How does Southeast Asia compare with China and India?
JB: Southeast Asia as a region falls into the middle income to high-middle income category of economies where per capita GDP is sufficiently high to support financially viable infrastructure demand.
Note that infrastructure demand is different from infrastructure need. The purchasing power of people in Southeast Asia financially allows investments to be made by the private sector. In India, the GDP per capita is significantly lower. Substantial investment needs exist there but the question is whether infrastructure users can afford the charges needed to make investments sustainable without significant support from government budgets.
In terms of GDP per capita and, by implication, affordability of private infrastructure provision, China and Southeast Asia are similar. The difference between the two is that in China you need a strong local partner at the fund level to help navigate local conditions, whereas in Southeast Asia the need for strong local partners rather is at the investment/asset level.
In terms of risk, systemic risk in Southeast Asia as a whole is lower because it offers country risk diversification. The risk correlation between Southeast Asian countries is limited whereas socio-economic and policy conditions are converging. In terms of the regulatory environment, China is perhaps better and more uniform as it is a unitary system of public governance. In India, on the other hand, with its quasi-federal system of public governance, there is more risk because policies and regulations governing the private financing and provision of infrastructure may differ significantly from state to state.
Like many OECD countries, Japan does not have an infrastructure asset base that is growing significantly if at all. Also, both Korea and Japan, due to perceived lower policy and macro-economic risks, have low returns. The difference between them and, for example, the markets in Southeast Asia, is also that it is much more difficult for foreign investors to penetrate those markets, primarily due to business culture, language and acceptance.
Are the problems in India and the slowdown in China making limited partners look more closely at Southeast Asia?
JB: As a result of the macro-economic correction and the currency adjustment, we see that some LPs are returning to the fence. While the larger, more sophisticated investors have taken a look at the market adjustments and have accepted there will be lower growth, they will still be in those markets. So there has been a pause, but this is a correction and not a crisis and investors continue to be interested there.
What are your views on Indonesia?
JB: We believe that the prospect of tapering of quantitative easing by the US Fed and the resulting withdrawal of capital from emerging markets is far from causing a 1997-style crisis. Rather, it has brought about market corrections in Indonesia and, for that matter, other countries in our ASEAN core markets.
The economic corrections currently ongoing mean that investors are looking more at economic and policy fundamentals now. Our views on Indonesia have not changed. We think that the correction is necessary and welcome, and I think it will help the monetary authorities and economic and financial policy makers focus even more. We are happy that some of the froth is gone.
Indonesia needs stable capital with a long-term horizon, such as that offered by fund managers like us. It is a deep market with plenty of opportunity. In my view, one of the main risks there is the institutional capability to implement policies and develop detailed regulations that encourage and facilitate private investment in infrastructure. It is still a work in progress. There has been considerable decentralisation, but the strengthening of institutional capability at the provincial and municipal levels has not kept pace.
*Johan Bastin is the Singapore-based chief executive officer of CapAsia, a private equity firm investing in infrastructure in Southeast and Central Asia.