2 1 INFRASTRUCTURE INVESTOR FUTURE OF INFRASTRUCTURE TRENDS Increasing public and corporate debt in Asian markets is likely to have an impact on private infrastructure investment in the region, writes Siddharth Poddar The Asian debt opportunityDEBT T he shortfall in infrastruc- ture spending in Asia is a story that has been told many times. Infrastructure demand in the region continues to outstrip supply and the infrastructure gap continues to widen year after year, despite the best efforts of governments in the region. Asian ec onomi es have grow n at rapi d rates over the last decade-and-a-half an d while gro wth rates i n the region’s eme rg- ing economies have fallen somewhat over the last two years, they still remain healthy . Rapid economic growth coupled with in crea sed urba nisa tion an d healt hy population growth have all brought the region’s inadequate infrastructure into sharp focus. Developing economies in Asia are faced with major infrastructure requirements – a fact acknowledged by governments and investors alike – as infrastructure development has not been able to keep pace with the demand for infrastructure. Poor infrastructure, particularly in the form of inadequate road networks and a shortage of power, is inhibiting growth in several Asian economies. Owing to these factors, there has always been a role in infra structure development for private investors. But Al lard Nooy, chief executive of InfraCo Asia, takes it further: “I think it’s fair to say that, in certain mar- kets, there has been an increase in pri- vate sector appetite.” A big part of that increased appetite comes from another story beginning to play out in Asian infra- structure: the region’s rising levels of debt. DEBT AS A DRIVER Compounding the issue for Asian gov- ernments has been the increase in debt- to-GDP ratios over the last decade-and-
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The Asian Debt Opportunity (Infrastructure Investor, December 2015)
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7/24/2019 The Asian Debt Opportunity (Infrastructure Investor, December 2015)
Increasing public and corporate debt in Asian markets is likely to have an impact on privateinfrastructure investment in the region, writes Siddharth Poddar
The Asian debt opportunity DEBT
T
he shortfall in infrastruc-
ture spending in Asia is a
story that has been told
many times. Infrastructure
demand in the region continues to
outstrip supply and the infrastructure
gap continues to widen year after year,
despite the best efforts of governments
in the region.
Asian economies have grown at rapid
rates over the last decade-and-a-half and
while growth rates in the region’s emerg-
ing economies have fallen somewhat
over the last two years, they still remain
healthy. Rapid economic growth coupled
with increased urbanisation and healthy
population growth have all brought the
region’s inadequate infrastructure into
sharp focus.
Developing economies in Asia
are faced with major infrastructure
requirements – a fact acknowledged
by governments and investors alike –
as infrastructure development has not
been able to keep pace with the demand
for infrastructure. Poor infrastructure,
particularly in the form of inadequate
road networks and a shortage of power,
is inhibiting growth in several Asian
economies.
Owing to these factors, there has always
been a role in infrastructure development
for private investors. But Allard Nooy, chief
executive of InfraCo Asia, takes it further:
“I think it’s fair to say that, in certain mar-
kets, there has been an increase in pri-
vate sector appetite.” A big part of that
increased appetite comes from another
story beginning to play out in Asian infra-
structure: the region’s rising levels of debt.
DEBT AS A DRIVER
Compounding the issue for Asian gov-
ernments has been the increase in debt-
to-GDP ratios over the last decade-and-
7/24/2019 The Asian Debt Opportunity (Infrastructure Investor, December 2015)
22 INFRASTRUCTURE INVESTOR FUTURE OF INFRASTRUCTURE
ROUNDTABLE
22 INFRASTRUCTURE INVESTOR FUTURE OF INFRASTRUCTURE
TRENDS
a-half, particularly since the onset of
the global financial crisis. While public
debt in Asia, barring a few countries,
is relatively low compared to developed
markets, levels of corporate debt have
increased significantly in a few countries.
According to the McKinsey Global
Institute (MGI), public debt in China has
increased from 26 percent of gross domestic
product (GDP) in 2000 to 41.7 percent in
2014. In the same timeframe, public debt
in Japan increased from 129.4 percent of
GDP to 235.5 percent of GDP and in South
Korea it increased from 23.5 percent in 2000
to 47.5 percent in 2014.
China has also witnessed a sharp
increase in its corporate debt-to-GDP
ratio, to 178.3 percent in 2014 from 91.4
percent in 2000. India, where public debt
levels remain low, has seen an increase
in corporate debt from 28.9 percent of
GDP in 2000 to 55.1 percent in 2014.
While debt levels in India remain low
compared to other economies, there are
sectors in which corporate debt is high.
One of them is India’s infrastructure
companies, which can have an impact
on the development of infrastructurein India.
According to MGI, government, cor-
porate and household debt amounts to
205 percent of total annual economic
output in Asia – a sharp increase from
the 144 percent debt-to-GDP ratio wit-
nessed in Asia in 2007, before the onset
of the global financial crisis.
While increases in household debt do
not necessarily have direct implications
for private investment in infrastructure,
investors will have their eye on risinglevels of corporate and government
debt.
Economies in the region are already
faced with fiscal constraints and
increased public debt-to-GDP ratios
could result in a squeezing out of infra-
structure spending. That, in turn, is
likely to be another catalyst for increased
private sector investment in infrastruc-
ture in certain Asian markets.
In Europe, for instance, an S&P study
of 16 countries showed that between
2003 and 2012, transport investment
in these countries declined as a result
of increases in overall levels of govern-
ment debt.
Hans-Martin Aerts, head of infrastruc-
ture at APG Asset Management Asia, says:
“Many governments in the region have
recognised these constraints and have
committed to structural reforms to pro-
vide a better infrastructure investment
framework and this should crowd-in pri-
vate investment in the sector, hopefully
leading to increased overall spending on
infrastructure development.”
Moreover, even those Asian countries
in which public debt is not a concern
just yet are still faced with fiscal con-
straints, particularly as they have a lot
of catching up to do in terms of spend-
ing on healthcare, education, housing
and social welfare. China, for instance,
is faced with an ageing society and its
government is ramping up expenditure
on healthcare and pensions.
Aerts believes that spending in these
areas could catalyse more capital into
infrastructure. “Improvements in educa-
tion and healthcare would trigger more
investments in hard assets,” he says. He
goes on to add that infrastructure assets
can play an important role in the portfo-
lio of pension funds, as these investments
are expected to generate long-term, stable
cash flows that match long-dated pension
liabilities. “Therefore, a higher contribu-
tion to pension programmes could lead
to more investments in infrastructure,”
he says.
DEBT AS A CONCERN
While increased public debt is likely
to provide investors with more oppor-
tunities to invest in infrastructure,
opinions in relation to high levels of
corporate debt are mixed. Take India,
for instance.
“Economies in theregion are alreadyfaced with fiscalconstraints andincreased public debt-to-GDP ratios couldresult in a squeezingout of infrastructurespending”
Hans-Martin Aerts
7/24/2019 The Asian Debt Opportunity (Infrastructure Investor, December 2015)