A local currency guarantee platform will give investors more confidence to pour funds into bonds to help finance infrastructure projects in Southeast Asia by mitigating the foreign exchange risks.
That's the hope of Boo Hock Khoo, vice president of operations at the Credit Guarantee and Investment Facility (CGIF), which is developing the Infrastructure Investors Partnership (IIP).
IIP is expected to be launched at an unspecified future date after getting the go-ahead at a meeting of finance ministers and central bank governors from the Asean+3 group of countries (The Association of Southeast Asian Nations plus China, Japan, and South Korea).
It draws on the experience of CGIF, a multilateral facility established by Asean+3 and the Asian Development Bank (ADB), and is seen as a way to indirectly kick-start equity investment in infrastructure too.
“When Asean projects are able to raise long-term local currency debt financing facilitated by IIP, we expect increased interest from project developers and sponsors from both developed and developing nations to invest equity in these projects,” Khoo told FinanceAsia.
“IIP is a new model of financing that is a unique solution to the currency mismatch risk and many projects earning local currencies can benefit from IIP’s support. It is an innovative pursuit of a solution to address the large funding gap for infrastructure in partnership with investors in the private sector,” Khoo said.
Currently, more than 90% of infrastructure investment in Asia is financed by governments, said Ong Ye Kung, a board member of the Monetary Authority of Singapore (MAS), at the Singapore-Bloomberg Investment Conference on May 9.
“There is now a strong realisation of the need to mobilise private capital,” he said.
The Singaporean government will develop infrastructure into a mainstream, investible asset class by creating infrastructure debt distribution facilities to attract institutional investors, said Ong.
The annual infrastructure investment requirement for the Asean region was estimated by the ADB in 2017 to be at least $145 billion for the period 2016 to 2030.
Although it is too early to forecast the increase in financing infrastructure projects that could be spurred by IIP, it's clear that the potential is huge. There are currently $12.7 trillion of local currency bonds in Asia, close to the amount of euro-denominated bonds issued in the euro area, an ADB report released on May 2 showed.
There are hopes that it could facilitate greater interest in green bond financing too.
“There is little sense for developing economies to be switching to sustainable infrastructure that remains unsustainably financed,” Khoo said.
LOWERING RISK
Under ABMI's roadmap, Asean+3 will increase support for infrastructure finance and promote green bonds and a framework for multi-currency bonds in Asean+3 nations. The roadmap seeks to harmonise bond regulations and facilitate cross-border bond transactions among Asean+3 countries.
“The growth of local currency bond markets means companies can obtain local currency funding often for longer terms, avoiding the currency and maturity mismatches that exacerbated the Asian Financial Crisis (of 1997/1998),” ADB Chief Economist Yasuyuki Sawada said.
IIP addresses foreign exchange risks through guarantees, which, unlike direct lending, separates the functions of funding and risk taking. IIP’s capital will not invest in projects but back the guarantees issued to help these projects raise matching local currency debt.
IIP will leverage on public and private sector funds in developed economies to back up the guarantees for local-currency infrastructure debt in developing countries. Institutional investors in developed countries will subscribe to bonds issued by IIP. The coupon payment of IIP bonds will be derived from the returns on investments in low-risk instruments and fees earned from the projects.
With IIP guaranteeing the debt of infrastructure projects in developing countries, it would be easier to mobilise local pools of savings to fund these countries’ infrastructure projects via loans and bonds, Khoo explained.
These savings in developing nations can be found in pensions, life insurers and banks.
In many emerging economies, infrastructure financing is challenged by the lack of indigenous capital and expertise, Khoo said. Often the only option is to seek financing abroad but that means taking on foreign exchange risk, typically US-dollar risk.
The sharp depreciation of a local currency against the US dollar can have devastating effects on a country’s ability to service its US dollar debt, Khoo said. Considering the depreciation of most Asean currencies against the US dollar over the past five years, debt servicing and repayments are now considerably higher, in some cases by up to 30%.
This story has been corrected to show that trials of IIP have not yet started
