Moscow, 6 December 2011 – Renaissance Capital, the leading emerging
markets investment bank, has issued a groundbreaking report analysing
the eurozone crisis and the reasons that prompted it.
When I’m 67 , authored by Charles Robertson, Renaissance Capital’s
Global Chief Economist, and the Firm’s award-winning global research
team, argues that excessive public pension spending (accounting for
nearly one-third of tax revenues in Italy, Greece and Japan),
worsening demographics and a lack of private pension provision have
served as key causes of the present eurozone fiscal crisis. Three of
the governments in most trouble today spend over 10% of GDP on pension
provision, notes the report, which also highlights that to bring
Italian pension spending down to German spending levels would require
pension payments to be cut by one-third. Given the 12mn Italian
pensioners (roughly one-quarter of voters), it is little wonder that
former-premier Silvio Berlusconi and his allies were so reluctant to
address the pension issue, the report says.
Since Lennon and McCartney wrote When I’m Sixty-Four , the effective
retirement age in France has fallen by nine years, to 59, and by five
years in Italy and Greece. Renaissance Capital believes the eurozone
crisis has been brought about by a combination of these falls.
Higher retirement ages of at least 67 or higher and less pension
provision seem inevitable, Renaissance notes. The Firm expects
inter-generational political conflict to replace class conflict in the
eurozone; in Italy, analysts believe the large, voting population of
pensioners may yet resist southern European reforms, and notes that
Germany and Ireland had better demographics when they advanced
reforms.
“Emerging market experience tells us that just two years of harsh
reforms can make a big difference,” says Charles Robertson. “We need
those two years. In the short term, we believe the eurozone has no
choice but to try reform in southern Europe, backed by IMF/European
Central Bank support.”
Renaissance’s favoured markets today are Russia, Nigeria and South
Africa. Anglo-Saxon and Nordic countries are pension (and bond) safe
havens in the developed market world, but it will surprise few that
Renaissance sees emerging markets as the safest haven of all. There
are exceptions, such as Hungary and Argentina, which have taken
significant steps backwards; but, the report notes, there are many
more positive examples, such as South Africa and Chile, with private
pension funds above 60% of GDP. Zimbabwe has better private pension
provision than Japan, Poland is stronger than Brazil and Nigeria is
better than South Korea.
Renaissance expects Nigerian pension funds to grow by $13bn by 2015,
enough to buy the entire stock market outright at 2011 prices.
Sub-Saharan African pension funds are not only larger than we
expected, but with 10-15 workers per pensioner, demographics suggest
African GDP growth rates will power past Asia in the coming decades,
offering the current generation a better retirement than that offered
by low Asian public or private pension provision.
The report sees the best Emerging European story in Kazakhstan, where
pension funds could own all the country’s debt and equity assets, and
where demographics are excellent. Turkey is also in a strong position,
but would do better still if it encouraged more cash into local
pension funds. Russia is in a good position today, as pension spending
has only recently risen above that of Japan and Belgium, but is on
course to follow the Italian model if more savings are not channelled
into local pension funds.
Most emerging market countries are, fortunately, following the
Anglo-Saxon/Nordic-private-pension model, rather than the bankrupt
Southern European public-pension-provision model, concludes the
report.
“ When I’m 67 may be a statement of optimism in emerging markets, as
it could be for all of us if our pension funds shift assets from 2% US
treasuries to higher-growth EM economics,” adds Charles Robertson.
***
About Renaissance Capital ( www.rencap.com )
Renaissance Capital is a leading investment bank focused on the
emerging markets of Russia, the CIS, Eastern Europe, Asia and Africa.
The Firm also offers its clients access to these markets through
financial centres such as London, New York and Hong Kong. Renaissance
Capital has market-leading positions in each of its core businesses –
M&A, equity and debt capital markets, securities sales and trading,
research, and derivatives. The Firm is building market-leading
practices across emerging markets globally in metals & mining, oil &
gas and agriculture. Renaissance Capital is part of Renaissance Group.
Global: Directional economics – When I’m 67
Since Lennon and McCartney wrote When I’m Sixty-Four , the effective
retirement age in France has fallen by nine years, to 59, and by five
years in Italy and Greece. In this update of our global views, we
argue that the eurozone crisis has been brought about by a combination
of these falls, excessive public pension spending (accounting for
one-third of tax revenues in Italy, Greece and Japan), worsening
demographics and a lack of private pension provision. The
unsustainable situation was recognised by the Italian labour minister
in early December, who cried as the government’s pension reforms were
unveiled. It was a justified response given the data in this report
(but please read on – most of the world is in a happier place). In
Japan, the number of workers per pensioner will fall below two by
2020, and we assume its long-awaited fiscal crisis will occur before
then. Higher retirement ages of at least 67 or higher and less pension
provision seem inevitable. We expect inter-generational political
conflict to replace class conflict in the eurozone; in Italy
pensioners already represent one-quarter of the Italian voting
population and may yet resist southern European reforms. Germany and
Ireland had better demographics when they advanced reforms. Emerging
market (EM) experience tells us that just two years of harsh reforms
can make a big difference. We need those two years.
In the short term, we believe the eurozone has no choice but to try
reform in southern Europe, backed by IMF/European Central Bank (ECB)
support. We expect ECB easing, low Fed funds until 2013, and China
easing to compensate for weak external demand, as they did in 1997,
2002 and 2009. We expect markets to benefit from reflation by late
January – e.g. when the S&P500 is back to 1,350. Beyond that, we do
not expect the markets to rise unless G3 growth surprises on the
upside and bank lending picks up in all three economies. Macro
weakness will be most pronounced in 1Q12, according to Chinese and
German leading indicators and assuming there is no eurozone disaster.
4Q11 data may yet surprise on the upside.
Our favoured markets today are Russia, Nigeria and SA. Not everyone
shares our 0-2% GDP growth range for CE3 and Turkey in 2012, but we
are so close to a point when such weak numbers are priced in that we
may soon start favouring these markets. Illiquidity will hold back
most of SSA and the CIS until larger markets have recovered.
Anglo-Saxon and Nordic countries are pension (and bond) safe havens in
the developed market (DM) world, but it will not surprise you that we
see EM as the safest haven of all. There are exceptions, such as
Hungary and Argentina, which have taken significant steps backwards,
but there are many more positive examples, such as SA and Chile, with
private pension funds above 60% of GDP. Zimbabwe has better private
pension provision than Japan, Poland is stronger than Brazil and
Nigeria is better than South Korea. We expect Nigerian pension funds
to grow by $13bn by 2015, enough to buy the entire stock market
outright at 2011 prices. SSA pension funds are not only larger than we
expected, but with 10-15 workers per pensioner, demographics suggest
that African GDP growth rates will power past Asia in the coming
decades, offering the current generation a better retirement than that
offered by low Asian public or private pension provision.
The best Emerging European story is in Kazakhstan, where pension funds
could own all the country’s debt and equity assets, and where
demographics are excellent. Turkey is also in a strong position, but
would do better still if it encouraged more cash into local pension
funds. Russia is in a good position today as pension spending has only
recently risen above that of Japan and Belgium, but is on course to
follow the Italian model if more savings are not channelled into local
pension funds.
Most EM countries in our timezone are fortunately following the
Anglo-Saxon/Nordic-private-pension model rather than the bankrupt
southern European-public-pension-provision model. When I’m Sixty-Seven
may be a statement of optimism in EMs, as it could be for all of us if
our pension funds shift assets from 2% US treasuries to higher growth
EM economics.
If you have any questions or comments regarding this report, please
contact Charles Robertson .
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Daria Khilenkova
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Marketing & Public Affairs
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