Covid-19 containment measures have been hard on Southeast Asian transport infrastructure and utilities. Many piled on leverage in expectation of strong secular growth. Now, firms are grappling with the double hit of stringent government restrictions, and rising sovereign rating risk. A slower-than-expected economic recovery, funding and liquidity strains, and weakness in the ability or willingness of governments to support state-owned entities also present risks to the region. However, industry will recover and continue to be supported by investments in infrastructure projects. The focus on the creation of sustainable and quality infrastructure and adoption of technology will aid in speeding up economic recovery from the Covid-19 shock in Southeast Asian countries.

Macroeconomic position

Asean+3 Macroeconomic Research Office (AMRO) expects GDP for the ASEAN region to contract 2.6 per cent in 2020 before rebounding to 5.7 per cent in 2021. The biggest challenge facing the region will be balancing the trade-off between easing restrictions to revive the economy and risking a second wave of infections. Currently, the ASEAN-5, consisting of the Philippines, Indonesia, Malaysia, Thailand and Singapore, are the slowest to recover from the pandemic. Other ASEAN countries, including Brunei, Cambodia, Laos, Myanmar and Vietnam, were proactive in implementing social distancing measures. This has made them successful in their containment measures. As per AMRO, the region is expected to follow a gradual U-shaped recovery due to the efforts to contain the virus. The lockdowns also caused disruptions to business operations and widespread collapse in domestic demand. Recent indicators show significant improvements in production and trade for some, while high frequency indicators of people movement suggest that activity within the region has been gradually recovering recently as containment measures are eased. However, the opening up has also led to renewed outbreaks in several places and authorities have had to retighten restrictions.

Emerging trends

Sustainable and green infrastructure

In developing cities, there are rural areas that lack even basic facilities. Governments have to build infrastructure for travelling and water, electricity, sanitation and other facilities. ASEAN member countries have begun sustainable development projects – Indonesia is producing environment-friendly vehicles while Vietnam and Myanmar are building huge solar power plants. Collectively, the Smart Green Cities programme in collaboration with the European Union (EU) seeks to reduce carbon emissions and promote sustainable development in Southeast Asia. The initiative will combine city-level solutions with national capacity building and regional approaches, such as the ASEAN Smart City Network, which supports green and smart city solutions in select ASEAN cities. An integral element will be the increased exchange of proven, environmentally sound city management practices between the EU and ASEAN.

More Southeast Asian banks can embark on sustainable and green financing since there is potentially a $3 trillion market for green and sustainable infrastructure investment in the period from 2016 to 2030. Sustainable investing is a rising trend among banks as they invest in a responsible manner in accordance with environmental, social and governance guidelines, contributing to social welfare. The issue facing sustainable infrastructure development is not a lack of projects, but a lack of bankable projects that are given investment grade status by credit rating agencies. A system of blended finance, which will involve the sharing of key risks between the public and private sectors, will help unlock more funds for sustainable infrastructure projects. There have been several key examples of successful blended financing schemes in Southeast Asia supporting sustainable infrastructure. For example, in Thailand, the Lomligor Company was able to secure financing for a 10 MW wind power plant and battery energy storage system partly through a blended financing arrangement. The financing addressed bankability challenges facing the project at the time.

As countries face an increasing financing gap for climate-resilient infrastructure, especially following the Covid-19 pandemic, it is essential for governments to tap the domestic and global capital markets with green and sustainability bonds. Thailand’s first sustainability bond, a first-of-its-kind issuance by a sovereign in Southeast Asia, was issued in two tranches totalling THB 30 billion (about $964 million) in August 2020. Its proceeds will be used to finance green infrastructure through the Mass Rapid Transit Orange Line (East) Project.

ASEAN a manufacturing hub

ASEAN has a chance to attract new investment in labour-intensive manufacturing. Several Southeast Asian countries have already taken steps in this direction.

  •  Thailand has announced policies to establish the country as an electric vehicle (EV) hub in five years, including use of EVs by government organisations and state enterprises and the introduction of electric buses and electric motorcycle taxis.
  •  Malaysia has built up 4.3 GW of solar cell module manufacturing capacity, making it the third largest maker outside of China.
  •  Vietnam has become a popular destination for electronics manufacturing. Vietnam has been a go-to for investors transitioning out of China for quite some time now. Whether it is because of an increasingly skilled workforce, improved infrastructure, pro-business policy decisions, close proximity to China, or a combination of these, Vietnam seems ready to step up as the ASEAN alternative to Chinese manufacturing.

Towards digital ASEAN

As businesses closed due to movement restrictions, they had to offer goods and services to consumers by engaging them via the digital space. Many businesses started to explore and adapt their business models and activities accordingly in order to attain business growth or to stay afloat. Prior to the pandemic, cloud technology capabilities and Internet of Things (IoT) innovations such as driverless cars, wearable smart devices, digital home appliances and smartphones had already revolutionised the way people work and live, facilitating real-time collaboration and automation processes.

There is huge potential in the Southeast Asian market. ASEAN has one of the fastest growing digital markets worldwide. The Brunei government announced the Digital Economy Masterplan 2025 in June 2020 to provide its citizens with the right digital environment and infrastructure. In Singapore’s smart nation initiative entitled “Smart Mobility 2030”, Singapore is running trials of autonomous vehicles and buses. It rolled out its EV-sharing initiative in December 2017, with sufficient electric charging stations nationwide. Vietnam visualised four potential digital futures and will transit to a digital economy by 2030, while growing sustainably and improving business competitiveness and productivity. Technologies are leveraged to develop smart digital solutions, which will ensure smart city advancements and urban transformation in Bandung, Indonesia. Ensuring urban mobility and the effectiveness of public transport and services are at the forefront of this development.

