ED HARRISON: Now, just to complicate things a little bit, I wanted to make an overlay
because I was just thinking about something that you talked about, like the 3Ds in terms
of thinking about emerging markets.
RASHIQUE RAHMAN: Absolutely.
To me, the broader thematic for EM, and this hopefully resonates with listeners, viewers
is dollars debt and demographics.
To me, that's an enduring thematic for EM.
If you're thinking about EM at all, these three aspects figure in prominently not just
now but in the future.
We should talk about each of those aspects.
I think they're very important.
To be honest, they're not very well understood even by EM investors and experts.
They don't understand these dynamics that well.
ED HARRISON: Because this is where the rubber hits the road.
Let's take an example, since you highlighted Mexico and South Africa.
Let's look at Mexico in particular, in terms of this middle-income trap, but also in terms
of the 3Ds that you were talking about and how that manifests itself in terms of investment
opportunities for people.
Talk me through an investment in Mexico given those preconditions.
RASHIQUE RAHMAN: Well, let's step back first.
Let me predicate the discussion on individual countries on the broader dynamics that are
at play.
I think this is super important for people to understand and appreciate, no pun intended,
as far as currencies are concerned, but the dollar is a prominent aspect of investing
in EM and I think we should dive into this a little bit because it's very important and
it's not very well understood.
I think people are coming to understand it a little bit better, but hopefully I can shed
some light on the importance of the dollar for EMs.
When we think about the dollars, we think about first and foremost, dollar denominated
debt.
That's what people think about for EMs and yes, that's been something of a concern on
the face of it.
If you look at Institute of International Finance, they measure global debt and EMs
have seen a significant rise in overall indebtedness, something like $70 trillion in debt to 200%
of GDP.
That's near double what it was 10 plus years ago.
It's been a significant rise in indebtedness.
ED HARRISON: In terms of overall global indebtedness, is that what's driving indebtedness increases?
RASHIQUE RAHMAN: That's a good question.
To a large extent, yes.
It's been China, China's account for something like 40% of that rise.
Other EMs, not so much because they're relatively small from an economic standpoint.
What we've seen is a significant rise in dollar denominated debt from non-financial corporates
in EMs so from 3 trillion 10 years ago to 6 trillion now, that's a massive increase.
On the face of it, it seems quite concerning.
To me, it's not a concern.
That's the stop of dollar denominated debt.
EMs have something on the order of 8 trillion dollars in hard currency assets, more than
offsetting the rise in external debt that we've seen.
The rise in external, that was 3 trillion to 6 trillion and most of that was due to
the rise in corporate dollar denominated debt, about 80% of that was in dollars.
The point is that you can't just look at one side of the balance sheet, 6 trillion dollar
denominated debt, you've got something like a trillion in dollar assets that offset that.
There's plenty of dollars there to pay down the debt if it's needed.
The question becomes about liquidity provision, having the dollars when the dollar payment
is due, that's the real issue.
It's a liquidity consideration, not a solvency consideration as far as EM is concerned.
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