Central and Eastern Europe should look to Asia for inspiration in building debt capital markets to fund infrastructure, a senior banker has told Emerging Markets.
Massimiliano Castelli, managing director and head of strategy for global sovereign markets at UBS Global Asset Management, said the “key question” for these countries was the development of local capital markets.
“If you look at Asia, they have made great progress. But here, excluding Poland and other parts of the EU, there is still room for growth, no doubt about that,” he said.
“So my view is they should look at the Asian experience, where they pretty much started from zero yet achieved a decent-sized local debt market where bonds can be traded.”
The gap between the region’s infrastructure needs and investment has been a constant theme in the build-up to the EBRD’s annual meetings, with a focus on methods of attracting private institutional capital to invest in its infrastructure.
“A number of challenges are limiting greater participation from institutional investors: poor project selection and planning, a lack of bankable projects, limitations around investment regulations, a lack of liquidity, and limited investor protection,” said Mauricio Janauskas, partner at McKinsey & Company. He estimated that institutional investment in infrastructure globally stood at $1.5tr-$2tr, and could climb as high as $5tr-$8tr “[That is] a significant step in the right direction, but not enough.”
DEVELOPING THE PIPELINE
But depth in local capital markets is not the only reason institutional capital has been absent from CEE projects. “It’s about regulation, creating the right conditions, and about the development of an institutional sector to buy the bonds,” Castelli said.
“The most natural buyer of local currency bonds would be local institutional investors who have liabilities in the same currency. Here, the institutional sector is still weak.”
Others felt there was a need for a demonstration effect: projects that had successfully been funded through the markets. “There is a need to build at a country level,” said Richard Chenga-Reddy, head of regulatory affairs at Standard Chartered.
“As one or two significant projects are seen to be well structured and well organised, it starts to build credibility. It’s about developing that pipeline.”
Chenga-Reddy also highlighted the need for transparency, policy certainty, investor and creditor rights, and the need for a degree of standardisation in structures and debt instruments.
“We have been in a very low interest rate environment and many investors are searching for yield,” he said. “It begs the question why there is such a funding gap. There is a great deal of demand for infrastructure finance, but a much more limited pipeline in terms of bankable and investable propositions for investors.”