Covid-19 has brought along, or perhaps accelerated, some fundamental changes in the world. In the transport and logistics industry, the need for contactless delivery, service suspension, inventory backlogs and disruption of the worldwide supply chain posed daunting challenges. However, many logistics companies were quick to explore unconventional approaches and adopt technologies including artificial intelligence (AI), IoT, and robotics to enhance efficiencies in their transport system. Digitalisation and automation will be the means to build smarter and more resilient supply chains, and this is where opportunities can be found.

Policy initiatives

In terms of policy response to the pandemic, ASEAN member countries have introduced various economic stimulus packages. Common measures are tax incentives/breaks for affected businesses/sectors; subsidies such as cash assistance, discounts on electricity bills, etc., to households and workers; deferred tax or loan payments and exemptions from or lower government fees and charges. Central banks have also lowered policy rates and reserve requirements, and bought government securities/bonds. Further, ASEAN member countries have agreed to establish the Covid-19 ASEAN Response Fund and reactivate regional bodies for financial stability.

Southeast Asian economies have been hurt badly by their dependence on China for raw materials and as an export market. China is now helping Southeast Asian nations respond to the pandemic in very public ways. It is providing technical advice on how to beat the pandemic and shipping large quantities of medical supplies to the region. China also supports the Covid-19 ASEAN Response Fund and has agreed to provide necessary support through the ASEAN-China Co-operation Fund and ASEAN+3 Co-operation Fund.

International financial institutions have also pledged to support countries affected by the Covid-19 outbreak. The International Monetary Fund pledged to increase lending capacity for members to $1 trillion, and to work on debt relief for low-income countries through the Catastrophe Containment and Relief Trust, while the World Bank has made available $160 billion for long-term financing over the next 15 months. The Asian Development Bank (ADB) also announced a $6.5 billion package for support to the Covid-19 crisis response. So far, ADB has approved grants for the Philippines and Indonesia, and has offered support for Vietnam. The Philippines launched a $5 million Rapid Emergency Supplies Provision Project, a provisional food assistance for vulnerable households and workers in Luzon. Indonesia has availed a $3 million grant to purchase essential medical equipment and supplies for Covid-19 response, such as ventilators and personal protective equipment.

The Asian Infrastructure Investment Bank has announced that it would make $5 billion available to help public and private sector clients negotiate the Covid-19 pandemic. It recently doubled the funds under its Covid-19 Crisis Recovery Facility to provide $10 billion due to high client demand. Even the US has acted swiftly to support ASEAN in combating the Covid-19 virus. The US has released over $35 million in emergency health funding to help ASEAN countries fight the virus.

Impact on China’s Belt and Road Initiative

The global economic outlook is gloomy in the shadow of Covid-19. The ongoing Covid-19 pandemic is having a traumatic drag on China’s Belt and Road Initiative (BRI). The policy attention of many BRI participating countries has been fixed on combating the coronavirus contagion, putting economic cooperation and infrastructure development on the back burner. Even before Covid-19, the BRI was facing increasing criticism in host countries for its lack of transparency, displacement of local communities, adverse environmental impacts and fears of debt-trap diplomacy. The global economic slowdown brought on by the pandemic has increased the likelihood of host countries cancelling or delaying BRI projects, especially large-scale infrastructure projects.

The process of reviving the BRI in a post-Covid-19 world can be facilitated and expedited through a two-step sequenced approach. The first step is to focus on the non-physical aspects of the BRI such as the Health Silk Road (HSR) and the Digital Silk Road (DSR). Despite a late start in 2016, the HSR is gaining currency with the outbreak of Covid-19. With social distancing measures continually pushing economic activities and consumption patterns online, China’s DSR will rise in prominence.

Outlook

Southeast Asian countries should focus more on public-private partnerships (PPPs), as that will help attract private capital and technical expertise in the infrastructure sector, which has been hit hard by the pandemic. Demand for existing infrastructure has fallen sharply due to Covid-19. Governments in Southeast Asia will need to quickly assess the potential short-term impact of reduced demand and increased costs across their PPP portfolio. ASEAN countries should revisit their PPP frameworks, making government support an integral element for seeking value for money through PPPs. Covid-19 is an opportunity for leadership to strengthen local governments so that cities, many of which are struggling to meet the social and economic challenges following the pandemic, can become front liners in the recovery process.

Asia’s growing heft in the world economy – the ADB predicts that the region will contribute more than half of global GDP by 2050 – and its improving political stability are pulling in funds from public institutions and the private sector. Despite concerns of a slowdown triggered by issues such as the US-China trade war and the Covid-19 pandemic, Southeast Asia will continue to offer attractive long-term project finance opportunities for years to come.

To facilitate quality infrastructure investment, ASEAN will need to work more towards institutional connectivity to facilitate international commercial trade and policies, removing behind-the-border issues as fast as possible. The region is moving towards innovative development (Industry 4.0) in which policies will be needed to facilitate small- and medium-sized enterprise development, smart cities, smart agriculture, etc. The member countries and ASEAN as a group may need to work on a “green deal recovery” to bring back normal economic activities as soon as possible through various measures including financing green projects and promoting quality infrastructure as part of their economic recovery packages.