Emerging Asia-Pacific’s infrastructure plans could crumble in the downturn
Emerging Market countries in Asia-Pacific (APAC) could face an infrastructure crunch in coming years as the global economic downturn and tight credit conditions jeopardise government plans for much-needed upgrades.
According to the Asian Development Bank (ADB), developing countries in APAC need to invest USD 1.7 trillion per year in infrastructure until 2030 if the region is to maintain its growth momentum, eradicate poverty, and respond to climate change1. As of 2017, developing economies in APAC invested around USD 881 billion annually in infrastructure, according to the ADB. COVID-19 threw another spanner in the works, with a lot of investment curtailed.
Thailand's infrastructure funding gap was USD 4 billion in 2022, according to the Global Infrastructure Hub2, while Indonesia's was USD 2 billion, Vietnam's USD 4 billion and China's a massive USD 62 billion. The disparity is projected to remain the same or worsen by 2030.
However, stretched government funding, weak investor sentiment and soaring inflation mean that critical infrastructure such as roads, power lines, bridges and electricity networks may not be updated sufficiently, potentially holding back economic growth, and putting lives at risk.
Read also: Sustainable investing in Asia – closing the gap between conviction and action.
Lower funding diversity
According to Moody's Investors Service, issuance of infrastructure debt across APAC declined markedly in 2022; particularly in emerging market Asia (ex-China). This is set to continue in 2023.
“Tighter credit conditions will result in both lower financing activity and lower diversity in the financing of Asian emerging market infrastructure in the next 12-18 months, which will have an outsized impact on emerging markets, especially outside of China," Moody's said in a recent report3.
Across developing Asia, power accounts for 56% of needed infrastructure investments, transport 32%, telecommunications 9%, and water and sanitation 3%, according to the ADB4. Decarbonisation and the push for renewable energy have exacerbated the issue in recent years, with most countries in the region planning upgrades to increase the share of renewables in the power mix.
Outsized impact on Emerging APAC
For developing Asia, the funding gap has an outsized impact because it exacerbates existing difficulties. For example, Indonesia is attempting to strengthen electricity interconnection across its vast archipelago and is also building a new capital city to offset the impact of climate change but is struggling to attract investors, with some pulling out in 20225. The government has introduced incentives for companies to encourage investment.
Read our former Senior Manager Partner Patrick Odier's interview on incentives needed for sustainability transition.
Moody's suggests that lower financing volumes indicate a possible synchronised pull back by key providers of capital, including by governments, debt capital markets and equity investors6. A perfect storm.
Multilateral development banks (MDBs) like the World Bank Group, ADB and Asian Infrastructure Investment Bank (AIIB) therefore have an important role to play in public and private sector infrastructure financing. The AIIB, for example, recently said that several development banks were facing capital shortages, and that AIIB is working on developing and innovating new tools to provide funds for development projects, particularly on projects related to climate change7.
Investors need help
However, the bottom line is that private investors need to see a steady pipeline of bankable investment opportunities, which have clear visibility on returns and debt recovery, and are unencumbered by red tape or onerous regulations.
For example, unattractive tariff schemes are rife in APAC's power markets, as are strict requirements on including local partners and components, which can make some projects unattractive for potential investors.
Although continued support from policymakers and MDBs will be instrumental in minimising the impact of volatility on the level of infrastructure investments, the real onus is on governments to increase and foster private sector investment. Otherwise, their ambitious infrastructure plans might crumble away.
1 https://www.adb.org/news/features/infrastructure-development-asia-12-things-know
2 https://outlook.gihub.org/
3 https://www.moodys.com/researchandratings/market-segment/infrastructure-project-finance/-/005008/04208A?type=Sector_Comment_rc_sector&dr=2022-03-22|2023-03-22
4 https://www.adb.org/news/features/infrastructure-development-asia-12-things-know
5 https://www.bloomberg.com/news/features/2022-12-05/indonesia-s-new-rainforest-city-president-jokowi-s-nusantara-plans-face-trouble#xj4y7vzkg
6 https://www.moodys.com/researchandratings/market-segment/infrastructure-project-finance/-/005008/04208A?type=Sector_Comment_rc_sector&dr=2022-03-22|2023-03-22
7 http://global.chinadaily.com.cn/a/202212/03/WS638b04e9a31057c47eba27bd.html
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