Living in Emerging Markets: What Many Expats Don't Know, but Should
By Chad Creveling, CFA, and Peggy Creveling, CFA
With increasingly global careers, weak job markets in some developed countries, and retirees looking to stretch their savings and pensions, greater numbers of people are building their lives outside their home countries. In many cases, they end up as expatriates in emerging and developing economies where growth and opportunity seem abundant and the cost of living can be cheaper.
While living, working, and retiring overseas can be a rewarding experience, it is not a decision that should be made lightly. It is one thing to be sent temporarily overseas by a multinational on a full "expat package" that includes a car, driver, generous housing and school allowances, and medical insurance. But it is an entirely different matter to seek your lot on your own or to retire overseas.
Entitlement programs and support systems available in your home country may not be available overseas, and you will likely be unable to tap into home country support systems while living in a foreign country. Without proper planning and an awareness of the challenges of building a life overseas, dreams of a lavish expat existence can quickly turn into a nightmare.
Whether as a retiree or a professional embarking on an extended stint as an expatriate, here are some things to know as you begin your expat life in an emerging economy.
- Access to banking facilities and bank products can be limited. Establishing a bank account in a developing country can be difficult. In addition to your passport, you may be required to show a work permit and a valid visa, as well as other documents establishing your residency such as a lease document or utility bill. Just having a tourist visa may not be enough. Even if you can open a bank account, your non-working spouse may not have access if joint accounts are not offered or if your spouse does not qualify.
Additionally, the range of banking products you are used to may not exist, or if they do, you may not be able to access them as a foreigner. For example, most countries do not offer 30-year fixed rate mortgages. It can be difficult, if not impossible, for foreigners to borrow in local currency.
For a number of reasons, having a local bank account can still make sense, so you will want to research what is involved in advance.
- Inflation is generally higher than in developed countries. While living overseas, especially in one of the emerging markets, can seem cheap at first glance, the reality is often different. The cost of a middle- or upper-middle-class lifestyle may have been bid up by lack of supply, increasing numbers of foreigners, and generous corporate expat packages. By some accounts, Luanda, Angola, is one of the most expensive cities in the world for expats—more so than Hong Kong, Zurich, London, or Sydney. Even in traditionally inexpensive Thailand, some items such as cars and wine may be more than double what you would pay in your home country.
Inflation in developing economies can also run much higher than in the developed world. For example, a recent survey by Mercer, a human resources advisory firm, found that the cost of living for expats has been increasing substantially in traditionally inexpensive cities such as Mumbai, Bangkok, Jakarta, and Hanoi. What was once affordable can quickly become untenable, particularly for those on a fixed income.
- Currencies tend to be more volatile. The exchange rates of emerging-market currencies tend to be more volatile as measured against developed-country currencies. This point can be important, as very rarely do expats live entirely on the local economy and generate earnings in the local currency. Often, they either are supported by earnings in their home currency or want to preserve the ability to return to their home country or a third country. Additionally, imported goods are often priced (directly or indirectly) in developed-world currencies such as USD.
Managing currency risk is paramount and can be difficult, especially for those on fixed foreign-currency pensions. Expats will want to avoid the situation where a combination of inflation and an appreciating currency prices those on a fixed income out of their intended retirement home.
- Investing overseas can be expensive and risky. Often, expats invest overseas to avoid home country taxes. In many cases, though, local capital markets are less developed and less regulated, resulting in less investment choice, expensive and inferior products compared with home country products, and less investor protection. This can make saving, funding goals, and hedging inflation and currency risk difficult at best.
Many expats rely on the offshore financial markets for their investment needs, but what they save in home country taxes, they often more than give back in the form of excessive fees. Lack of regulation, investor protection, and predatory sales practices often permeate the offshore financial market, although recent attempts by regulators to crack down and competition are forcing improvements.
For Americans, investing overseas opens them up to a whole range of regulation, punitive taxes, and onerous reporting requirements backed by substantial civil and criminal penalties for failure to comply.
