Friday, 24 September, 2021

Funding Asia’s trillion-dollar infra needs

SINGAPORE: Roads, water and sewage systems, ports, and railway lines. These are some big-ticket infrastructure items that all countries in Asia will need to invest in to maintain growth momentum, tackle poverty and respond to climate change.

According to the Asian Development Bank, Asia’s infrastructure needs are expected to cost about US$26 trillion between 2016 and 2030. That works out to more than US$1.7 trillion per year, report agencies.

The COVID-19 pandemic has inflated the bill further, with extra funds needed in sectors such as  healthcare, sanitation and information technology infrastructure.

At the same time, government coffers are being depleted as they pour in money to help their pandemic-hit economies.

Given this double whammy and the scale of the numbers, it will be difficult to plug the gap through public sector funding alone, said industry watchers.

The money for infrastructure projects will thus have to come from the private sector.

The banks will not be the key source of financing though. Industry players said relying on banks for financing is not healthy practice, as seen during the Asian financial crisis of 1997. “At that time, the bond markets across Asia were not as vibrant and much of the debt burden was held by a handful of banks. So when there was stress, this handful of banks couldn’t hold it and the domino effect led to the Asian banking crisis,” said Mr Clifford Lee, global head of fixed income at DBS.

“The healthier way is to introduce the debt financing needs into the debt capital markets for funding to be provided through many investors through the market itself, so that any volatility or credit stress in the future is cushioned and spread out,” he added.

This increases the need for the region’s capital markets to take on a bigger role in infrastructure financing.

Asian firms are already issuing bonds that are denominated in the G3 currencies - the US dollar, the euro and the Japanese yen. This market has more than doubled in valued since 2014. Experts said the continued growth is a sign of its potential. Industry players said foreign investors will drive the next stage of growth in the Asian G3 bond markets.

“Over the past 10 years or so, many of these bonds have been taken up by Asian investors. The rest of the world has yet to participate in the Asian G3 bond markets in a bigger and more meaningful way,” said Mr Lee.

“The reason for that is really a lack of supply. There is no lack of interest in participating in Asia’s economic growth via the bond market. The real shortcoming is that of supply, meaningful supply and steady constant supply,” he added.

There is also scope for the region’s capital markets to expand further to include bonds that are denominated in the local currency of each country.

Mr Alfonso Garcia Mora, vice president for Asia and the Pacific at International Finance Corp, added that liquidity is “critical”.