S&P: Global investors still wary of Asia

The region needs to develop a deeper credit culture if it is to meet its infrastructure needs, fresh research shows.

Asia runs the risk of slower growth and gaping infrastructure deficits if it doesn’t put more effort into luring foreign investors, according to Standard & Poor’s.

In a report released this week, the rating agency said that lower credit quality and insufficient relative returns in the region limit the number of investable projects for private financiers.

Many global institutions expect higher returns from the region’s infrastructure projects to reflect the greater risks attached to new Asian ventures, which often come with a combination of construction, counterparty, currency and refinancing risks.

International funds require higher credit controls to monitor the liquidity and solvency of the projects they back, a move prone to raising costs and reducing management flexibility for borrowers. They also tend to be more expensive as they often focus on the credit quality of a single project rather than the ownership group.

Yet S&P notes that few project sponsors are ready to accommodate for these constraints, because in most cases they can count on cheaper and more lenient alternatives.

“Unlike the 1990s, when local banks couldn't finance domestic infrastructure, today [local banks] are very liquid. [They] are able to fund in local currency and at rates that make infrastructure affordable,” the report said. Local banks tend to have weak lending standards, it added, as they base their assessment on the credit quality of the ownership group rather than the project itself.

This debt, however, is mostly short-term – meaning that assets often need to be refinanced. And given the relative weakness of local corporate bond markets, S&P observed, governments end up footing at least part of the bill to ensure continuity of the project.

“These investments become part of the government debt levels. While private funding is proportionally small, it's nonetheless a large amount and alleviates pressure on government finances.”

Predictable revenue streams – in the form of availability payments or fees – as well as fair and reliable legal systems were seen as key to attracting foreign investors in greater numbers. Failing this, the report concluded, “those Asian governments in high-growth countries may face difficulties in maintaining growth and funding for all their infrastructure needs”.