SINGAPORE: Roads, water and sewage systems, ports, and railway lines are all examples of infrastructure. To preserve growth momentum, combat poverty, and adapt to climate change, all Asian countries will need to invest in these big-ticket infrastructure items. Between 2016 and 2030, Asia’s infrastructure needs are anticipated to cost almost US$26 trillion, according to the Asian Development Bank. This equates to around US$1.7 trillion per year.
The COVID-19 epidemic has added to the cost, necessitating additional funding in areas like healthcare, sanitation, and information technology infrastructure.
Government coffers are being eroded at the same time that money being poured in to aid pandemic-affected economies.
Given this double whammy and the magnitude of the numbers, industry observers believe it will be difficult to close the gap just through public support.
As a result, private funding for infrastructure projects will be required.
Budget 2021: The government intends to issue fresh bonds to fund long-term infrastructure projects.
However, banks will not be the primary source of funding. As shown during the Asian financial crisis of 1997, relying on banks for financing is not a healthy practice, according to industry players. “At the time, Asia’s bond markets were not as active, and a small number of banks held the majority of the debt burden. When there was stress, this small group of banks couldn’t handle it, and the result was the Asian banking crisis,” said Mr Clifford Lee, DBS’ global head of fixed income. “The better option is to bring debt financing needs into the capital markets for funding to be given by many investors through the market itself, so that any future volatility or credit stress is cushioned and spread out,” he added.
As a result, the region’s capital markets will need to play a stronger role in infrastructure funding.
Asian companies are already issuing bonds in the G3 currencies, which include the US dollar, the euro, and the Japanese yen. Since 2014, the value of this market has more than doubled. According to experts, the company’s ongoing expansion is a proof of its potential. Foreign investors, according to industry insiders, will fuel the next stage of expansion in the Asian G3 bond markets. “Many of these bonds have been purchased by Asian investors in the last ten years or so. Mr Lee stated that “the rest of the world has yet to participate in the Asian G3 bond markets in a significant and meaningful way.” “The problem is that there isn’t enough of it.” There is a lot of interest in using the bond market to participate in Asia’s economic progress. The fundamental problem is a lack of supply, both meaningful and consistent supply,” he continued. There is also room for the region’s capital markets to develop even further to include bonds denominated in each country’s local currency. “The market for local currency bonds is still emerging. Local currency bond markets have various advantages, such as reducing currency and maturity mismatches, which contributed to the Asian financial crisis. However, there is still work to be done in the local currency bond market. For example, liquidity needs to be increased, and the investor base can be expanded further,” said Shu Tian, an economist at the Asian Development Bank. Mr. Alfonso Garcia Mora, vice president of International Finance Corp’s Asia and Pacific region, stressed that liquidity is “essential.” “The one thing that is necessary for the growth of capital markets is to ensure that you have the liquidity that is required for an investor to be able to sell an instrument in the market anytime they believe it is their right to do so. If you don’t have the capability, don’t bother. It is quite difficult for an investor to commit to a long-term relationship.” Liquidity in local currency bond markets will take time to develop. Commentary: It’s a difficult task to fund Singapore’s significant infrastructure projects. In order to accomplish this, Singapore plans to issue its first tranche of Singapore Government Securities (Infrastructure) bonds in the fourth quarter. Singa, or the Significant Infrastructure Government Loan Act, will be used to issue the bonds. Singa bonds will be used to fund important long-term infrastructure projects like new train lines and coastal protection projects. These bonds, according to Ms Tian of the ADB, are a significant step forward in the development of Singapore’s local currency bond market. “The issue of additional Singa bonds will help to improve investor awareness of this asset class by increasing the availability of infrastructure and green bonds in the market. This will also add liquidity to the markets. They will also increase demand for infrastructure and green projects by providing long-term instruments for participation in these projects,” Ms Tian added. “The goal here will be long-term infrastructure finance,” Mr Mora continued. As a result, the government’s power to invest in specific challenges will be strengthened.” The world’s finance markets are increasingly moving in that direction. When you look at the range of instruments available in the market – green bonds, impact bonds, and social bonds – you’ll notice that there’s a clear demand from investors to match the bonds they buy to the bond’s ultimate goal.” Plain vanilla bonds backed by the Singapore government’s balance sheet are known as Singa bonds. Traditional infrastructure project bonds, on the other hand, are backed by infrastructure projects. Industry observers believe Singapore will be able to issue such pure-play infrastructure project bonds in the future. “It’s virtually the logical next step, and it’s worth investigating. But when you’re going from a shallower or shorter-history bond market, it takes time, and it makes sense to do it in stages because it’s also about avoiding indigestion in the market by issuing a large number of very long-maturity bonds all at once,” said Mr Manpreet Gill, head of fixed income, currencies, and commodities strategy at Standard Chartered Private Bank. “From a strategic standpoint, it appears to be pretty intriguing. It will also be critical to gauge investor interest in this type of longer-term, more structured issue. However, when it comes to establishing the Singapore dollar bond market, these are the types of measures and directions the market must take.”
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