To meet the needs of its increasing urban population, Southeast Asia has planned huge capital expenditure on the infrastructure sector. While the strategic role played by China and Japan in funding infrastructure in the Association of Southeast Asian Nations (ASEAN) is evident, a number of new financing mechanisms have gained prominence in the past few years. Governments are stepping up private investment and looking at new funding mechanisms such as green bond financing, real estate investment trusts, etc., to meet capex needs as there is still a huge spending gap. Southeast Asia Infrastructure takes a look at the funding mechanisms adopted by ASEAN to meet the funding gap for its infrastructure development…
A large number of infrastructure projects are being approved by multilateral agencies in Southeast Asian countries. The majority of these projects have been facilitated through loans and other assistance provided by Japan and China. Although Japan is the leading provider of financial assistance to the projects in Southeast Asia, China is also catching up through financing major projects in the Asia-Pacific region. So far, Japan’s financial support to these countries has been mostly long term with low-interest yen loans. However, it is now looking at providing short-term loans to strengthen its ties with ASEAN countries through investment commitments. In December 2019, the Japan government announced its plan to provide funding of about $3 billion to the members of ASEAN in public and private investments and loans over three years from 2020 for infrastructure development. China has invested in large infrastructure projects in the region, including the infamous One Belt, One Road initiative. Besides, the Chinese-sponsored Asian Infrastructure Investment Bank (AIIB) has approved a total of $3.19 billion for 14 projects in seven ASEAN countries so far.
Apart from the investment and loans for infrastructure development, the two countries have also stepped forward to provide financial assistance to deal with the ongoing pandemic. The Japanese government has announced the disbursement of $1 million in a new fund to assist ASEAN’s response to the novel coronavirus pandemic. Further, the Covid-19 Crisis Recovery Facility has been launched by the AIIIB to provide emergency funding to its member nations. This $10 billion facility is flexible and adaptable to changes in the current economic scenario. It aims to support healthcare and infrastructure investments affected by the pandemic. In a bid to provide investment funding for infrastructure, energy and natural resources in the ASEAN countries, the Export-Import Bank of China and other institutional investors have also sponsored the China-ASEAN Investment Co-operation Fund.
Green bond funding has attracted huge attention since the signing of the Paris Climate Agreement in December 2015. Green bond and loan issues in ASEAN almost doubled, reaching $8.1 billion in 2019 from $4.1 billion in 2018. About two-thirds of the funding has been allocated to the building and energy sectors. ASEAN issues represent 3 per cent of the global total and 12 per cent of the Asia-Pacific region in 2019. The share has considerably risen from about 1 per cent and 5 per cent in 2018, respectively. The cumulative green debt issues by ASEAN stands at $13.4 billion as of December 31, 2019. In 2019, ASEAN had 39 green bonds/loans/sukuk issuers cumulatively. About 20 issuers issued 32 green debt instruments in 2019, up from 15 and 16 in 2018 respectively. Financial corporates have shown a particular interest in green bonds in ASEAN as they represent 29 per cent of the total amount raised. At present, Indonesia is the largest source of green bonds, followed by Singapore and Malaysia.
The pressing need to address loopholes in social infrastructure in the Asia-Pacific region has diverted the attention from green bonds to social bonds during the pandemic. Green bond issues in the region were the least in more than five years during April-June 2020. According to Climate Bonds Initiative, the nine most active green-bond issuing markets in the 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 last year. The prime reason could be 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, issues of social and sustainability bonds surpassed issues 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, i.e., green bonds, are expected to bounce back in the medium to long run.
The ASEAN Infrastructure Fund has been set up by ASEAN members and the Asian Development Bank to address the region’s infrastructure funding requirements. In a major development, the ASEAN Catalytic Green Finance Facility (ACGF) was launched in April 2019. The new facility provides financial assistance for climate-friendly infrastructure projects including sustainable transport, clean energy, and resilient water systems. In February 2020, the European Union committed Euro 50 million to invest in the ACGF. It will make the investment from its Asia Investment Facility. The first ACGF-backed project is expected to be approved by end 2020.
Private equity investments
Another major funding source that has been affected by the Covid-19 pandemic is the private equity market. Investments made in Southeast Asia by private equity and venture capital declined considerably in the first three months of 2020. During January-March 2020, private equity investments in the region amounted to $1.4 billion across 141 deals, declining from $4.1 billion across 155 deals in the corresponding period last year. Further, the private equity aggregate deal value declined by 47 per cent from $2 billion to $1.1 billion during the review period. According to media reports, the decline in private equity investment has been the lowest since the third quarter of 2013. The strong momentum of the private equity market in 2019 could not withstand the burden of the pandemic in 2020. However, it has created abundant investment opportunities in technology, education and healthcare firms. Covid-led digitalisation has resulted in increased interest among venture capital firms to diversify their portfolios through investment in supply chain and logistics, e-commerce, fintech, digital communication tools, etc. Therefore, private equity investors have huge potential to fund emerging firms and start-ups in the region.
The way forward
Funding for projects in ASEAN is expected to get affected in the short run in view of the ongoing pandemic as there are risks associated with the large dependence on external sources for financing needs. The dampening of investment activities due to the pandemic is expected to slow down growth in Southeast Asian countries. However, the recent infrastructure boom in countries like Vietnam, the Philippines and Singapore has attracted global investors towards Southeast Asia. Besides, relief funding announced by fellow nations and large development banks is expected to help the region bounce back in no time. Going forward, the focus on the creation of green and sustainable infrastructure as part of economic recovery is expected to bode well for the green bond market in the region. Besides, the investment opportunity in unicorns will soon be tapped by venture capital