Key Takeaways
- A marked improvement in infrastructure and logistics will support the next leg of growth for the emerging markets of Asia.
- Economies can unlock higher growth rates through accelerated investment in infrastructure assets on top of infrastructure efficiency gains.
- The pandemic eroded budget capacity, which will constrain public capital spending. Improving so-called soft aspects of infrastructure such as the regulatory environment can support faster economic growth.
Improved infrastructure will underpin strong growth in emerging Asia-Pacific ex-China. We continue to expect that in 2023 price terms, the economy will expand to US$11.4 trillion by 2033 from US$6.6 trillion in 2023. This translates to an annual real growth rate of about 5.5%. Our baseline forecast incorporates improved infrastructure as a cornerstone supporting these strong growth outcomes.
Infrastructure Equals Growth
Policymakers agree that sustaining high rates of growth requires meaningful investment and infrastructure. Several governments have made infrastructure development a key policy. India is a recent example where the central government has expanded infrastructure outlays. Regional initiatives are promoting sustainable infrastructure development through multilateral institutions such as Asian Development Bank, the World Bank, and ASEAN.
Accelerating Big-Ticket Infrastructure Projects
- India: The government has increased capital spending to target various areas such as transport connectivity, and upgrades to the electricity grid and power generation. In its 2024-25 budget, the Indian government maintained a focus on infrastructure. It has placed emphasis on improving rural infrastructure, with further spending on all-weather connectivity for rural areas. It also allocates more spending for building up digital infrastructure in the agriculture sector. Such emphasis could alleviate infrastructure bottlenecks and help improve rural economic outcomes.
- Indonesia: Policymakers have made concerted efforts to improve infrastructure around the country's nickel processing and electric vehicle battery sectors.
- Thailand: The Eastern Economic Corridor, a large special economic zone with connectivity to Bangkok, is a focal point for infrastructure upgrades, including a high-speed rail link connecting two airports in the vicinity.
- Malaysia: Authorities have several projects under way, including light rail in Penang, a new Mass Rapid Transit line part of the Klang Valley Mass Rapid Transit system, and a pan-Borneo highway.
- The Philippines: The National Economic and Development Authority coordinates flagship Infrastructure projects such as a new airport in Manila, a heavy rail project linking ports in Subic, Manila, and Batangas, and several highway projects.
- Vietnam: The government introduced Vietnam's infrastructure master plan in 2021 with connectivity expansion plans, which include two high-speed rail links, a new airport (Long Thanh International Airport), and a new deep-water port in Hai Phong. The target implementation timeline is up to 2030.
Making Infrastructure Profitable: Onus On The Public Sector
The public sector tends to bear much of the responsibility for infrastructure delivery. Returns on investment are spread over two or more decades, meaning duration risk for the private sector is high. The benefits of infrastructure accrue for several different parties, including those who don't directly use the infrastructure service.
As such, infrastructure operators cannot easily get revenue from these people for the benefits they obtain from the project. Consumers may, for instance, derive quicker delivery times for consumer products without ever having to use an expanded port and connecting infrastructure. These factors mean that operating infrastructure profitably is difficult and puts more onus on the public sector.
This does not rule out a role for the private sector. The private sector favors bottom lines and is hence better at innovating, and can typically operate faster and more efficiently. Private capital can ease the capital outlay burden on cash-strapped governments already committed to wide-ranging spending priorities. Still, the durations, regulated rates of return, and other project risks mean that the public sector dominates the space.
Data from the IMF's Investment and Capital Stock Database show variation in public capital stocks relative to the size of the economy (chart 1). Due to fast-growing economies, and after factoring in depreciation, public assets relative to economic size have not been deepening significantly. Public fixed investment assets are sizeable in Malaysia and Thailand; and by contrast, relatively low in the Philippines and Indonesia.
However, in the Philippines and Indonesia public-private partnership capital assets are higher than global averages. In the Philippines they are about 6.7% of GDP; in Indonesia it's about 4.2% of GDP, which would add to the available total public assets.
