The Association of Southeast Asian nations (Asean) is planning to tap the bond market within the next three years to source funding for investing in infrastructure projects that will enhance inter-regional connectivity.
The region’s countries are working to obtain an ‘A’ credit rating so that the fund will be able to issue bonds to finance both greenfield and brownfield projects, Malaysian finance minister Dato’ Seri Ahmad Husni Mohamad Hanadzlah told Asiamoney PLUS on October 9 on the sidelines of the Asean Finance Ministers’ Investors Seminar in Hong Kong.
“We’re very confident [of our ability to obtain a credit rating], said Hanadzlah. “The investments will be based on the critical requirement of each and every country.”
The fund will be established with an initial cash injection expected to be US$485 million, of which US$335 million is being provided by nine Asean members excluding Myanmar, according to the Asia Development Bank (ADB) website. The remaining US$150 million is being provided by the ADB. ADB managing director general Rajat Nag said the fund will provide capital to six projects a year with a lending cap of US$75 million per venture, according to the Business Inquirer. Asean consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
Obtaining a credit rating will also allow central banks of the region to buy the bonds issued by the infrastructure fund and keep investments within the region. The region’s US$700 billion in reserves have mostly been deployed outside of Asean and out of Asia.
“In that way it will facilitate the recycling of our substantial reserves into the region itself. In fact, these are the instruments [needed] so that the recycling of our funds is done within Asia and not sent outside Asean,” said Philippines finance minister Cesar Purisima during a press conference at the meeting.
The ability of Asean to keep its capital circulating within the region’s economies will boost the creditworthiness of the individual countries. Only Thailand, Indonesia and Malaysia are rated investment grade by international credit agencies.
“It will be credit positive for countries in the region if they get this going,” said Christian de Guzman, a sovereign credit analyst at Moody’s in Singapore. “It’s a way to recycle savings within the region rather than investing outside the region in US Treasuries, for example. Certainly, keeping that money within the region would be good because there are pretty wide infrastructure deficits that need to be plugged in several of the countries in Asean.”
The fund’s total lending commitment is forecast at US$4 billion and is planning to leverage US$13 billion in infrastructure financing by 2020, according to the ADB. Malaysia is expected to be the largest Asean contributor with a US$150 million investment, followed by Indonesia with US$120 million. The region will require US$60 billion a year to fully address Asean’s infrastructure needs.
The infrastructure fund aims to provide over half a billion people with better access to cleaner water and sanitation, increased access to energy and improve transportation. Separately, Indonesia is planning to increase its infrastructure spending to help achieve these goals by increasing funding by 25% to IDR210 trillion (US$21.8 billion) by next year.
“We will also ask support from the state-owned enterprises and also private sectors to improve infrastructure in Indonesia,” said Indonesian finance minister Agus Dermawan Wintarto Martowardojo.
Private sector investment in infrastructure has been marred by the perceived risk associated with providing funds for the long term. The fund aims to provide finance for public-private partnerships to mitigtate such risks, according to the ADB.
Thailand will also be stepping up its infrastructure spending to improve the flow of goods between neighbouring countries.
“Thailand is the puzzle in the missing link because we are in the middle of connecting Myanmar to Vietnam and down to Singapore. So we see the need to be very solid about the infrastructure investment plan,” said Thailand’s finance minister Kittiratt Na Ranong. “We see the transport of shipment of goods all the way from Vietnam to Myanmar. It will be a major achievement.”
In addition to goals in developing the region’s infrastructure to help improve trade activity, heightened inter-connectivity will also help bring down the price of goods.
“It can also help address inequalities within countries. When shipping a container for international trade from Jakarta to Singapore or Jakarta to China, it’s often cheaper than shipping a container from Jakarta to West Papua. These price differentials are reflected in the costs of certain goods, which can be several times higher in one part of the country than another. Facilitating trade between rural and urban areas, including improving inter-island access in archipelagos such as Indonesia and the Philippines, will also help improve development outcomes,” said de Guzman.
The ADB has also provided a credit facility for local currency bonds to entities domiciled in the Asean nations as well as China, Japan and South Korea starting from the third quarter of this year.