Count babies if you want to know where EM real rates are headed
A report has found that countries where families have fewer children are likely to have higher bank deposits.
By Bloomberg |
BCCL
Countries like Morocco, India and the Philippines are already on the right trajectory.
By Natasha Doff
Investors trying to predict the trajectory of real interest rates in emerging markets might do well to start digging up some good data on fertility rates.
A report published by Renaissance Capital on Wednesday has found that countries where families have fewer children are likely to have higher bank deposits, which in turn typically reduces real interest rates and the risk of default.
“When families have fewer children they tend to save more because they can no longer rely on children to be their pension provision,” the analysts led by Charlie Robertson wrote. “We think this explains the surprisingly high correlation between fertility rates and bank deposits to GDP – a correlation which holds in the 1990s as well as today – and across a great many countries.”
A good example of the theory working out in practice is China, where over half an increase in household savings since the 1970s can be attributed to the one-child policy, according to the report. Those savings in turn have contributed to a large rise in bank deposits and a drop in borrowing costs.
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Based on the findings, Egypt, Ghana, Kenya, Pakistan and Zimbabwe could see their real rates halve over the coming decade as fertility levels drop, the analysts wrote. Countries like Morocco, India and the Philippines are already on the right trajectory.
Brazil’s real rates, according to the model, should drop from the 4% seen over the last few years to zero.
“By contrast fertility forecasts suggest that Nigeria, Tanzania, Angola and Ivory Coast will continue to have the world’s highest real interest rates until 2050 because bank deposits are unlikely to jump,” the analysts wrote. “This will affect investment and long-term growth.”
