Post-COVID recovery: Infrastructure in Emerging Asia holds the key
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The COVID-19 pandemic and resulting lockdown have resulted in the worst economic recession the world has ever experienced in recent history. In Asia, major economies are reporting deep contractions in economic activities in the first half and most Asian governments have announced aggressive fiscal stimulus packages to cushion the slump in growth. Little has been thought about increasing future productivity beyond the pandemic and infrastructure investment could hold the key. Recent global supply chain disruptions and heightened stress on national healthcare provision are pointing to a strong need for infrastructure investment in Emerging Asia. Collectively, the region can become more resilient through sustained infrastructure investment, which will help markets to return to a higher growth trajectory.
Recent infrastructure investment trends
A fast-growing, rapidly-urbanising population have driven demand for infrastructure in emerging markets, where investments in this sector have grown considerably in recent years. Overall, infrastructure investments1 increased by 4.7% per annum in global emerging markets during 2007-2018 compared to just 1% per annum in advanced markets.2 Emerging Asia3 accounted for 75% of total emerging markets and 45% of global spend on infrastructure during the period.4 This was mainly driven by China, whose infrastructure investment grew by an annual average of 6.2% to account for about two-thirds of emerging Asia total during the decade. India also reported strong increases by an annual rate of 7%, though its share of emerging Asia total remains small at 8%. The relative share of other key emerging markets in Asia varies from 3.2% for Indonesia to around 1% each for Thailand, Malaysia, Vietnam and the Philippines. It is also important to note that while China invested around 7% of its GDP and Vietnam invested 5.7% of its GDP in infrastructure, rest of the key emerging Asian markets invested in the range of 3%-4% of their GDP.
Note: CAGR – Compound Annual Growth Rate
Infrastructure investment outlook
While COVID-19 delivered a heavy blow to emerging Asia economies and the recovery of some markets will be protracted, it also highlighted the importance of investing in infrastructure to improve resilience. Current projections are still pointing to sustained increases in infrastructure investments in global emerging markets, at around USD 2.2 trillion per year over the next twenty years, compared to USD 1.3 trillion spent during 2007-2018. Emerging Asia will continue to be where most new infrastructure is built, investing USD 1.7 trillion annually over the next 20 years up from 1 trillion spend during 2007-2018. China will remain the largest contributor, while India will be the second largest to contribute 10% of emerging Asia spend.
Sector-wise, road (35% of total investment) and energy (34%) will be the key infrastructure growth sectors in emerging Asia over the next 20 years. Around one-third of the energy investment will be in renewable sources, mainly driven by China and India. There will be large investments in road and rails in key markets like China, India and Indonesia. In China, transport (including rail and roads) is a key focus for infrastructure investments in the next two decades, followed by energy of which a significant portion will be in renewables. Rail investment tops the list of key infrastructure projects announced by China in 2020 as the country focuses on improving inter-city connectivity through high-speed rail. Apart from the traditional sectors, China is also emphasising the importance of 'new infrastructure' to accelerate digital transformation. Estimated at around USD 370 billion in 2020, investment in 'new infrastructure' is expected to increase fivefold by 2030.
In India, more than half of future investments are expected to be in energy (57%), followed by roads and telecommunication (13% each). To meet the infrastructure deficit, India launched the National Infrastructure Pipeline in 2019, with USD 1.4 trillion sanctioned to be invested in infrastructure by 2025. Among other key emerging markets, energy will receive highest investments followed by roads.
Infrastructure investment gap
Despite strong investments forecasted over the next 20 years, infrastructure growth in emerging Asian markets based on the current trend still falls short of full needs. In other words, there is a substantial infrastructure gap5, estimated at USD 5 trillion for next two decades. In relative terms, Philippines has the highest gap, where 44% of infrastructure needs will not be met if it continues to invest as it does now, followed by India (42%). Other key markets who face considerable infrastructure gap are Vietnam (33%), Thailand (27%) and Malaysia (22%).
The highest gaps by sector in emerging Asia is in airports, where infrastructure investment needs are 44% higher than current forecast. Telecommunication (22%) and roads (21%) follow. However, this differs across countries. While China has highest gap for airports, it is minimal for the rail and road sector. Similarly, India has relatively lower gap for rail roads and energy but has the has the highest gap in water infrastructure, followed by telecommunication.
Implications for insurers
Infrastructure development offer two types of opportunities for insurers –
- opportunities for long-term investments in the infrastructure projects , as well as
- premium growth by providing coverage for risks associated with infrastructure development.
Financing infrastructure investment is becoming a growing challenge for many Asia economies as public finance is under pressure as a result of COVID-19 induced economic recession, coupled with significant rise in debt levels over the past decade. Insurers can take the opportunity to support infrastructure development in emerging markets. In the current low interest rate environment, insurers are in search of investments that deliver attractive yields to help them match their long-term liabilities. Infrastructure projects in emerging markets can meet that need, while bringing added benefits of region and asset class diversification. Assuming that the private sector steps in and covers 75% of the existing infrastructure gap, as well as 25% of the total identified spend, emerging Asia provides an infrastructure investment opportunity of USD 12 trillion over the next twenty years or USD 607 billion per year.
Insurers can also take the opportunity to provide cover for various risks associated with infrastructure in both construction (eg, engineering, construction all risk, marine) as well as operational phases (eg, property). The top three insurance markets in emerging Asia – China, India and Indonesia –account for around 80% of the infrastructure investments forecasted, and will provide a combined insurance opportunity of USD 42 trillion over the next ten years.6 China will account for around 72% of this total, followed by India (20%) and Indonesia (8%). In terms of lines of business, engineering will be the largest sector to benefit (46% of total) followed by property (30%) and Marine (9%).
In the post COVID-19 economic recovery, a strong commitment to infrastructure investment can help recover from the slump and support sustainable growth in the long-term. Emergign markets, in particular emerging Asia will drive infrastructure investments over next two decades. This provides opportunity for insurers both in terms of long-term investments as well as premium growth by covering risks associated with infrastructure development.
1 Here infrastructure is defined as consider economic infrastructure which include energy, transport (rail, road, ports and airports), telecommunication, and water & sanitation. Health and social infrastructure is not part of the economic infrastructure investment estimates.
2 Infrastructure investment numbers are estimated using the “infrastructure investment as percent of GDP” data from the Global Infrastructure Outlook by the Global Infrastructure Hub (GIH, a G20 initiative) and Oxford Economics, Gross Fixed Capital Formation data from the World Bank and GDP estimates and forecasts from Swiss Re Institute. All numbers are in 2015 prices and exchange rate. For GIH data please visit: https://outlook.gihub.org/
3 Emerging Asia also includes emerging Middle East and Central Asia as per regions defined by Global Infrastructure Hub.
4 For discussion on infrastructure investments in other emerging regions, please see "sigma 3/2020: Power up: investing in infrastructure to drive sustainable growth in emerging markets", Swiss Re Institute, 2020.
5 Infrastructure investment gap is measured as the difference between investment needed and investment projections based on current trends.
6 Estimated using the respective insurance rates for each line of business in each country, and layering by types of infrastructure