- Difficulty in owning property. Expats from developed countries are often surprised how difficult it can be to buy property in an emerging country. In Thailand, for instance, foreigners are not allowed to buy land, which generally precludes them from purchasing a house. They can buy condominiums, however, subject to foreigner/local building ownership ratios.
The lack of a developed mortgage market for foreigners means purchases typically have to be in cash, which constrains an already relatively illiquid secondary market.
Some Americans are also surprised that they are liable for U.S. capital gains taxes on property sold overseas and that movement in exchanges rates on both the foreign property and foreign mortgage can have a significant impact on the taxes due.
- Difficulty in obtaining adequate insurance. Like the financial markets, the insurance market in emerging markets and offshore markets typically offers less product choice, less regulation and investor protection, and greater expenses than markets back home.
Obtaining adequate medical insurance can be particularly difficult for the long-term expat. Home country policies will often not cover you for an extended time overseas, and offshore or local policies tend to be expensive and restrictive in what they cover. Many expat policies have age limits and will not cover you after age 70 or so. This can be particularly difficult for intended retirees. In the past, expat retirees had the option of returning to their home country to access national medical programs, but many countries are shutting off that access for expats. Likewise, Americans are unable to use Medicare overseas.
In addition to health care, other policies—such as long-term-care insurance, long-term disability, and term life insurance—can be nonexistent, restrictive, and expensive. However, there is no shortage of fee-laden insurance-linked investment and savings schemes.
- Increased tax complexity. Expats face increased tax complexity compared with their home country compatriots, especially Americans. Not only can they be taxed by their home country, but they also taxed by their country of residence and other countries where they may own assets. Sorting out the intersection of conflicting tax codes and tax treaties can be complicated and time consuming. In the past, many expats typically ignored the situation, but a renewed emphasis on compliance by many governments around the world is now making this impossible.
- Limited availability of retirement plans, pensions, and other benefits. Expats working overseas often have no access to national pension schemes or other government-incentivized retirement savings structures. While working overseas, particularly for a foreign company or their own business, expats may not be paying into Social Security or other home country national pension systems, which means they will not receive the benefits when they retire.
Even if they can participate in local savings-oriented retirement schemes, these schemes are typically inadequate and, for Americans, generally not recognized by the IRS, and thus taxable. Offshore products billed as "pensions" bear little resemblance to national pension schemes and are certainly no replacement.
Without access to the same type of retirement support structures offered in their home countries, planning for retirement becomes even more important and difficult for expats.
- Increased complexity of estate planning. Expats must often consider estate planning from the multiple conflicting perspectives of their home country, their country of residence, and any other country where they may have significant assets. Many expats are surprised to find that while they are considered non-residents of their home countries for income tax, this is not the case for estate/inheritance tax, which is often based on citizenship rather than residency.
It can be particularly important to have a coordinated set of estate planning documents when subject to multiple jurisdictions with differing property disposition and minor custody laws.
Planning can be further complicated by the lack of trust law and recognition of powers of attorney, living wills, and health care directives in the emerging markets.
- Limited availability of professional resources. Cross-border planning issues can be complex, and too few professionals are serving the growing expat population beyond those offering services to the ultra-wealthy. Local professionals serving the domestic population are often poorly equipped to deal with expat cross-border planning issues, as are home country professionals who lack local knowledge and global perspective.
Professionals such as estate lawyers, tax advisors, financial planners, and other service professionals so readily available back home are often few and far between in the emerging markets—although there doesn't appear to be any shortage of people selling real estate, insurance, and offshore investment schemes. Unfortunately, selling a financial product or asset falls far short of the type of comprehensive, coordinated planning that is needed to plan a secure future overseas.
Challenging, but Rewarding
While an expat life can be rewarding and adventuresome, it comes with challenges, especially expat life in the world's emerging or developing economies. While this list is not all-inclusive and each country will have its own planning challenges, this article touches on some of the main issues faced by expats as they embark on the adventure of overseas living. As with most planning, solid financial planning done in advance can make life easier. This is all the more the case for expats who live outside of the financial infrastructure and protection that their home countries may provide.
This article is a revised and updated version of ones that have appeared previously on www.crevelingandcreveling.com.
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
Copyright © 2018 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.