A horribly-fonted chart from Ashmore Investment showing the development of local-currency emerging market fixed income debt…
… but what caught our eye was the forecast for its continued medium-term growth:
We estimate that the Emerging Markets Fixed Income universe is likely to triple or even quadruple in size by the end of the current decade.
We expect all Emerging Markets Fixed Income asset classes to expand in absolute terms, but local currency in particular to be become hugely dominant, while local currency corporate bonds will be well on the way to occupying the very top spot by the time we hit 2020.
Ashmore writes that it bases the lower end of that range — a tripling in size from just under $12 trillion to roughly $36 trillion — on the assumption that emerging economies average seven per cent real growth through the end of 2020.
This is roughly the pace at which emerging markets grew from 2005 through the end of last year. Assuming 5 per cent growth, approximately the post-crisis average, the asset class would still grow to $30 trillion. (And by point of not-really-that-relevant comparison, the US Treasury market is normally estimated to be about $10 trillion.)
These estimates seem plausible to us, especially when you consider that right now emerging markets account for roughly 36 per cent of global GDP at market exchange rates, and their fixed income markets are lagging:
In addition to supplementing economic growth, this development could be a factor in helping to reverse the global trade and capital flows imbalances that have persisted since the late 1990s. It’d provide domestic pools of money with dependable local savings vehicles.
Not that it would be enough on its own, of course — correcting these imbalances also requires the deliberate government policies of the FX reserve accumulators and oil exporters to change, if gradually.
The obvious corresponding worry is that the development of debt markets typically sets the stage for financial crises (Reinhart & Rogoff 101) when currency mismatches are replaced by maturity mismatches. This makes the role of policy — fiscal, monetary, macroprudential, etc — all the more important to get right. China is obviously the biggest and most complicated of these markets, and we won’t do any better than what our colleague Martin Wolf writes today.
We’d just emphasise again that this will take a while to play out, but these incremental solutions based on national self-interest are a lot more likely than, say, ineffectual “let’s do something about it” promises by the G20.
Related links:
Of bond markets and imbalances – FT Alphaville
Uncertainty and capital controls – FT Alphaville
A G20 “victory” – FT Alphaville