Easy Cash Ebbs for $300 Billion Asean Port-to-Rail Cost: FreightKarl Lester M. Yap
Emerging Southeast Asian nations need to pour $300 billion into transport links to help ease freight bottlenecks. That just got harder as the prospect of reduced Federal Reserve monetary stimulus pushes up borrowing costs.
Indonesia, Thailand, Malaysia and the Philippines require $128 billion of investment in roads, $119 billion for rail, $33 billion in ports and $16 billion for airports through 2020, Goldman Sachs Group Inc. estimates. At the same time, their government bond yields have surged since May as concern the Fed could taper cash injections sparked outflows of foreign capital.
The four nations plan about $1 trillion in development spending, partly to improve goods transport performance that declined in all except the Philippines since 2007, based on World Bank rankings. The expenditure is needed to keep up a pace of expansion that averaged more than 6 percent in 2012, closing in on China and beating India for the first time in a decade.
“The region has to improve infrastructure, including transport links, to sustain higher growth rates,” Sanchita Basu Das, an economist and fellow at the Institute of Southeast Asian Studies in Singapore, said in an interview. “It can’t rely on cheap funds from abroad as America looks to suck liquidity out of financial markets.”
Fed Chairman Ben S. Bernanke said May 22 $85 billion a month of debt purchases could be reduced if the country’s jobs market shows sustained improvement. Employment growth was the weakest in four months in July even as the U.S. jobless rate fell, underscoring uneven progress in America’s labor market.
Indonesia’s 10-year bond yield has climbed 193 basis points, or 1.93 percentage points, to 7.63 percent since Bernanke’s comments, according to data compiled by Bloomberg.
The rate on the similar-maturity debt in Malaysia surged 91 basis points during the same period to 3.96 percent. Thailand’s increased 66 basis points to 3.97 percent and the Philippines’ 36 basis points to 3.74 percent.
Emerging-market debt funds suffered a 10th consecutive week of outflows in the period to July 31, as investors pulled out $741 million, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Higher rates threaten to make it more difficult for governments to borrow to fund projects while sticking to fiscal goals.
Indonesia’s 2011-2025 development plan seeks $390 billion of investments. Malaysia’s goal is developed-nation status by 2020 through a 10-year, $444 billion program.
In Thailand, Prime Minister Yingluck Shinawatra plans $64 billion of railway investments, partly to speed up freight traffic. Philippine President Benigno Aquino is aiming for more than $17 billion of projects from roads to airports.
The pool of domestic savings in the 10-member Association of Southeast Asian Nations was about $760 billion in 2012, concentrated in the group’s bigger economies, the Asian Development Bank estimates. Asean contains Indonesia, Thailand, Malaysia and the Philippines, as well as Singapore, Vietnam, Cambodia, Myanmar, Laos and Brunei Darussalam.
The coverage provided by Southeast Asia’s infrastructure is a fraction of that in advanced economies and trails the Asian average, the lender said in May.
World Bank rankings underscore the need for improvements as Asean tries to create an integrated economic bloc by 2015.
Indonesia placed 59th out of 155 economies in the World Bank’s Logistics Performance Index for 2012, down from 43rd in 2007. Thailand fell to 38th from 31st. Malaysia placed 29th from 27th. The Philippines rose to 52nd from 65th. The index measures the perceptions of international freight forwarders.
The cost of transporting goods in Indonesia as a proportion of gross domestic product was 24.6 percent in 2011, more than double the 9.9 percent of GDP in the U.S., Indonesia’s Trade Ministry said in April.
Trucks hauling goods to the country’s main port in Jakarta provide an example of the bottlenecks. They take up to 18 hours to cover 10 kilometers on rainy days, according to Copenhagen-based A.P. Moeller-Maersk A/S, owner of the world’s biggest container line. That’s slower than walking pace.
Once at the port, loading times for a 200-meter cargo ship exceed the world’s most efficient berths at China’s Qingdao by about 25 percent, the company said.
“The road network is a huge challenge and there aren’t enough loading windows in the port,” Thomas Knudsen, Asia-Pacific Chief Executive Officer for Maersk Line, said in an interview. “These delays increase our costs.”
Better transport links will improve the region’s integration into the global economy, Goldman Sachs said in a May report.
While the region missed an opportunity in the past few years when funding costs were at record lows, “it’s by no means clear we’ll get an aggressive Fed tapering as markets feared back in May and June,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.
The stimulus being provided by the Bank of Japan also means it’s still “somewhat early” to gauge the potential impact of Fed tapering on infrastructure financing in Southeast Asia, said Arjun Goswami, a regional ADB director in Manila.
BoJ Governor Haruhiko Kuroda on April 4 unleashed a two-year program designed to double Japan’s monetary base, in an effort to revive credibility on price stability and growth.
Indonesia’s 10-year yield dropped 67 basis points as of Aug. 6 from 8.3 percent reached on July 16, the highest level since March 2011. The rate on similar-maturity Philippine debt fell 79 basis points to 3.74 percent from 4.53 percent on July 5.
The rate in Thailand hit a two-year high of 4.02 percent on Aug. 2. In Malaysia, it was 4.13 percent on July 31, the most since January 2011, according to data compiled by Bloomberg.
While some emerging-market bonds have recovered in the past month, “make no mistake, global stimulus will end in the next few years and the era of cheap financing will come to an end,” HSBC’s Neumann said.
The efflux of capital from the Asean countries hurt their currencies. The Philippine peso and Malaysia’s ringgit have dropped about 5.8 percent against the dollar this year, followed by the Indonesian rupiah’s 4.8 percent slide, and a 2.7 percent fall in the Thai baht.
Of the four Southeast Asian nations, the Philippines is the only contender for a credit-rating upgrade that would help to restrain borrowing costs, after Moody’s Investors Service placed the country’s assessment on review on July 25. The $250 billion economy expanded 7.8 percent in the first quarter.
Fitch Ratings cut Malaysia’s credit outlook July 30 to negative from stable because of rising debt levels. Standard & Poor’s dashed Indonesia’s chances of escaping junk status by lowering the outlook to stable from positive May 2, citing stalling reform momentum and risks from a current-account gap.
Growth in Indonesia’s $878 billion economy fell below 6 percent year-on-year in the three months through June for the first time since 2010. Thailand and Malaysia have also slowed.
“Infrastructure is an economic enabler and all these plans are encouraging,” Maersk’s Knudsen said. “But what we normally have seen, especially in Southeast Asia, is that the time it takes them to actually finish these projects is too long.”