Why infrastructure investing in emerging markets is more critical than ever
My life, along with many of yours, is gradually returning to a sense of normality after the disruption caused by the COVID-19 pandemic. It's admittedly a new form of normality, one where I can take the train to work a few times a week to interact with colleagues from a distance. One where my family and I can head into the city for a meal – with our phones to scan the QR code for the menu – and listen to school stories the children brought with them.
Infrastructure is what allows me to have this life. In many emerging countries, however, the disruption from COVID-19 is "just" another disruption. Disruptions to infrastructure – provided the infrastructure even exists – are an everyday concern that reduces employment opportunities, hampers health and education and limits economic growth.
While the world economy will face headwinds from impaired supply chains and production capacities, higher unemployment, business bankruptcies, and higher debt burdens, several emerging market countries are particularly exposed. This is because many have weak healthcare systems to begin with, rely heavily on global trade and tourism, are dependent on oil imports/exports or face a steep decline in remittances.
A lifeline on the road to recovery
The fiscal stimulus measures announced by governments in response to the coronavirus play a crucial role in softening the blow of the pandemic on the global economy. But little so far has been directed at securing future growth.
For this, investment in infrastructure is essential: the relationship between infrastructure and economic growth is mutually reinforcing. As productivity increases and broadens across different sectors, and as incomes rise and ways of life change, the composition of infrastructure also has to evolve. This leaves a big question mark on how to finance the growing infrastructure gap across emerging economies, which according to Swiss Re Institute's latest sigma is estimated to reach USD 520 billion annually over the next 20 years.
A bedrock of global resilience
Emerging economies are set to drive two-thirds of global GDP growth and are home to more than 80% of the world's population. Global resilience therefore strongly relies on the resilience of emerging markets. Our planet's resilience is increasingly put to the test with the higher frequency of virus outbreaks and the looming threat of a climate crisis.
The consequences of climate change disproportionately affect small island developing states (SIDs) and least developed countries. In SIDs alone, climate-related disasters have contributed to a loss of 2-3% of GDP over the last 30 years. Therefore, while investing in infrastructure improves present-day economic conditions, it also plays an important role in building resilience to climate and other global shocks such as future pandemics. This shows the importance of acting now. There is no time to waste waiting for the next pandemic to jolt us into action or for economic conditions to become so dire we are out of options.
The unveiling of Germany's new stimulus package aimed at ensuring the country emerges from the COVID-19 crisis with renewed strength offers a glimmer of hope that other nations will follow suit. Of the total EUR 130 billion announced, nearly 30% is focused on long-term growth incentives. This includes additional federal investment projects and subsidies to incentivise private investments.
Building back better
While there is an obvious need to spend more, it is important to also spend better. This means investing in sustainable, quality infrastructure which closes access gaps and improves economic and social outcomes. The World Bank estimates that 940 million people currently live without electricity, 663 million lack improved sources of drinking water, 2.4 billion lack improved sanitation facilities, one billion live more than two kilometres from an all-season road, and four billion people lack internet access. These are staggering statistics!
Working towards a better and safer future is part of why I am proud to work in the re/insurance industry. We have the power to help drive a stronger recovery after a shock, thereby promoting macroeconomic resilience. As institutional investors, the long-term horizon of our liabilities also makes infrastructure assets an attractive investment which allows us to contribute towards improving the lives of individuals while securing higher productivity for the future and driving sustainable growth in emerging economies.
Seizing new opportunities
In the current low interest rate environment, infrastructure projects can deliver attractive yields while also offering regional and asset class diversification to institutional investors. Additionally, such investments provide an opportunity for environmentally and socially responsible investing.
The demand is there to attract some of the USD 80 trillion under management by institutional investors. But for this, policy makers will first need to establish a market-friendly framework in which infrastructure investments move closer to becoming a standardised asset class.
Emerging markets have much to gain from such initiatives. More investment in infrastructure is key to helping them achieve better development outcomes, whether that's by strengthening health systems, improving education, creating new job opportunities or securing sustainable livelihoods for their growing populations.
But the other big beneficiary is the rest of us. For many years now, the global economy has depended on emerging markets as a source of growth, stability and resilience. As the world faces the deepest recession in modern times, their role has hardly been more critical than now.