Thiam Hee Ng, Senior Economist with ADB's Office of Regional Economic Integration, warns the global financial market turmoil that has led to volatile capital outflows will make infrastructure financing costlier and more difficult. He says the region should encourage more stable sources of funding such as pension funds to promote much needed financing.
Title: Asia Needs New Funding Sources for Key Infrastructure
Description: Thiam Hee Ng, Senior Economist with ADB's Office of Regional Economic Integration, warns the global financial market turmoil that has led to volatile capital outflows will make infrastructure financing costlier and more difficult. He says the region should encourage more stable sources of funding such as pension funds to promote much needed financing.
Q: What are the key risks for the Asia local currency bond markets right now?
A: The region has faced capital outflows following the expectation that the Federal Reserve will taper their quantitative easing operations. As a result we saw quite a few bond yields rising and currency depreciating.
The good news for the region is that they rely now more on local currency bond markets, which means they no longer face the currency mismatch that they did during the 1997 Asian financial crisis. So, the depreciating currency does not result in higher foreign liabilities.
Going ahead, given the volatility of the capital outflows, the region should seek to encourage more stable sources of funding. One way they can do that is to promote greater intra-regional or intra-Asian investment.
Q: What are the challenges for infrastructure financing?
A: The key challenge for infrastructure financing is that the region missed the opportunity to ramp up their infrastructure financing during the period of easy liquidity. Now, with this global financial market turmoil, financing is likely to become more difficult and more expensive.
At the same time, we know that the Basel III regulations are going to make it more difficult for banks who usually traditionally finance infrastructure projects to finance infrastructure.
So, given these challenges – and we know that we estimate that the region needs 8 trillion dollars over the period of 2010-2020 to invest in infrastructure. So there’s a huge challenge ahead.
Q: What can we do not get more financing into infrastructure projects?
A: Developing a more liquid and deeper financial bond market for the region can help draw in nontraditional investors, such as pension funds. Pension funds, with a long investment horizon, matches quite closely with the long investment timeline of infrastructure projects.
At the same time, we can look at ways to improve the rating of infrastructure bonds to make them attractive to these institutional investors. We can also look for ways to make data on cost and performance of infrastructure projects available to make it easier and more transparent for these investors to invest in infrastructure projects.