Top Five Markets For Fixed Investment

BMI View: The Asia Pacific region will see very strong growth in fixed capital formation (FCF) over the next decade. While the bulk of the project pipeline in value terms will continue to sit in a few countries such as China, India and Australia, we forecast the fastest average growth rates in FCF to occur in the Philippines, Indonesia, India and Malaysia over the next five years.

We believe that the Asia Pacific region presents huge opportunities for fixed investment and forecast the region to see very strong growth in fixed capital formation (FCF) over the next decade. This is because many countries still face significant infrastructure deficits and their respective governments remain keen to address these deficits. That said, we expect Asia's share of global fixed capital formation (FCF) to peak at 45.0% in 2016 and decline over the next decade. The large surge in Asia's share since 2007 was largely due to a collapse in FCF in developed markets during the financial crisis, combined with large government-targeted investment projects in Asia, China being a case in point.

This strong potential for fixed investment opportunities in Asia is reflected in our Infrastructure Projects Database. Looking through our database, we note that approximately USD4.9tn worth of projects have been announced for the region, with the bulk of them going to China, India, Australia and Indonesia. Although these figures are subject to substantial revision (details are scarce for some projects, project values may be updated, projects may be added, or cancelled, etc) it illustrates that there are significant project opportunities in the transport, energy and utilities sectors as these countries prioritise infrastructure development.

Asian Share of FCF To Decline
Asia - Fixed Capital Formation & GDP As a Share of Global (%)

BMI View: The Asia Pacific region will see very strong growth in fixed capital formation (FCF) over the next decade. While the bulk of the project pipeline in value terms will continue to sit in a few countries such as China, India and Australia, we forecast the fastest average growth rates in FCF to occur in the Philippines, Indonesia, India and Malaysia over the next five years.

We believe that the Asia Pacific region presents huge opportunities for fixed investment and forecast the region to see very strong growth in fixed capital formation (FCF) over the next decade. This is because many countries still face significant infrastructure deficits and their respective governments remain keen to address these deficits. That said, we expect Asia's share of global fixed capital formation (FCF) to peak at 45.0% in 2016 and decline over the next decade. The large surge in Asia's share since 2007 was largely due to a collapse in FCF in developed markets during the financial crisis, combined with large government-targeted investment projects in Asia, China being a case in point.

Asian Share of FCF To Decline
Asia - Fixed Capital Formation & GDP As a Share of Global (%)

This strong potential for fixed investment opportunities in Asia is reflected in our Infrastructure Projects Database. Looking through our database, we note that approximately USD4.9tn worth of projects have been announced for the region, with the bulk of them going to China, India, Australia and Indonesia. Although these figures are subject to substantial revision (details are scarce for some projects, project values may be updated, projects may be added, or cancelled, etc) it illustrates that there are significant project opportunities in the transport, energy and utilities sectors as these countries prioritise infrastructure development.

Project Pipeline Is Large & Will Grow
Asia - Project Pipeline By Country & Sector (USDbn)

We expect China to remain the single largest market for infrastructure-related investment, accounting for approximately 24% of global FCF in 2013. While China will remain the largest by value over the coming years, the growth rate of fixed capital formation will slow dramatically, averaging 4.3% per annum over the next five years. This is in sharp contrast to the average growth rate of 12.0% over the last decade, and will result in China's share of the global FCF peaking in 2016.

Plenty of Fast Growing Markets
Asia - Five Year Annual Average Growth Forecast For Fixed Capital Formation, %

Size Doesn't Mean Growth

While the bulk of the project pipeline in value terms will continue to sit in a few countries such as China, India and Australia, we forecast the fastest average growth rates in FCF to occur in the Philippines (8.8%), Indonesia (7.0%), India (6.8%) and Malaysia (5.8%) over the next five years. Indeed, these countries have large structural infrastructure deficits, which need to be addressed given their burgeoning demographic profiles. Moreover, the vast improvement in the macroeconomic fundamentals and business environments of these countries, combined with high returns on investment, all point to significant investment growth in the years to come. Several governments continue to implement a host of policies aimed at boosting domestic and foreign investment such as private public partnerships, de-regulation and infrastructure financing schemes amongst others.

Small Market, Fast Growth
Philippines - Project Pipeline By Sector (USDbn)

The Philippines is a relatively small market by regional standards, but we forecast FCF growing by an average of 8.8% over the next five years. We forecast the country's construction sector to be the fastest growing market in Asia over the medium-term (after Myanmar) as conditions that are ideal for construction activity still persist despite the occurrence of Typhoon Yolanda. Our project database shows that the energy and utilities sector has a project pipeline of USD43bn, while the transport infrastructure sector has a pipeline of USD35bn. Some of the biggest projects include the San Lorenzo wind farm project, which should be finished by the end of 2014, as well as the construction of a second international airport in Manila, which is in the planning stage. The outlook remains bullish for the Philippines, but we caution that the relatively slow progress with the government's Private-Public Partnership Programme could point to elevated risks to project execution and poses a major threat to our infrastructure team's long-term outlook for the sector.

