Merrill Lynch has raised its emerging markets infrastructure forecast to $2.25 trillion annually, or 5% of GDP, from $1.25 trillion over the next three years, due to more aggressive government spending programmes and higher analyst estimates.
Infrastructure spending—which Merrill Lynch calls a long-term solution to inflation—is expected to be fuelled by decades of under-investment in power, transportation, and water. Merrill Lynch expects 70% of infrastructure spending to be concentrated in China, the Middle East and Russia.
"The higher forecast is due to more aggressive government spending and higher analyst estimates," Merrill Lynch says in a report.
To give an example of the infrastructure spending in the pipeline, Merrill Lynch notes that Xstrata recently estimated $22 trillion in emerging markets infrastructure spending in the next 10 years. Xstrata is a global diversified mining group, listed on the London and Swiss stock exchanges. "That estimate is among the highest that we have seen, with an implied run rate of $6.6 trillion over the next three years," the report says.
Merrill Lynch breaks down its upward revisions in emerging markets infrastructure spending over next three years (new versus old estimates):
China—$725 billion vs $400 billionGulf—$400 billion vs $225 billionRussia—$325 billion vs $195 billionIndia—$240 billion vs $110 billionBrazil—225 billion vs $100 billionMexico—$120 billion vs $60 billionTurkey—$65 billion vs $50 billionSouth Africa—$60 billion vs $60 billionCentral and Eastern Europe (CEE)—$45 billion vs $45 billion
Merrill Lynch's near doubling in its estimate for China incorporates greater emphasis on transportation spending by the Chinese government and still strong spending in other infrastructure areas such as water. The estimates do not incorporate additional spending needed to rebuild areas stricken by the recent earthquakes.
The new estimate for India factors in the government's more aggressive position on accelerating infrastructure spending over the next decade. The Indian Planning Commission is signalling "discontinuity" in taking its spending from a business as usual scenario of $300 billion from the Eleventh Five Year Plan to a new higher orbit of $550 billion in the Twelfth Five-Year Plan, according to Bharat Parekh, Merrill Lynch's India engineering and construction analyst.
The investment spending numbers in the Middle East are massive and are climbing steadily with the help of enormous wealth and high energy prices, Merrill Lynch says. The firm's estimate is modest compared with the estimate of $480 billion three-year run-rate based on the International Monetary Fund's numbers.
Bureaucracy is the primary risk to emerging markets infrastructure spending most commonly cited by Merrill Lynch's regional analysts. "Projects may be delayed due to decision-making approvals and so on," the report notes.
Rising costs for labourers and commodities used for infrastructure projects add to the bureaucracy in the decision making, budgeting and approval processes. They are indicative of tighter supplies of resources and the greater need to allocate across projects.
A collapse in commodity prices will also hinder spending programmes for many resource-linked emerging market countries, especially the Middle East and Russia. A marked deterioration in budget positions in China will slow spending.
Otherwise, budget surpluses, massive foreign currency reserves and large current account surpluses should keep infrastructure spending programmes intact, Merrill Lynch notes.