Asia bond markets offer alternative infra funding

Infrastructure spending in Asia is expected to increase by 15 percent over the next few years, and the region currently needs about $10 trillion in infrastructure funding for airports, subways, power networks and water treatment facilities, delegates heard at the World Bank Infrastructure Finance Summit, in Singapore.

With the need for funding increasing by the day, governments will not be able to shoulder the entire burden of financing projects on their own. At the same time, infrastructure loans – an essential ingredient in any infrastructure investment – are getting harder to come by in the region.

Fear of inflation has encouraged governments and corporations alike to tighten liquidity, and new financial regulations (including Basel III) have “hamstrung” the banks that used to lend to infrastructure projects, according to the World Bank’s executive summary of the forum.

One option for alternative debt financing should be Asia’s bond markets, several panels at the summit contended. In particular, deepening regional municipal bond markets and the creation of an effective project bond market offer the most opportunities.

In some countries – such as China and Korea – the bond markets are already quite liquid, according to Hans-Martin Aerts, head of Asian infrastructure at APG Asset Management. But most markets remain dominated by bank loans, even as European banks have scaled back their Asia operations, he said.

Historically, APG itself has primarily relied on banks in Asia and thus Aerts believes the bond markets in the region have a long way to go. However, he also looks forward to their development as an additional option for infrastructure debt.

“The bond market development would only work to our advantage, since the bond markets will increase the region’s liquidity,” Aerts told Infrastructure Investor.

APG looks on Asian infrastructure as a market offering higher returns and a diversification play, Aerts explained. The firm hopes to continue expanding its footprint in emerging markets worldwide, and although its mandate is primarily focused on the equity side of infrastructure investments, Aerts said debt like that offered by bond markets is one of the key drivers of good equity returns.

Any additional options for debt funding will be welcome for infrastructure investors in the region, but governments are still working out the regulatory framework needed for those bond markets to develop, according to World Bank managing director Sri Mulyani Indrawati.