Asia Pacific Infrastructure Ratings: Risks A Growing Concern

BMI View: The average Risk/Reward scores for the Asian infrastructure sector remain largely unchanged from the previous quarter. However, the risk/reward profiles for several countries have changed slightly, with greater risks being presented by several of the larger emerging markets and lesser risks by others. Overall, the potential for returns in Asia's infrastructure sector remains considerable, reinforcing the region's status as the world's most concentrated infrastructure and construction market.

The average Risk/Reward scores for Asia's infrastructure sector this quarter remain relatively unchanged from the previous quarter. There is still a substantial disparity in the demand for infrastructure throughout Asia. This translates into a significant divergence in rewards and risks among the Asia Pacific infrastructure markets, and a sizeable 40-point differential exists between the top- and bottom-ranked countries in our regional infrastructure ratings table. This wide dispersion presents investors with a range of rewards for different risk appetites.

The key findings from this quarter's update can be summarised as follows:

  • The more developed countries in the region continue to present the most attractive business environments to realise their relatively sizeable rewards, with some of these markets (i.e. Australia and Japan) experiencing an improvement in policy continuity - a major criterion to project execution and viability - following their parliamentary elections.

  • That said, exposure to the Chinese economy is a threat to the demand for infrastructure in some export-oriented economies - namely Taiwan and Hong Kong.

  • The most populous countries in the region continue to present sufficient scope in rewards to overcome risks, but these risks are rising. Policy inertia and continuity continue to be a problem in India and Indonesia, suggesting that risks at a grass-roots level will remain considerable for these countries.

  • Emerging South East Asian (SEA) countries continue to offer sizeable rewards for their level of risk, though recent events have changed their individual level of risks, with some markets (such as Thailand and Cambodia) presenting greater risks, while others (such as Vietnam and the Philippines) offering fewer.

A Mixed Bag
Asia Pacific - Infrastructure BE Risk/Reward Ratings, Scores out of 100

Asia Pacific Infrastructure Ratings: Risks A Growing Concern

BMI View: The average Risk/Reward scores for the Asian infrastructure sector remain largely unchanged from the previous quarter. However, the risk/reward profiles for several countries have changed slightly, with greater risks being presented by several of the larger emerging markets and lesser risks by others. Overall, the potential for returns in Asia's infrastructure sector remains considerable, reinforcing the region's status as the world's most concentrated infrastructure and construction market.

The average Risk/Reward scores for Asia's infrastructure sector this quarter remain relatively unchanged from the previous quarter. There is still a substantial disparity in the demand for infrastructure throughout Asia. This translates into a significant divergence in rewards and risks among the Asia Pacific infrastructure markets, and a sizeable 40-point differential exists between the top- and bottom-ranked countries in our regional infrastructure ratings table. This wide dispersion presents investors with a range of rewards for different risk appetites.

The key findings from this quarter's update can be summarised as follows:

  • The more developed countries in the region continue to present the most attractive business environments to realise their relatively sizeable rewards, with some of these markets (i.e. Australia and Japan) experiencing an improvement in policy continuity - a major criterion to project execution and viability - following their parliamentary elections.

  • That said, exposure to the Chinese economy is a threat to the demand for infrastructure in some export-oriented economies - namely Taiwan and Hong Kong.

  • The most populous countries in the region continue to present sufficient scope in rewards to overcome risks, but these risks are rising. Policy inertia and continuity continue to be a problem in India and Indonesia, suggesting that risks at a grass-roots level will remain considerable for these countries.

  • Emerging South East Asian (SEA) countries continue to offer sizeable rewards for their level of risk, though recent events have changed their individual level of risks, with some markets (such as Thailand and Cambodia) presenting greater risks, while others (such as Vietnam and the Philippines) offering fewer.

A Mixed Bag
Asia Pacific - Infrastructure BE Risk/Reward Ratings, Scores out of 100

Developed Markets: Favoured

The top spots in our Asia Pacific Risk/Reward infrastructure regional ratings table continue to be dominated by countries that have attained developed market status in terms of their infrastructure market maturity, with Australia, South Korea, Singapore and Japan coming in at first, second, third and fourth place respectively.

Despite their maturity, these markets still offer significant greenfield opportunities. The average score for rewards in these developed markets is 57.8 out of 100, higher than the other 10 Asian markets (higher scores indicate higher rewards) which have an average of 50.7. Meanwhile, they offer the best business environments for realising these investment returns as they are highly developed in terms of their legislative and regulatory environments and present very little in the way of risks to sponsors and financiers. The average score for risks in these developed markets is 78.2 out of 100, significantly higher than the other 10 Asian markets (higher scores indicate lower risks) which have an average of 49.1.