Substantial Opportunities Ahead
Indonesia - Project Pipeline By Sector (USDbn)

We forecast investment in Indonesia to slow slightly in 2014, on the back of tighter monetary conditions since late 2013 as well as the uncertainty in the run up to the July 2014 presidential elections. That being said, we forecast growth in FCF formation to accelerate in 2015, averaging a healthy 7.0% over the next five years. Despite the political uncertainty, both presidential candidates, Joko Widodo (Jokowi) from the Indonesian Democratic Party - Struggle (PDI-P) and Prabowo Subianto from the Gerindra Party - are in agreement that one of Indonesia's key challenges is the country's infrastructure deficit.

Similar to the case of the Philippines, Indonesia offers significant project opportunities in the transport sector (USD157bn) and the energy and utilities sector (USD80.8bn). The largest projects include the Trans-Sumatra toll road (USD25bn), the Jakarta-Surabaya high speed railway line (USD20bn) as well as the Kayan River hydropower project (USD17bn). Although the project pipeline in Indonesia remains significant and we forecast strong investment growth over the coming years, we highlight several risks to our outlook. First, regulatory reforms and a boost in institutional capacity are still required to reduce red tape and accelerate project execution in Indonesia ( see 'Land Acquisition Still A Threat', January 14 2014). Second, although we think that pro-business candidate Jokowi will win the presidential election, nationalistic undertones have surfaced recently, particularly in the mining sector, which could pose a risk to domestic and foreign investment ( see 'Jokowi Victory To Carry Infrastructure, Mining and Oil & Gas Upside', March 27 2014).

Opportunities Matched By Challenges
India - Project Pipeline By Sector (USDbn)

India will also be a very important market, both in terms of size and growth rate of investment over the coming years. Although the country offers substantial opportunities, it also suffers from huge regulatory challenges, which could ultimately dampen the outlook for investment. Based on data from our infrastructure project database, the value of India's project pipeline currently stands at USD939bn, and we forecast growth in FCF to average 6.8% over the next five years. The transport sector offers around USD470bn worth of projects, while the energy and utilities sector offers around USD310bn worth of projects, with the largest projects including the Dhamra Port expansion project (USD163bn) which is in planning stage, and the Riverine Port project (USD67bn).

Although the recent election of Prime Minister Narendra Modi will bode well for investment into infrastructure projects as we believe he will try to fast track some of them in an effort to boost growth, there are several downside risks. First, state governments have a substantial amount of autonomy, and as such, do not always align with central government plans. Second, there are often huge environmental hurdles, which can cause delays and cost overruns, and third, the cost of capital is often a concern given the structurally high level of inflation and interest rates in India. Given these dynamics, India suffers from one of the region's highest number of project cancellations and delays, posing a substantial downside risk to our forecasts.

ETP To Dominate Agenda
Malaysia - Project Pipeline By Sector (USDbn)

Although investment growth in Malaysia will slow slightly in the coming years, we believe FCF in the country will still post a robust average growth rate of 5.8% over the next five years. Malaysia's 10-year economic plan, the 2011-2020 Economic Transformation Programme (ETP), has a significant focus on developing the transport sector and is forecast to account for around 68.0% of the total infrastructure pipeline between 2014 and 2018.

Railways in particular will account for around 50.0% and 72.0% of total infrastructure and transport infrastructure industry value by 2018, respectively. In addition, there are several large-scale energy related infrastructure projects being launched by Malaysia's energy commission. In total, our projects database shows a potential project pipeline of USD130bn over the coming years, equivalent to approximately 41.0% of Malaysia's nominal GDP in 2013. The energy and utilities sector accounts for about USD56bn worth of projects, while the transport sector accounts for about USD33bn projects.

Although Malaysia is one of the more investor-friendly economies in South East Asia, there are some downside risks. First, any deterioration in the government's consolidated fiscal deficit, owing to the recent build-up of contingent liabilities, could weigh on financing for these projects. Second, a rise in support in the opposition PAS (the Pan-Malaysian Islamic party), could weaken the outlook for foreign investment as they attempt to implement new laws which are more compliant with Sharia practices. Third, the government does display a bias towards local players, by only supporting foreign participation in projects that cannot be handled by local players.

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Sector: Country Risk, Infrastructure
Geography: Asia, Ukraine
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