ED HARRISON: When you look at that picture, I know that you are looking at challenges
on three different fronts.
You talked about commodity issuers like Russia, you were talking to me about the people who
have the external imbalances that could come to.
Talk me through those three groupings that you talked about, first and foremost, I think
with the external imbalance of countries because those are the ones where you might see some
crisis.
RASHIQUE RAHMAN: Yeah, those are the ones that tend to be most in the headlines, I guess
you could say.
If you think about the challenges that EMs in general face, and I don't want to take
that notion too far, because part of the thesis that I'm presenting here is that EMs were
considered a unitary block in the past, and I don't think that we should be thinking about
them in that way going forward.
There's a lot of differentiation, the dynamics are very different across countries.
I think it's more important, instructive and beneficial to think about them on a standalone
basis rather than as a broad grouping.
I don't want to take that notion too far.
If you think about EMs from the standpoint of the challenges that they face, I'd put
them in three broad groupings.
Those that are suffering from internal external imbalance, Argentina and Turkey are prominent
in that grouping and they've seen a massive adjustment in 2019.
They'll still suffer the repercussions of that, I believe, over the next year or two.
Then you have the broadest grouping, which is I call countries that are in the middle-income
trap.
This is really a manifestation of what I talked about before, not really taking advantage
of the virtuous cycle to institute structural reform.
ED HARRISON: Chile, would they fall into that grouping?
RASHIQUE RAHMAN: Yes, absolutely.
I think the poster child really for this group are Mexico and South Africa, we've seen a
real decline in underlying investment activity for various reasons, and it's going to have
repercussions for growth going forward.
They also tend to be to the more prominent EMs as well, so I think they're really instructive
in terms of this broader grouping.
I think the discussion on EM really centers around this.
It's the middle-income trap for EMs.
They're stuck in middle income territory, income per capita has been stagnating, and
it's causing social disruption.
We'll get to that in a second.
I think that's a really important sub-theme.
ED HARRISON: That's why I was thinking about Chile in particular.
RASHIQUE RAHMAN: That's right.
Obviously, we've seen massive protests and now, they're moving to reform the constitution,
that's going to take time.
We've seen that spill over into Colombia as well.
I think it's a real product of this fraying of social contracts, I like to call it, and
then what you're seeing manifest, particularly an EM, it's not going to go away.
In fact, it's likely to intensify and it's a part of this middleincome trap that the
EMs are in.
This essential notion is that look, you guys can, for lack of a better phrase, pad your
pockets all you want, but give us prosperity, give us growth.
That's the underlying right social contract, and we're seeing fraying of that.
You're not providing us with the prosperity that we are promised and so you get protests
and social tension and those sorts of things.
You're seeing it in Hong Kong, you're seeing it in terms of the manifestation of political
changes in the developed world as well.
Populism and those things.
It's pervasive.
It's not just an EM thing.
The issue for EMs is that you have relatively young populations, and you need the growth.
It's much more intensified in the case of EM, and I think we're going to see a lot more
disruption there.
That's the middleincome trap story.
Part of it is this fraying of social contracts that we've started to see and we're likely
to see manifest in much more intensity going forward.
Chile, Colombia, we talked about in terms of some of the tension, those certainly flag
prominently South Africa as well.
The way you can think about it is mapping measures of inequality trajectory and income
per capita, government effectiveness or sense of corruption, those are good metrics to look
at to see how countries rank on a relative basis.
Countries in Latin America, unfortunately, favor quite poorly in that regard.
South Africa, Turkey as well, countries in Central Europe, not as much.
You're going to see this dislocation, I think across, I think countries like, not really
Chile or Colombia is prominent, but Mexico, South Africa, going forward are going to be
much more in the spotlight as far as how countries are dealing with that middle-income challenge,
let's say.
ED HARRISON: What's the third group that you were talking about?
RASHIQUE RAHMAN: It's the ones that have been much more reliant on commodities.
It's a relatively large group, but I like to think that it's narrowing.
A country like Russia is the poster child for that, the heavy reliance on hydrocarbons,
particularly-- and I think it's really interesting that the reshuffling recently of the government
cabinet by Putin and the focus on investment spending to bolster growth going forward,
I think that's a positive step ultimately.
Russia has been known for being really fiscally prudent but at the sacrifice of growth.
They've been making promises for years about investment structural reform and those sorts
of things.
I think now, they seem to be redoubling their commitment to that.
I think that's a good sign.
It's a good step.
They made other strides to decouple, delink the economy from oil as relates to the budget,
so those are all positive moves actually and should benefit Russia if they follow through
in not only delinking Russia from oil, hydrocarbons in general, this commodity linkage, but also
fostering much more favorable growth conditions.
Russia could be a very positive story in that respect.
ED HARRISON: What's interesting about what you just said is, is that you're talking about
this cabinet reshuffle from a real perspective.
It's not just so that Putin can remain in power, that actually behind it is some thinking
about Russian growth and actual real economy.
RASHIQUE RAHMAN: Absolutely, absolutely.
From an investor perspective, you think about it from the real aspects impacts.
From that standpoint, what we're seeing is a move towards bolstering growth, reducing
the ties to commodities, and that's a positive thing.
Absolutely.
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