany's population in the old-age dependency category will increase twofold, the percentage of the elderly in the United Kingdom's population will increase by one-third, in the United States and Japan it will increase by two-thirds. Many of these countries' problems are well-known and three years ago Standard & Poor's demographic report noted that "governments in the developed world were attempting to address the rapid build-up of debt since the financial crisis by overhauling public pension and healthcare systems".

However, less well-known is that many of developing countries and members of the BRICS group are also facing similar old-age dependency increases. By 2050 the percentage of Brazil's population that are elderly will increase threefold. Egypt's elderly population will double, as will India's. Mexico's population will also have three times as many old people as it does today. As the Financial Times reports:

"Demographic analysis by Standard & Poor's has found that ageing populations across emerging markets are forcing governments to increase access to healthcare while relying on a shrinking workforce to pay for social programmes, leading to a deterioration in public finances and a rise in government borrowing."

The burgeoning elderly population in developing nations leads S&P to predict that average debt in emerging markets to rise from 42 percent of GDP today to 136 percent in 2050, unless policy changes are made. Such debt increases would have an effect on these countries' credit ratings and investors' confidence in them as places to invest. Earlier this year the IMF warned that the consequences of ageing populations would be large and that age-related spending would "reach unmanageable levels unless steps were taken to deal with the issue".

At the moment investment decisions are not being driven by demographic forecasts of the next few decades; instead short-term issues like political upheaval in Brazil were more important. However, according to Kevin Daly, emerging market fund manager at Aberdeen Asset Management, demography is not completely ignored: it is "a topic of conversation". Indeed the fact that S&P has since 2002 been analysing the implications of changing demographics on government debt levels shows the increasing importance that demography is having on economies and investment.