Greatest Potential To Realise Rewards
Developed Countries In Asia - Infrastructure Rewards (LHS) And Risks (RHS) BER, Scores out of 100

Looking at the individual countries, Australia and Japan have experienced an improvement in policy continuity - a major criterion to project execution and viability - following their parliamentary elections. In Japan, the Liberal Democratic Party's success in the Upper House elections has increased the potential for policy formation and execution, which could speed up the country's reconstruction process and see the implementation of reforms that could lift long-term infrastructure demand. In Australia, the Liberal-National coalition's victory in the federal elections and the party's dominant political clout at the state level creates a strong potential for greater coordination between state and federal governments over infrastructure development across Australia. This could lead to an improvement in project execution for all public-led infrastructure projects in Australia.

However, the infrastructure sectors of countries that are heavily reliant on trade activity with China - namely Hong Kong and Taiwan - appear highly vulnerable to the deleterious effects of a languorous Chinese economy. Although the recent resurgence in credit aggregates has once again boosted economic activity in China, we believe that it might not last and that China's structural downturn could come back into focus in 2014. Taiwan is also set to hold elections in five major municipalities in 2014 and the lack of political clarity could deter investors from taking on infrastructure projects.

Giants Of Asia: Rewards Sizeable, Risks Sizeable

These developed markets however, do not offer the highest rewards to investors. Asia's largest emerging economies - China, India and Indonesia - continue to head the group in terms of industry rewards, securing second, third and fourth place respectively for this category. The combination of high industry values, positive long-term macro fundamentals, large fiscal expenditure on infrastructure and expectations of relatively high growth in construction and infrastructure industry value underpin the high scores in this category. However, they also present numerous risks, as indicated by their below-average risks scores.

Below Average Risks
China, India And Indonesia - Infrastructure Rewards (LHS) And Risks (RHS) BER, Scores out of 100

China, for example, is expected to face greater threats to its rewards in the near-future, and this is reflected by our downward revision of its rewards score from 68.4 to 66.8. The country's infrastructure market still presents considerable opportunities, but these are increasingly located in tier-two and tier-three cities - areas where the economic viability for some projects is highly questionable. In addition, the new government has been quick to implement changes to the infrastructure programmes in China, starting with the break-up of the powerful Ministry of Railways and greater considerations towards environmental issues. These changes suggest to us that the new government is re-thinking several of its previously announced infrastructure projects in transport (especially railways) and power generation. This could result in a severe scaling down of infrastructure investment as the country rebalances to a consumer-driven economy. Lastly, the structural deficiencies within the Chinese economy (shaky financial system, overvalued property market, expensive infrastructure build-up, and huge industrial overcapacity) still remain. This creates the potential for a deep slowdown in China's economic activity, which could cap infrastructure demand over the near-term.

India is also experiencing significant threats to its rewards. Some of these threats are: the relatively high cost of capital in India; a weak rupee, resulting in costlier imports of equipment and raw materials for Indian infrastructure companies; and the numerous business environment issues that continue to delay infrastructure development (e.g. environmental clearances, land acquisition, convoluted bureaucracy).

Political risk is also on the rise in India, prompting us to revise the country's risks scores from 54.9 to 54.7 (a lower risk score represents greater levels of downside risks to returns for investors). The country is scheduled to hold general elections between April and May 2014, with recent results at the state elections indicating a strong potential for a change in government. The country's ruling Indian National Congress Party suffered major defeats to the main opposition Bharatiya Janata Party (BJP) in all four state elections held in December 2013, signalling its weakening popularity. The four states - namely Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh - comprise some 15% of the India's population, and the BJP victories will mean that the party will head into the 2014 campaign very much on the front foot.

While we believe that a BJP victory would improve the country's political risk profile and increase the potential for economic reform, we note that such a transition in power would likely have negative effects on short-term political stability and policy continuity. As seen in many countries, a change in government could lead to a review of infrastructure projects approved by the predecessor. This typically results in new feasibility studies and schemes being conducted and crafted respectively, which could lead to project delays, revisions, or worse, cancellations.

Varied Performance
Asia Pacific - Q313 & Q413 Infrastructure Rewards Ratings, Scores out of 100

As for Indonesia, the country continues to present vast opportunities across the entire infrastructure spectrum - in November 2013, the central government released the fifth edition of its Public Private Partnership (PPP) Book during Indonesia's annual infrastructure conference, with the book listing 48 infrastructure projects on offer to investors.