Chart 1
Better Logistics, Better Growth
The policy focus on infrastructure has improved outcomes. According to the United Nations Energy Statistics Database, installed power generation capacity has jumped (chart 2). There has also been progress in areas such as fiber coverage and data center construction.
Chart 2
Logistics Performance Index (LPI) scores for emerging markets in Asia have improved since 2014 (chart 3). LPI is the World Bank's measure for infrastructure delivery. It surveys logistics providers globally on various aspects of a country's logistics outcomes. India and the Philippines have seen the largest improvement since 2014 whereas Vietnam, Thailand, and Malaysia saw more modest improvements. In Indonesia, the logistics performance score declined marginally.
Chart 3
Improved logistics performance may support growth. There is positive correlation between an economy's LPI score and GDP per capita (chart 4). Improved infrastructure performance raises an economy's productive capacity. Firms need to be able to easily, quickly, and cost-efficiently source and ship inputs and products to maintain smooth operations and boost competitiveness.
Chart 4
Soft aspects such as shipment-tracking or the regulatory environment are important determinants of overall logistics performance. Among LPI sub-scores across emerging Asia, ease and predictability of border clearance and customs is a key bottleneck. Infrastructure is a strength for higher-income economies in the region, but not for emerging markets, suggesting some room for improvement. Timeliness is seen as a stronger area for these economies.
Chart 5
Creative Approaches To Boost Infrastructure
Economies can unlock higher growth rates through more infrastructure relative to the size of the economy, and through more efficient use of that infrastructure. As economies grow, they will need to invest more just to maintain enough infrastructure compared with the larger economy. Emerging Asia has higher growth rates than the global median: just sustaining the capital stock relative to the economy requires meaningful investment.
In addition, these economies will have to grow their capital stocks relative to the economy to support higher income levels. This means there are three investment requirements for economies: (1) replace and maintain depreciating capital; (2) support the growth of the economy to ensure adequate levels of capital stock relative to the economy; and (3) grow capital stocks relative to the economy to unlock higher growth rates.
Parts of the region that can leverage creative options for improving infrastructure delivery can improve potential growth. Such efficiency gains are particularly important as the pandemic eroded the available public funding for infrastructure outlays in the region (chart 6). This means growing public infrastructure assets may be harder. India and Malaysia have relatively lower available fiscal space, higher net government debt to GDP, and may face more constraints on future infrastructure spending.
Chart 6
Boosting soft infrastructure has an important role to play in improving overall infrastructure efficiency. Examples of soft infrastructure include streamlining regulations, process improvements, more efficient maintenance, and enabling greater private sector participation. Streamlining customs procedures or deregulating tariffs on utilities can smoothen logistics performance, improve returns, and increase efficiency of existing investment.
The soft approach can yield material benefits and minimize lower direct public sector capital outlays. Vietnam, Indonesia, and the Philippines have tighter bottlenecks around soft infrastructure and as a result may gain more from this area.
Powering emerging Asia's growth requires large investment and greater investment efficiency. The region has made big strides on both fronts, putting economies on course for strong growth over the coming years. Countries will need to keep investing to improve and expand infrastructure that supports growth and ensure climate resilience too.
Growing infrastructure relative to the economy will be no easy task, given competition from other important policy areas for available public resources. But the logistics of what's ahead are clear cut: invest in priority areas and improve infrastructure efficiency to raise potential growth.
Editor: Lex Hall
Related Research
- Economic Outlook Asia-Pacific Q3 2024: Exporters And EMs Are Outperforming, June 24, 2024
- Asia-Pacific Energy Transition: Adapting To Looming Execution Risks, April 15, 2024
This report does not constitute a rating action.
| Asia-Pacific Economist: | Vishrut Rana, Asia-Pacific Economist, Singapore + 65 6216 1008; vishrut.rana@spglobal.com |
| Asia-Pacific Chief Economist: | Louis Kuijs, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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