Asia's unfinished road to growth

Infrastructure has become one of the biggest growth constraints in Asia, but many funds that could be used to solve the problem are going elsewhere.

FT.com

The Asian Development Bank annual meeting was held in Manila this year, hardly the showcase for what a 21st century city should look like. The meeting also came against the sombre backdrop of rising concern about the impact of Europe’s deteriorating economic health on Asia, especially since European banks have been big players in regional infrastructure.

The ADB regularly publishes estimates for how much it will cost to build world-class infrastructure in the region. This year the number being tossed about was an impressive $8 trillion in the next 10 years, while India alone will need at least $1 trillion.

Infrastructure has become one of the biggest constraints to growth in many countries, among them India, Indonesia and Pakistan – not forgetting the Philippines of course.

Many governments do not have the money themselves to pay for the roads, ports, power plants, irrigation and waste management systems their countries desperately need. The Philippine government’s great contribution as host of the ADB meetings was to erect a wall so delegates stuck in Manila’s frustrating traffic would be spared the sight of the hovels of Manila’s less fortunate residents.

Most banks, meanwhile, are looking at higher capital requirements, especially given the greater capital hit for the very long-term financing that underwriting infrastructure involves. As a result, some international banks have pulled back.

But money is not necessarily the constraint that it first appears to be. There is a lot of Asian money that could and should stay in the region and help finance infrastructure, rather than going abroad and buying paper securities in currencies whose value will surely erode over time.

Moreover, there are plenty of measures that the region can adopt to help free itself of dependence on outside capital and on banks vulnerable to periodic crises. Asian bond markets remain under-developed despite 20 years of talk.

Meanwhile, Asian governments should take advantage of regional banks that do still have money on offer. The Japanese have always been big players in regional infrastructure, especially when their companies help build it or are beneficiaries in other ways. But now they have been joined by the Koreans and by the vastly deeper pockets of the Chinese, particularly China Development Bank and Export Import Bank of China. All three offer attractively priced long-term financing, with far less of it tied to the use of local contractors and equipment than in the past.

In Vietnam, for example, half of the $1 billion financing for a coal-fired power plant for PVN, the local power company, came from China Development Bank, in a deal with HSBC. That financing last year came at a time when few international banks would go near Vietnam, given its economic problems and rampant inflation. It also came despite increased tensions between the two countries over the South China Sea. In addition, Export Import Bank of China is financing a gas-fired power plant in Pakistan along with HSBC, albeit with a Pakistani state guarantee, operating in another country where most international banks are reluctant to do business.

The Chinese, Japanese and Koreans are increasingly active in South America as links between the two regions grow. One reason the Inter-American Development Bank sent a big delegation to the ADB meetings was because China Development Bank alone provides more money to Central and South America than the IADB, the CAF, the regional development bank of the Andean nations, and the World Bank combined – in excess of $30 billion.

The cheap financing available from the Chinese and Japanese today may not always be there. The cost of capital will go up in China over time, especially when capital controls are dismantled. China will inevitably want to start lending more in renminbi rather than in dollars and a floating renminbi will probably be an appreciating renminbi over the long term.

Similarly the Japanese have every reason to become more active financing big infrastructure deals in the region, given that the two obvious alternatives are corporate lending at home, where there is little demand or margin, or to invest in their government bond market.

But at some point, yields on Japanese government bonds will go up and the banks will be left with massive capital losses on their holdings. In the future, Japanese rates generally will rise and their money too will become more costly.

Governments in the region that do not get their infrastructure act together soon will find the gap with those that do will only get bigger over time. It will be an expensive lesson.

Henny Sender is the FT’s Chief International Finance Correspondent

Copyright Financial Times 2012.

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