The digital revolution has already started to work economic magic on emerging markets (EM). Over time, it could significantly accelerate growth across these countries, creating a once-in-a-generation step change in their development. This is particularly good news for EM investors.
For instance, major economies developed during the 20th century thanks to vast and expensive networks of telecoms or electricity cables. EMs are already compressing decades of this sort of investment into mere years thanks to efficient and relatively cheap mobile telecommunications and small-scale, locally generated and sustainable power sources. These, in turn, open up unprecedented economic efficiencies by giving ever greater numbers of people access to information—be it about market prices or how to fix an engine—and services essential to economic growth, not least finance and banking.
And with the cost of sustainable energy generation dropping exponentially, EMs, which tend to sit closer to the equator and thus are sunnier, benefit disproportionately—not least because new tech is power hungry (even lighting has gone digital in the form of LEDs), while sustainable power sources themselves are digitally driven. For instance, in 1975, the cost of solar photovoltaic energy per watt was US$115.28. By 2021 that had dropped to 27 cents and will continue to fall, not just with advances in technology but with scale of production. Where the sun is less strong, wind power can make a big difference.
All of this suggests that energy self-sufficiency might not be a pipe dream for the emerging world.
In both cases, China is a major force in sustainable energy. For instance, since 2010 the country has been the world’s largest wind market by installed capacity, with total capacity forecast to reach 1000 gigawatts (GW) by 2050 from around 300 GW now, according to the International Energy Agency (IEA). China also represents the bulk of solar manufacturing capacity, accounting for three-quarters of global supply of PV modules, according to the IEA.
All of this suggests that energy self-sufficiency might not be a pipe dream for the emerging world.
Meanwhile, smartphones have opened up digital finance to ever more unbanked people. Access to banking services makes e-commerce possible, both to vendors and consumers. Some 66 percent of unbanked people own a mobile phone. So, for instance, in Indonesia, about half the adult population, some 90 million people, remain unbanked—yet 74 percent has access to the internet via smartphones. Markets broaden and deepen, and, as they do, countries grow richer.
In this new world, FinTech and big tech replace banks in acting as the new intermediaries in providing credit. Decentralized FinTech platforms allow individual online lenders to interact directly with borrowers, in either a peer-to-peer lending model or a marketplace for loans. There is scope for evolution between various services. What’s more, being digital means these new financial providers don’t have to carry the burden of expensive branch networks.
Given that developing countries are already growing faster than the rich West, any further impetus can only be good news for investors—not least those holding emerging market debt.
Pictet Asset Management’s economists estimate that the growth gap between emerging and wealthy countries will top 5 percent later this year, excluding Russia and Ukraine, roughly double its four-year moving average. That’s thanks, in part, to China’s reopening and that emerging economies were quicker to grasp the inflationary nettle and are therefore better placed to relax liquidity conditions now. What’s more, if the digital and technological revolution pans out as we expect over the coming years, that growth gap could well widen further.
The clear blue sky between clay-footed rich countries and fast ascending emerging economies is a call to action for debt investors. Robust growth makes servicing debt easier—tax revenues rise, investors become more confident, and rising credit ratings reduce the cost of capital. This virtuous cycle could well be further supported by signs that the dollar’s relentless climb of the past 15 years or so is running out of steam.
EM debt looks attractive from near-term, medium-term, and long-term perspectives. EM economies should benefit from their secure fundamentals over the coming quarters. That’s not least because of how readily they responded to inflationary pressures—after all, EM finance ministers have had a lot more experience of inflation over the past three decades than their developed country counterparts. But they look well placed over the longer term, too, thanks to the blessings of the digital and technological revolution.