Articles & stories

Frontier Markets: Asian Countries Are on the Move

As Chinese growth has slowed, investors are taking a closer look at Asia's fast-growing frontier markets.

By one measure of economic success, Asia's largest frontier markets rank below most of their global peers. Pakistan, beset by social welfare challenges such as illiteracy, has a per-capita GDP of 1300 dollars. Vietnam, which didn't begin to transition to a market economy until the late 1980s, does better at 2100 dollars. By comparison, Africa's largest frontier markets, Nigeria and Morocco, each have per-capita GDPs of 3300 dollars, while those in Europe and the Middle East range between 7800 (Bulgaria) and 43,200 dollars (Kuwait).

But when the low per-capita GDP of a frontier market is coupled with the transformation of productivity and institutions, it can lay the groundwork for significant economic growth. And a handful of Asian frontier markets, including Mongolia, Sri Lanka and Vietnam, offer a mix of compelling growth prospects for savvy investors, while improvements in Pakistan have even led one index provider to recently upgrade the country from frontier market to emerging market status. How, then, does one practice savvy investing out on the Asian frontier? Credit Suisse believes that investors need to pay attention to the following factors if they're interested in participating in some of the most dynamic growth stories in Asia.

Government Reforms

Pakistan's reclassification as an emerging market by index provider MSCI is a comeback of sorts. The country was removed from the MSCI Emerging Markets index in 2008 after political turmoil led the country to set a temporary floor for its securities, a move that ultimately paralyzed its stock market. But a host of market reforms in recent years, including the conversion of its stock exchanges to shareholder-owned corporations, helped prompt the upgrade to its former status.

In Mongolia, the expansion of the stock exchange is a key part of the current government's agenda, and recent policy changes have spurred progress on major infrastructure projects in the country while also improving overall business conditions, says Helman Sitohang, the CEO of Credit Suisse's Asia Pacific region. Meanwhile, some 2000 miles south in Vietnam, ongoing reforms such as the privatization of state owned enterprises are also supportive of economic growth.

For all their collective potential, the differences among Asian frontier markets suggest varying opportunities for investors.

IMF support

In June, the IMF began working with Sri Lanka to help avert a potential balance of payments crisis. The fund approved a three-year, 1.5 billion dollar loan to Sri Lanka to assist in its fiscal consolidation efforts, budget transparency, tax system simplification, and other goals.

But it's important to keep an eye out for both the entry – and exit – of financial assistance. For the last three years, Pakistan has relied on loans from the International Monetary Fund Extended Fund Facility to strengthen its finances and help it avoid a balance of payments crisis. That facility is scheduled to conclude in September, and while Pakistan is seeking to continue fiscal consolidation measures under its 2017 fiscal year budget, Credit Suisse Investment Strategy analysts caution that the country could still see "slippage" in revenue and expenditures without the "watchful eye" of the IMF.

Population Growth and Old Age

 A growing working-age population can boost GDP, while an excessively high old-age dependency ratio — the ratio of people older than 64 to those between the ages of 15 and 64 — puts pressure on a country's workers and its economy. Of 12 major emerging market economies recently studied by Credit Suisse, Pakistan had the third highest growth rate of its working age population at 2.2 percent, behind just Nigeria (2.9 percent) and Kenya (3 percent). At the same time, old-age dependency ratios in Pakistan (7.43) and Sri Lanka (14.07) are significantly lower than those in Eastern Europe, although higher than those in most African and Middle Eastern frontier markets.

Asian Frontier Markets

Asian Frontier Markets

Source: Credit Suisse, United Nations

Youth Unemployment and Education

Youth unemployment rates are high in most frontier markets and Asian countries are no exception. Pakistan's is 7.7 percent compared to 5 percent for its general population, while Mongolia's, at 16.5 percent, is more than double the 7.9 percent general jobless rate, according to United Nations data. In Sri Lanka, the youth unemployment rate is 20 percent, more than four times that of the general population rate of 4.4 percent. Vietnam has the lowest youth unemployment rate of the four countries, at 6 percent, but that's still three times the country's 2 percent general jobless rate.

On the education front, Pakistan lags behind its smaller peers: Barely a third of the population receives at least some secondary school education, while just over half (54.7 percent) are literate. By contrast, the proportion of the population with some secondary education in Vietnam (65 percent), Sri Lanka (74 percent) and Mongolia (85 percent) puts those countries ahead of major Middle Eastern frontier markets such as Kuwait and Lebanon, both of which are below 60 percent.


Good health is critical for productivity and growth. Citizens of Asian frontier markets have healthy life expectancies ranging from 58 in Pakistan to 67 in Sri Lanka, ahead of frontier market economies in Africa — Nigerians have a healthy life expectancy of only 47 years — but slightly behind the healthiest frontier market countries in the Middle East and Europe.

Asian frontier markets do better than their African peers when it comes to sanitation but generally lag Middle Eastern and European counterparts. Some 40 percent of people in Mongolia and Pakistan lack access to proper sanitation facilities, making them more vulnerable to the spread of communicable diseases. In Vietnam, the situation is better, with roughly 20 percent of the population in similar straits, while Sri Lanka stands out as a leader among the four countries, with fewer than 5 percent of its residents coping with inadequate sanitation.


Urbanization generally helps frontier economies become more productive, as cities encourage economies of scale in production and distribution, and firms tend to benefit from knowledge transfers and a larger, more diverse labor pool when they are surrounded by lots of other companies. Though Pakistan is less urbanized than the frontier markets of the Middle East – some 38 percent of Pakistan's population lives in cities, compared to more than 98 percent in Kuwait – those Pakistanis who are city dwellers largely live in so-called mega cities with more than 10 million residents. In Mongolia, meanwhile, the World Health Organization projects that more three-quarters of the population will live in urban areas by 2020. Sri Lanka remains among the most rural of frontier markets, with fewer than 20 percent of its population composed of urbanites, a number that's expected to barely budge in the next four years.

For all their collective potential, the differences among Asian frontier markets suggest varying opportunities for investors. While there are a number of promising policy changes taking place across the board, Asian frontier markets still have a significant amount of work to do in the all-important realms of health, education and employment. Sustained investment in those areas could help them reap a demographic dividend from their young and growing populations. Weighing each country's potential strengths and weaknesses is critical to investing wisely.

In a special report by The Financialist, hear Credit Suisse's and other experts participating in our 2016 Asian Investment Conference discuss the promise and challenges facing four of the most dynamic frontier markets today—Pakistan, Vietnam, Sri Lanka, and Mongolia.

Access the report Asia's Frontier Markets.