Asian Development Outlook 217 Update Sustaining Development Through Public Private Partnership Yasuyuki Sawada Chief Economist Asian Development Bank EMBARGOED UNTIL 9:3 AM Manila/Hong Kong, China/Singapore time Thursday, 26 September 217 The views expressed in this document are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent. 2 2 1
Key messages Growth in developing Asia upgraded to.9% in 217 and.8% in 218 on trade rebound and PRC momentum PRC growth boosted by fiscal support and trade pickup: 6.7% in 217 and 6.4% in 218 India growth strong despite short term challenges: 7.% in 217 and 7.4% in 218 Trade rebound is broad based and synchronized across Asia, as production networks evolve Public private partnership can be an innovative tool to meet Asia s massive infrastructure needs 3 Developing Asia s growth forecast revised up GDP growth (%) 8 Developing Asia Developing Asia excluding NIEs 6 6.3 6.8 6. 6.6 6.3 6.3 6.4.8.7.9 6.2 6.3.7.8 4 214 21 216 217 217 218 218 ADO 217 Update ADO 217 Update f = forecast; NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China Source: Asian Development Outlook database. 4 2
Faster recovery in industrial economies... GDP growth (%) 21 216 217 218 Actual ADO 217 Update ADO 217 Update Major industrial economies 2.3 1. 1.9 2. 1.9 2. United States 2.9 1. 2.4 2.2 2.4 2.4 Euro area 1.9 1.7 1.6 2. 1.6 1.8 Japan 1.1 1. 1. 1..9 1.1 Note: Average growth rates are weighed by gross national income, Atlas method, in current US dollar. Source: Asian Development Outlook database....supports a synchronized rebound in trade Growth in Nominal Exports People's Rep. of China Brunei Darussalam Hong Kong, China Republic of Korea Kyrgyz Republic 21 to Sep 216 Oct 216 to Jul 217 Bangladesh Cambodia Pakistan Nepal Tajikistan Thailand Singapore Malaysia India Philippines Sri Lanka Taipei,China Indonesia Azerbaijan Viet Nam Georgia Armenia Kazakhstan Mongolia 2 2 % change, year on year Growth in Nominal Imports Azerbaijan Myanmar Brunei Darussalam Sri Lanka Kyrgyz Republic Hong Kong, China Georgia Bangladesh Singapore Philippines Malaysia Indonesia People's Rep. of China Thailand Taipei,China Republic of Korea Kazakhstan Mongolia Armenia India Viet Nam Pakistan Nepal Cambodia 21 to Sep 216 Oct 216 to July 217 4 2 2 4 % change, year on year Note: Unless otherwise indicated, 217 data refers to the period uary to July 217. KGZ 217 data ends in April; Cambodia, in May; and Bangladesh and Brunei in June. Sources: CEIC Data Company and Haver Analytics (accessed 1 September 217). 3
Growth upgraded across the region 217 218 217 218 ADO Update ADO Update ADO Update ADO Update East Asia.8 6..6.8 South Asia 7. 6.7 7.2 7. China, People s Rep. of 6. 6.7 6.2 6.4 Bangladesh 6.9 7.2 6.9 6.9 Hong Kong, China 2. 3.6 2.1 3.2 India 7.4 7. 7.6 7.4 Korea, Rep. of 2. 2.8 2.7 2.8 Pakistan.2.3.. Taipei,China 1.8 2. 2.2 2.2 Central Asia 3.1 3.3 3. 3.9 Southeast Asia 4.8...1 Azerbaijan 1.1 1.3 1.2 1. Indonesia.1.1.3.3 Kazakhstan 2.4 2.7 2.2 3. Malaysia 4.4.4 4.6.4 Philippines 6.4 6. 6.6 6.7 The Pacific 2.9 2.9 3.3 3.2 Singapore 2.2 2.7 2.3 2.7 Fiji 3. 3.6 4. 3.9 Thailand 3. 3. 3.6 3.6 Papua New Guinea 2. 2. 2.8 2.8 Viet Nam 6. 6.3 6.7 6. Developing Asia.7.9.7.8 Excluding NIEs 6.3 6.4 6.2 6.3 NIEs = newly industrialized economies. Source: Asian Development Outlook database. 7 Domestic demand still the main growth driver Demand side contributions to growth, selected economies, H1 217 Percentage points 1 Total consumption Total investments Net exports GDP growth NIEs ASEAN PRC IND HKG KOR SIN TAP INO MAL PHI THA VIE H = half. Notes: ASEAN = Association of Southeast Asian Nations; NIEs = newly industrialized economies; GDP = gross domestic product; HKG = Hong Kong, China; IND = India; INO = Indonesia; KOR = Republic of Korea; MAL = Malaysia; PHI = Philippines; PRC = People s Republic of China; SIN = Singapore; TAP = Taipei,China; THA = Thailand. IND data refers to FY 217. Components do not add up to total due to a statistical discrepancy. Sources: Haver Analytics and CEIC Data Company (accessed 1 September 217); Asian Development Outlook database. 8 4
PRC growth exceeding expectations 1 Demand side contributions to growth percentage points Consumption Investments Net Exports Gross domestic product % change, year on year, 3 months moving average 3 Merchandise exports and purchasing managers index Export growth PMI expansion Index 21 Q3 216 Q3 217 3 214 21 216 contraction 217 4 Source: Bloomberg; Haver Analytics; and CEIC Data Company (accessed 1 September 217). 9 India growth strong despite transitory challenges percentage points 1 Demand side contributions to growth Net exports Gross fixed capital formation Government consumption expenditure Private consumption expenditure Gross domestic product Merchandise exports and purchasing % change, year on manager's index year, 3 months moving average 3 Export growth PMI expansion Index contraction 21 Q3 216 Q3 217 3 214 21 216 217 4 Q= quarter. Note: Years are fiscal years, refers to data for April June. Supply side output are at basic prices. Excludes other expenditure which includes valuables, changes in inventories and statistical discrepancy. Source: Bloomberg; Haver Analytics; and CEIC Data Company (accessed 1 September 217). 1
