ADB Sees East Asia Growth Risk on $8 Trillion Funding ChallengeLilian Karunungan
Emerging East Asian economies risk slower growth after they failed to take advantage of ample cash supply made available by global monetary authorities to build roads and ports, the Asian Development Bank said.
Funding infrastructure needs has become harder following recent turmoil in regional financial markets, and borrowing costs could rise further when the U.S. Federal Reserve starts tightening policy, the Manila-based lender said in a report today. Weakening growth momentum could accelerate capital outflows, and moves to defend Asian currencies by raising interest rates will further curb economic expansion, it said.
The ADB estimates the region needs to invest $8 trillion in transport, communication and energy framework in the decade through 2020 to sustain growth. Developing deep and more liquid bonds markets can help emerging economies attract investors such as pension funds to finance such projects and guarantees can help boost the ratings of infrastructure bonds, it said.
“When you are having a party, plenty of cheap money, you don’t really pay too much attention on what is more fundamental and needed in the long run,” Iwan Azis, head of the ADB’s economic integration office, said in a telephone interview from Manila. Building “strong infrastructure” would help shield the region’s growth prospects in the event of tapering of global stimulus, he said.
The lender classifies emerging East Asia as comprising China, Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Thailand, Vietnam and the Philippines.
In 2011, Thailand and the Philippines spent 1.5 percent and 1.6 percent of their gross domestic product on infrastructure, respectively, according to today’s report. Spending by Malaysia, Singapore and South Korea each amounted to about 2.3 percent of GDP, while investment in Hong Kong was at 4.7 percent, it said.
The ADB in July cut its 2013 growth forecast for developing Asian economies, including India, to 6.3 percent from a 6.6 percent expansion predicted in April. The projection for 2014 was lowered to 6.4 percent from 6.7 percent.
Indonesia’s rupiah is Asia’s worst-performing currency this year, losing 16 percent, as investors fled nations with worsening current-account deficits amid concern less money will flow into emerging markets. Bank Indonesia has raised its benchmark reference rate by a total of 150 basis points, or 1.5 percentage points, since June this year to 7.25 percent.
Fed Chairman Ben S. Bernanke said Sept. 18 more evidence of a recovery in the U.S. economy is needed before the central bank starts paring its $85 billion a month of bond purchases. The average yield on Asian-local currency bonds has climbed 68 basis points to 4.17 percent since May 21, the day before Bernanke first hinted the Fed may start scaling back its record monetary stimulus, an index compiled by HSBC Holdings Plc shows.
Asian local-currency notes have lost 4.8 percent in 2013, led by Indonesia’s 11.6 percent drop, according to 10 debt indexes compiled by HSBC.
Local banks and companies are major holders of fixed-income securities and could face losses as policy makers raise interest rates to defend their currencies, ADB’s Azis said.
“If the interest rate is raised much, the value of those bonds will go down,” affecting balance sheets, he said. “This is a prescription for bankruptcy. This is the reason we caution against raising interest rates.”
Total sales of local-currency notes in the region declined 3.3 percent last quarter from a year earlier to $827 billion, according to the ADB. Issuance by companies shrank 16 percent to $168 billion, while government and central bank debt offerings gained 0.4 percent to a combined $659 billion.