The Asian Infrastructure Investment Bank (AIIB) expects uneven economic recovery to widen the infrastructure financing gap in developing and emerging Asia in 2022.
Ongoing concern over inflation, pandemic impact and fiscal constraints are dampening investor appetite for development projects and putting pressure on governments seeking to finance new infrastructure. However, the new year will bring opportunities in markets able to overcome pandemic implementation delays and successfully channel capital toward Paris-Aligned investments.
AIIB believes the international community needs to continue encouraging an equitable and green recovery throughout Asia. Top priorities for investors and the development community would be funding for vaccines, climate finance loans alongside capacity to design and implement Paris-Aligned projects and thought leadership on integrating technology into infrastructure investments.
“The turbulence of the past two years is still with us, but there are positive signs the recovery is progressing across much of Asia,” said AIIB Chief Economist Erik Berglof. “However, we should not let our guard down. Despite headwinds on the horizon, it is critical to maintain investments that will quicken vaccination efforts and transition emerging markets to net-zero goals.”
AIIB predicts the following trends will impact the infrastructure sector in Asia throughout 2022:
1. Inflation concerns and an uneven recovery: Different approaches to vaccine rollouts, difficulties in acquiring vaccines and varying capacities to respond to and implement policy support measures mean that some countries are recovering faster while others are trailing behind. Central banks may bring forward earlier and faster rate increases (leading to a scarcity of low-cost liquidity). High debt economies and highly leveraged companies will need to consolidate. There could be an increasing appetite to shift more assets into infrastructure as a hedge against inflation, provided the assets are well structured. Policy makers will also need to calibrate their infrastructure investment plans in light of higher prices and interest rates coupled with supply chain disruptions and pandemic-induced implementation delays.
2. Transition to net-zero: COP26 and net-zero announcements by major economies such as China, Japan and India signal a major shift in how we think about infrastructure in the immediate and near future. To make good on these commitments, Asia’s biggest economies will need to channel increasing amounts of capital toward renewables and energy transmission and distribution projects. More adaptive and resilient infrastructure to respond to catastrophic weather events already underway in the region will also need to be ramped up.
3. Accelerating current megatrends: Digital connectivity investment will increase as more people work remotely and demand for internet services increases. Projects that improve physical connectivity will also rise to address supply chain, logistics and food security needs. There needs to be a move away from restrictive contracts to deeper collaborative approaches by diversifying the ways we deliver projects. Collaborative delivery models and outcome-based procurement will help foster innovation, break silos and enable best technologies to be applied. New talent, especially women and digital natives, needs to be encouraged into infrastructure sectors through thoughtful and deliberate workforce planning.
4. Political and economic instability leading to cautious investor appetite: Political disruptions may lead to financial and trade sanctions and energy insecurity in some markets. The ending of quantitative easing in developed countries, coupled with the ongoing risk of lockdowns and an uneven recovery can trigger destabilizing capital flow reversals and negative spillovers on real economic activity in emerging economies. Private investors will stay wary of investing in infrastructure in developing economies, even as countries seek to redouble investments in energy, roads and water projects.
The October 2021 IMF World Economic Outlook projects growth in emerging and developing Asia to slacken in 2022 compared to 2021. Pressure to respond quickly to new variants and manage a tightening economic environment leaves policymakers few options to maneuver. Funding decisions need to be carefully thought through to ensure value for taxpayers and a strong return on investment.
Embedding technology, climate resilience and digital capabilities will reduce costs, deliver better-quality data and improve connectivity. “Banks like AIIB can support policymakers in assessing these possibilities and derisking investments,” said Berglof.
Multilateral development banks are responding with continued funding for pandemic preparedness and response and support for economic resilience. As part of the coordinated international response to the pandemic, AIIB swiftly pivoted our investment strategy and launched USD13 billion COVID-19 Crisis Recovery Facility (CRF) to support AIIB’s members and clients in alleviating and mitigating economic, financial and public health pressures arising from COVID-19. The Bank also committed to have all operations aligned with the Paris Agreement by mid-July 2023. AIIB estimates its cumulative climate finance approvals to exceed USD50 billion by 2030.
The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank whose mission is financing the Infrastructure for Tomorrow—infrastructure with sustainability at its core. We began operations in Beijing in January 2016 and have since grown to 105 approved members worldwide. We are capitalized at USD100 billion and Triple-A-rated by the major international credit rating agencies. Working with partners, AIIB meets clients’ needs by unlocking new capital and investing in infrastructure that is green, technology-enabled and promotes regional connectivity.