However, risks to infrastructure development are on the rise in Indonesia, which is reflected in our downward revision of the country's risks scores from 47.4 to 46.6. President Susilo Bambang Yudhoyono is constitutionally prohibited from standing for the presidential elections in 2014, while popular support for his party, the Democratic Party, has collapsed. This scenario creates a growing likelihood for a more protectionist and potentially nationalist candidate to accede to the office. The government and the private sector also continue to experience considerable difficulties in filtering infrastructure investment into the ground, while Indonesia's macro environment is becoming increasingly non-conducive for infrastructure development.

South East Asia: Fluctuations In Risks

South East Asian (SEA) countries continue to offer sizeable rewards for their level of risk as they push forward with their multi-billion dollar infrastructure-building programmes. However, recent events have seen a change in the level of risks for the individual SEA markets, with some markets (such as Thailand and Cambodia) presenting greater risks and others (such as Vietnam and the Philippines) presenting fewer risks than before.

In Thailand, we have revised down the country's risks scores from 56.9 to 56.1. This is because we are witnessing a complete breakdown in political stability, with the dissolution of parliament and the escalation of anti-government protests since November 2013. At present, this political crisis looks unlikely to end anytime soon as the ruling Puea Thai Party (PTP), led by Prime Minister Yingluck Shinawatra, have refused demands for the immediate resignation of Yingluck Shinawatra as caretaker prime minister and a suspension of the electoral process, which would lead to the formation of a 'people's council' to oversee political and electoral reforms in Thailand. This lack of political stability will most likely lead to fresh delays for the PTP's infrastructure plans and disruptions to on-going project infrastructure tenders. This is because political unrest typically increases security threats to project sites and requires the government to devote considerable resources and attention to resolve the crisis.

Similarly in Cambodia, we have revised down the country's risks scores from 37.2 to 36.6 as the country continues to be gripped by political unrest since the end of general elections in July 2013. The ruling Cambodian People's Party (CPP), led by long-time Prime Minister Hun Sen, and the opposition Cambodia National Rescue Party (CNRP) are still at loggerheads over the results of the elections and a resolution does not appear forthcoming over the near term. Even if a resolution is reached, the end of CPP's political dominance and the formation of a more evenly-balanced parliament are likely to set the stage for an increase in uncertainty and paralysis regarding government policy. This is because the CPP would need support from the opposition to make amendments to the constitution and the CNRP could hold up certain parliamentary proceedings by walking out of the National Assembly.

In Vietnam however, we have revised up the country's risks scores from 51.8 to 53.0. This is because we expect monetary conditions to remain conducive for construction in 2014. We have also seen the government take an aggressive stance in restructuring its state-owned enterprises (SOEs) and improve the business environment for infrastructure development. The restructuring process could not only allow the Vietnamese government to raise funds for investment through the privatisation of these SOEs, but also attract greater FDI due to a less protectionist investment climate. In addition, the Vietnamese government has strengthened its regulatory framework for public-private partnerships (PPPs) - it had launched the tender for its first road PPP project in the second half of 2013 - and passed a revised legislation that could speed up the land acquisition process.

Asia Pacific Infrastructure Risk Reward Ratings
Rewards Risks
Industry Rewards Country Rewards Rewards Industry Risks Country Risk Risks Infrastructure RR Rating Regional Ranking
Australia 62.5 86.1 70.8 90.0 77.0 82.2 74.2 1
South Korea 47.5 88.9 62.0 70.0 77.5 74.5 65.7 2
Singapore 37.5 86.2 54.6 90.0 88.6 89.2 64.9 3
Japan 45.0 87.0 59.7 75.0 73.7 74.2 64.1 4
China 70.0 60.9 66.8 40.0 66.8 56.1 63.6 5
India 75.0 45.4 64.6 55.0 54.5 54.7 61.7 6
Hong Kong 35.0 90.1 54.3 85.0 72.3 77.4 61.2 7
Malaysia 55.0 64.3 58.2 55.0 62.3 59.4 58.6 8
Thailand 47.5 72.3 56.2 50.0 60.1 56.1 56.2 9
Indonesia 65.0 48.2 59.1 35.0 54.4 46.6 55.4 10
Vietnam 52.5 60.4 55.3 40.0 61.7 53.0 54.6 11
Taiwan 30.0 74.0 45.4 75.0 69.9 71.9 53.4 12
Philippines 47.5 55.1 50.2 35.0 60.1 50.1 50.1 13
Myanmar 40.0 24.7 34.6 25.0 43.4 36.0 35.0 14
Pakistan 25.0 43.6 31.5 35.0 48.1 42.9 34.9 15
Cambodia 32.5 25.9 30.2 25.0 44.3 36.6 32.1 16
Regional Average 48.0 63.3 53.3 55.0 63.4 60.0 55.4
Scores out of 100, with 100 highest. Source: BMI
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