The economic crisis in Europe and the US, together with a long-awaited stimulus
package in Japan, may bring about the investment capital needed for
Southeast Asia’s crumbling infrastructure
By Eddy Sunarto
There is little doubt that the future success of Asean largely depends on building export-oriented economies, much like China has over the past few decades. A growth rate of over 5% has to, in one way or another, be supported by a proportional investment in infrastructure. New roads, airports, railways and power lines will have to be built on a major scale in order to remain competitive in the global export market.
In January, floodwaters ravaged Jakarta, leaving 20 dead and 50,000 homeless. With the region’s largest city paralysed for days, the flooding showcased the urgent need for long-term strategic investment in the city’s crumbling infrastructure if the government is to achieve an annual growth rate of 6% in the coming years. Jakarta requires about 12,000 kilometres of road to accommodate a bulging population. Japan has agreed to fund a nationwide infrastructure project in an agreement with the Indonesian government worth $43 billion. This Official Development Assistance (ODA) loan is a strategically-timed investment to assist the steady influx of Japanese manufacturers such as Toyota, Mitsubishi, Hitachi and Denso, among others, which have recently set up bases in Indonesia.
Thailand’s path mirrors the Indonesian story. Recognising the overwhelming need to build new infrastructure, the Thai government has gone on a wild bond-issuance spree in the last few years. The outstanding Thai government debt market grew from 12% to 71% of GDP in 2012, and most of the money raised has been channelled into numerous infrastructure projects around the country. Apart from China, the UK and France, the Kingdom is the only country to have issued a 50-year maturity bond, which makes sense as it takes years to build roads and railways.
The state of infrastructure in some countries is even more desperate. Not only can the roads, bridges and railways be deficient, there is often an absence of basic services such as electricity and telecommunications.
Cambodia is a case in point. According to the UN Development Programme, only 22% of Cambodians have access to electricity, and 85% of them live in Phnom Penh. Furthermore, recent government research found that more than 50% of Cambodia’s roads are in poor condition, and in critical need of major upgrades.
The Asian Development Bank (ADB) has estimated that the Asia-Pacific needs an investment of $8 trillion over the next ten years to build new, or replace existing, infrastructure, and to make up for historical under-investment. Of that number, Asean accounts for a staggering $600 billion, roughly one-third of combined Asean GDP. The sheer size of the necessary investment means that capital-raising has to be diversified away from the more traditional donor-recipient loan mechanism employed by treaty organisations such as the World Bank and the ADB. It is inconceivable to think that these treaty organisations have the mandate or capacity to finance the required capital.
The Asean Infrastructure Fund, founded in 2012 by Asean members and the ADB to address this critical need, is a step in the right direction. However, as momentous and forward-looking as it may be, the fund can only commit $13 billion in the next ten years, a fraction of what is required. Hypothetically, every Asean country would have to tap into and unleash all of their foreign reserves to cover such an amount.
There is no question that foreign investment and private capital have a big part to play in Asean infrastructure projects. The continuing debt crisis in Europe has helped strengthen the case for Asia as a long-term investment destination. Asia is no longer seen as a place for speculative investors to chase yields, but rather as a safe long-term strategic reallocation of assets from the developed world to the emerging markets. The austerity measures being taken across the Eurozone will stunt its growth to virtually zero in 2013. Money managers across the zone will certainly be looking to park their money elsewhere until the dust settles in Europe.
The US government has attempted to stimulate its sluggish economy through a series of asset repurchase programmes, which boils down to printing money. The resulting increase in inflation will force fund managers to look beyond American shores for higher yielding assets. Furthermore, as the dollar comes under pressure, it may bring about a rush of capital outflow from dollar assets to emerging markets such as Asean. Given the US’ ‘pivot to Asia policy’, which has been embraced by the Obama administration, this is a likely scenario.
Japan has been pursuing a money printing timetable of its own. The newly elected prime minister, Shinzo Abe, has been keeping up his relentless pressure on the central bank to meet the inflation target of 2%, with an announced stimulus package of $117 billion, the biggest since the financial crisis. Abe’s first official visit since taking office was to Indonesia, Thailand and Vietnam, providing evidence of Japan’s commitment to this region.
With 2013 seemingly the year for printing money, some of the cash will certainly find its way to other parts of the world, including Asean. The recent credit rating upgrade for some Asean countries will make the region more attractive for investors, and cheaper for infrastructure developers to raise funds in the capital markets.
It is against this backdrop that Asean will be presented with the biggest opportunity to attract funds into its infrastructure projects. It is imperative that Asean countries work together fast to integrate their disjointed capital markets. Securities regulators across the region must also work towards a common legal jurisdiction for securities documentations to facilitate a smooth entry for international investors. In addition, Asean countries must tighten the rule of law and ease the risk of doing business in their respective countries. A recent survey by the World Bank ranked all Asean countries, apart from Singapore, unfavourably when it comes to enforcing contracts and protecting investors.
More than anything, Asean countries must be opportunistic and use the current situations in the US, Europe and Japan to their advantage, to attract investments in their ailing infrastructure projects. It is time to build the foundation of a sustainable economy for the whole region, and there is no better time than 2013.