Modest pickup in global commodity prices... Prices of Brent Crude $/barrel 1 1 Spot Annual average Baseline Food prices 21=1 13 Monthly Baseline forecast Annual average 1 Forecast Sources: Bloomberg (accessed 22 September 217); World Bank. Commodity Price Data (Pink Sheet). http://www.worldbank.org (accessed 8 September 217). 7 213 214 21 216 217 218 Forecast 11 11...ease inflationary pressures Inflation (%) 4. 4 3 2 3.8 ADO217 Update 1 year average (27 216) 3. 2.2 2. 3. 2.4 3.2 2.9 1 212 213 214 21 216 217 218 f = forecast. Source: Asian Development Outlook database. 12 6
Risks have become more balanced Policy uncertainty in the US Fed balance sheet normalization Fiscal policy direction Geopolitical or weather shocks Since immediate risks are more balanced, focus on removing constraints to higher productivity 13 Theme chapter: Sustaining Development through Public Private Partnership 14 7
$ trillion in 21 prices 1.2.8.4. Asia s infrastructure needs dwarf traditional funding sources $1.7 trillion annual investment needed through 23 $.98 [6%] $.6 [32%] $.1 [9%] $. [3%] Energy Transportation ICT Water ICT = Information and Communication Technology Source: ADB estimates based on country sources and Private Participation in Infrastructure Database, World Bank; World Development Indicators, World Bank. 1 8 6 4 2 Region s infrastructure financed largely by public funds 23.4% 76.6% Private 1.2% 48.8% Public 78.6% 99.8% 21.4%.2% ICT Energy Transportation Water 1 Public private partnership has potential to fill the infrastructure gap PPPs in Asia rose fourfold in 2 years number of projects 1..8..3 Central Asia East Asia The Pacific South Asia Southeast Asia PPP committed investments, by sector 1991 21 ($7 billion) Water and sewerage, % Transport, 3% Energy, 4%. 1991 199 1996 2 21 2 26 21 211 21 ICT, 11% ICT = Information and Communication Technology. Source: ADB estimates based on country sources and Private Participation in Infrastructure Database, World Bank; World Development Indicators, World Bank. 16 8
PPP can yield better results Improve delivery Improve access and growth Incentivized finance Operational efficiency Capacity to innovate Doubling PPP investment from its current.% of GDP to 1.% 12 million more people with safe drinking water 14 million more people with electricity Additional.1 percentage points in GDP growth 17...but there are hurdles to PPP success Project cancellation $41.6 billion in Developing Asia are cancelled (6.3% of all committed PPP investment) Factors to PPP survival Project Solicited/unsolicited proposal through competitive bidding Type of PPP Risk allocation Macroeconomic factor Macroeconomic performance Fiscal balance Socioeconomic stability Law and order Degree of corruption 18 9
4 3 2 1 New finance sources need to be tapped... Institutional investors: assets under management, $ trillion, end 213 Global $ trillion Pension funds Asia Pacific, incl. Japan and Australia Mutual funds Insurance funds SWFs Others SWF = Sovereign Wealth Funds Note: Others include family offices, foundation, endowments, and other institutions Source: Estimates based from World Bank 214, The CityUK 214, OECD 216, Inderst 216 Conventional: Equity and bank loans Emerging: Bonds Underutilized: Institutional investors $ 1 trillion globally How does Asia tap institutional investors? 19...which entails bridging the risk gap Credit Enhancement Multilateral Development Banks Partial credit or revenue guarantee Bond guarantee Project completion risk guarantee Mezzanine and subordinated debt Provide creditenhancement products Unlock potential in private capital markets Support quality project preparation 2 1
PPP success depends on the 3 Ps: suitable Projects Net social benefits Sufficient private sector interest With scope for innovation and efficiency gains Verifiable performance qualified Partners Technical expertise Experienced and reputable Access to private finance right Process Optimal risk allocation Effective and enforceable contracts Transparent bidding process Credible revenue expectations 21 Key messages Growth in developing Asia upgraded to.9% in 217 and.8% in 218 on trade rebound and PRC momentum PRC growth boosted by fiscal support and trade pickup: 6.7% in 217 and 6.4% in 218 India growth strong despite short term challenges: 7.% in 217 and 7.4% in 218 Trade rebound is broad based and synchronized across Asia, as production networks evolve Public private partnership can be an innovative tool to meet Asia s massive infrastructure needs 22 11