ASEAN Half A Trillion Dollar 'Hidden' Infrastructure OpportunityVW Staff
Andrew Tilton of Goldman Sachs is out with a new report on the massive infrastructure needs of ASEAN countries. He estimates that over the next few years the countries will need to spend $550 billion more than the current estimates. Below is the full report on this interesting topic.
We estimate ASEAN’s infrastructure needs through 2020 to be US$550 bn, higher than current government estimates. This is driven by a low base, as well as rising per capita incomes and ongoing urbanization.
The infrastructure build-out could have large macro implications in terms of driving overall investment growth. For instance, in the Philippines, infrastructure could account for nearly 20% of total investments.
Infrastructure investments can potentially reduce current account surpluses, and decrease appreciation pressures on currencies. They can also contribute to global rebalancing.
While fiscal deficits are likely to increase, our projections suggest that financing the infrastructure needs may not be very difficult.
Implementation will be key, and will depend in part on individual governments’ prioritization of infrastructure. We think that political stability will be vital for successful implementation of infrastructure plans.
Overall, we see a greater scope for a ramp-up in investments in the Philippines and Thailand, partly due to a low base, but mostly due to our perception of a renewed focus on infrastructure plans by their governments.
I. Why is infrastructure important?
ASEAN’s need for infrastructure investment is apparent to a first-time visitor or long-time resident. As per capita incomes rise and urbanization ensues, the demand for infrastructure will likely continue to increase. Investments in infrastructure—roads, power, port, airports, railways, water and sanitation—can have several desirable effects not only for the ASEAN economies, but also more broadly. An infrastructure build-out can:
- Directly contribute to investment demand and therefore to GDP growth.
- Catalyze other investments in the economy. To the extent that power, road, airport capacities are increased, it helps increase manufacturing investment.
- Improve productivity growth by reducing travel times, freight costs, power costs, and communication costs, among others. It therefore acts to boost growth and reduce inflation by increasing the potential growth rate of an economy.
- Reduce current account surpluses in the ASEAN economies by using excess savings, and ease appreciation pressures on their currencies.
- Help global rebalancing, to the extent that the infrastructure build-out requires imports and FDI, it will help developed economies to export.
In this piece, we estimate the infrastructure demand for each of the ASEAN-4 (Malaysia, Indonesia, Thailand, and the Philippines) through 2020. We estimate the sectoral breakdown of investments required, and the aggregate amount for each country. We then project investment rates for the economy due to the infra build-out. We then assess the implications for their fiscal and current accounts due to the need for infrastructure. Lastly, we compare and contrast where the prospects of infrastructure are particularly encouraging.
II. Mapping ASEAN’s infrastructure needs
According to the World Economic Forum, while individual economies in ASEAN, such as Malaysia and Thailand, have improved the quality of their infrastructure, others still have a large need for investments. Indonesia and the Philippines rank near the bottom of the scale for infra quality.
In the decade ahead, income growth and urbanization will drive infrastructure demand. We expect the ASEAN-4’s per capita GDP to nearly double between 2010 and 2020. This will increase demand for power, roads, airports, and water, among others. Rapid urbanization and population growth will add to the infrastructure needs of the economy. Despite some variation in the starting levels of urbanization (Malaysia has a rate of 75%, while Thailand has 40%), the process will likely continue over this decade.
To estimate ASEAN’s infrastructure needs, we used a model (see Box 1) which can project demand for each sector and country. The key macro determinants of infrastructure that we use are per capita GDP, urbanization, population, and trade volumes.
We looked at six key infrastructure sectors which are typically included in the definition: power, paved roads and highways, railways, ports, airports, and water and sanitation. We derived demand for each sector based on the macro variables mentioned above. Thus, power and road demand are highly sensitive to the level of urbanization, air travel is sensitive to per capita income, while demand for ports is influenced by the volume of trade.
Box 1: Modeling infrastructure demand
To estimate infrastructure demand we used an econometric model based on projected per capita income growth, urbanization and population, developed in previous global papers (see Global Economics Paper: 166 – Building the World: Mapping Infrastructure Demand, April 24, 2008, and further applied in Global Economics Paper: 187 – India CAN Afford Its Massive Infrastructure Needs, September 16, 2009).
Our baseline model is based on pooled least squares, with each of five infrastructure sectors—roads, ports, air travel, electricity installed capacity, water and sanitation as dependent variables. The independent variables are—real GDP per capita for all sectors; urbanization as an independent variable for paved roads and electricity; population for air passengers and access to water & sanitation; and trade volumes for port traffic. For railways, we relied on government estimates.
We use an unbalanced panel, with country fixed effects, to control for country-specific factors and differences. Real per capita income comes from our estimates, urbanization and trade volumes comes from the World Bank’s World Development Indicators, population numbers come from the UN’s population database.
We have modeled water and sanitation and ports separately in this piece, using a sample of the main emerging market countries, as these sectors are more relevant to emerging markets.
To assign dollar values to power, roads, and water and sanitation infrastructure spending, we rely on cost estimates from the World Bank, indexed for our world CPI inflation estimates and projections from 2003-2020.
For railways, ports, and airports, we project dollar values of demand based on government estimates adjusted by our real GDP growth assumptions for each country for the period 2013-2020.
As shown in the table below, we find that:
- A 1% increase in urbanization leads to a 1.8% increase in electricity installed capacity. The model also predicts that a 1% increase in income per capita would lead to a 0.5% increase in installed capacity.
- We find that air travel is most sensitive to income. In particular, a 1% increase in per capita income correlates with a 1.4% increase in the number of air passenger travelers.
- Roads are considerably less sensitive to income compared to their sensitivity to urbanization.
- Ports have high sensitivity to trade volumes as we expected and their sensitivity to income is comparable to that of roads.
- Water and sanitation demand is highly sensitive to a rise in population. Its sensitivity to income is relatively less.
We used unit cost estimates for the construction of these sectors to derive values for the total financing need of each sector. By aggregating each sector, we look at the overall country demand for infrastructure.
Indonesia has the largest absolute demand for infrastructure, at US$235 bn between 2013 and 2020, in our view. It is the largest country in the region—both in terms of population and land—and therefore its infrastructure needs are unsurprising. Its power and road capacity per capita is one of the lowest in ASEAN and, therefore, nearly 65% of infra demand can be from these two sectors.
The Philippines could see the largest increase in demand for infrastructure as a percent of GDP. It has the lowest per capita income in the region, and ranks the weakest in infrastructure quality. The low base, and increases in per capita income and urbanization could drive demand across the board for a projected US$110 bn.
Thailand would also need to increase infrastructure spending as a percent of GDP, also due to its more open economy and need to boost manufacturing. It would need US$105 bn, according to our projections.
Malaysia has the highest quality infrastructure in the region, and therefore the base is high. Its infrastructure needs would therefore be lower than the rest of the countries, at US$100 bn, based on our projections.
We compared our projections with those of their respective governments. While available government estimates are for different time periods, and include the telecom sector, our estimates are generally higher (Exhibit 6).