The investment and finance scenario in Southeast Asia remained under pressure whilst facing a multitude of macro challenges. The onset of the US-China trade war, coupled with the sudden emergence of the Covid-19 pandemic, led to economic growth hitting a plateau in the region. Infrastructure spending took a hit with government spending on the sector remaining stagnant due to the macroeconomic challenges emerging in the region. Further, the pandemic has strained government finances and thus pushed governments to cut corners and prioritise projects that are of greater importance.
Resilience in multilateral aid
Multilateral funding to Southeast Asian countries continued to show robustness over the course of 2020. A total of 12 loans were sanctioned in 2020 with over $1.85 billion committed towards infrastructure development in the region. The largest lender in terms of commitment to the region was the Asian Development Bank (ADB) followed by the Japan International Cooperation Agency (JICA) and the World Bank. The transport and energy sectors attracted the lion’s share of funding with 82 per cent of the total loan book of ADB, 70 per cent of the overall loan book of the World Bank and 77 per cent of the overall loan book of JICA committed to these two sectors.
Some notable deals of the year include a $335 million loan by ADB to commission an additional 110 MW of geothermal electricity generating capacity in Indonesia, a $350 million loan from the World Bank for a power system efficiency and resilience project in Myanmar and a $126 million loan from ADB for the Angat Water Transmission Improvement Project in the Philippines.
The banking sector in Southeast Asia experienced some turbulence as loans expanded at a slower rate due to lower economic growth. This trend was felt across both the household and non-household segments. However, bank lending still proved to be a major source for funding infrastructure projects in the region due to a less developed bond market.
Bonds: An untapped potential
The bond market for infrastructure financing remains a largely untapped route in Southeast Asia on account of a number of persistent issues such as lack of liquidity and lower project ratings that have made investors vary of investing in the bond market. Malaysia and Singapore continue to dominate the corporate bond market in the region due to successful project financing via bonds. The bond market has matured over the years owing to a number of factors, including sanctity of contracts enforced and comprehensive regulations. Thailand has become a formidable force in the local currency (LCY) corporate bond market, recording the highest issues in the first half of 2020 as well as becoming the largest bond market by size.
The corporate bond market remained subdued in 2020 due to uncertainties regarding the pandemic and thus corporate bond issuances decelerated in every country except the Philippines as compared to 2019. In the infrastructure project segment, transportation projects were the most successful in raising capital through bonds followed by the energy and water segment.
Green bonds: Future ready
Another emerging source of finance in ASEAN is the use of green bonds to finance infrastructure projects. Green bond issues from ASEAN picked up pace significantly in 2019 and stood at $13.4 billion as of December 2019. Country-wise, Singapore represents the largest source of green bonds at 46.2 per cent of the total ASEAN issues. Indonesia comes second at 21.64 per cent, and Philippines third with 15.07 per cent. Malaysia, Thailand and Vietnam constitute the rest of the market while Brunei, Cambodia, Laos and Myanmar are yet to issue a green bond. In 2019, ASEAN had 39 green bond and loan issuers. The number of issues rose to 32 in 2019 from 16 in 2018, while the number of issuers increased less, with 20 in 2019 compared to 15 in 2018.
The pressing need to address loopholes in social infrastructure in the Asia-Pacific region diverted attention from green bonds to social bonds during the pandemic. The issue of green bonds in the region was the lowest in more than five years during April-June 2020. According to Climate Bonds Initiative, the nine most active green bond issuing markets in Asia Pacific raised a total of $5.22 billion in the three months ended June 30, 2020, as compared to $16.53 billion raised in the corresponding period of 2019. The prime reason is the diversion of funds towards supporting healthcare infrastructure through social bonds, which aim to raise debt for projects with positive social outcomes. For the first time ever, the issuance of social bonds and sustainability bonds surpassed the issuance of green bonds in April 2020. While the ongoing pandemic has rightly put sustainability and social bonds under the spotlight, the sustainable fixed income funds, that is, green bonds, are expected to bounce back in the medium to long run.
Even though the financing market in Southeast Asia has matured, it still faces some pressing challenges. First, a weak legal or regulatory framework will block private sector capital and expertise from participating in infrastructure projects that are inherently public in nature (power, water, transport) as legal certainty is a key ingredient to providing comfort to investors that their capital is secure and that they will be treated fairly. One common challenge in the region is the difficulty in the acquisition of land for an infrastructure project. This may arise from lack of regulation that supports acquisitions or delays in the implementation of regulations. Second, there is an imbalance between risks and rewards in the region. Most foreign investors and financiers will assess the risks in projects they will be exposed to and whether they will be able to compete with the local market. If the returns offered by a specific project do not fairly compensate advisers, investors and lenders, developers and operators, they will invest their money in competing projects and jurisdictions that do. This is further exacerbated by the varying preferences of financiers and investors (which include governments, banks, funds and insurance companies). For instance, investment funds might prefer higher returns in a shorter term, whereas sovereign wealth funds might have opposing preferences (lower returns over a longer period). Third, there are several hurdles to doing business in most Southeast Asian countries. This can be seen by the fact that the World Bank’s Ease of Doing Business report ranking for 2020 rates some of the Southeast Asian countries very low in terms of ease of doing business. While Singapore and Malaysia are better placed, countries such as Cambodia, the Philippines and Myanmar rank among the lowest. Lastly, the region suffers from poor project bankability. Across much of Southeast Asia, there is an insufficient pipeline of infrastructure projects that meet the bankability requirements of international investors. This issue is a key driver of the infrastructure financing gap in the region and needs to be resolved for a meaningful level of international private investment to be channelled towards ASEAN. While many countries have begun making changes in line with international best practices, neither the volume nor the pace of change has been enough yet.
The infrastructure financing sector has emerged as a formidable force in Southeast Asia. It has grown substantially in the region with an increasingly diversified base of instruments available to raise and utilise credit. Covid-19 has proved to be a major hindrance in the growth of the sector because of the increased economic uncertainty in its wake in the short run. However, the long-term outlook of the industry is bright due to the favourable demographic and economic conditions present in the region as well as due to increasing institutional interest in assets that provide a positive yield around the globe.