China's Belt and Road Initiative to remain central to Asia's infrastructure growth: Fitch Solutions

Emerging Asian markets such as Myanmar and Bangladesh struggle to attract private construction financing.

China’s Belt and Road Initiative (BRI) which aims to address global infrastructure gaps and boost economic growth is forecasted to continue its important role in driving infrastructure growth in developing economies in Asia, according to a report by Fitch Solutions.

Some Asian emerging markets such as Myanmar, Bangladesh and Pakistan continue to struggle to fund their infrastructure needs, spending an average of 2.1% of their gross domestic product (GDP) on infrastructure which in effect widens their infrastructure deficit, data from the Asian Development Bank (ADB) showed.

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The continued dependence on BRI as a source of investment is expected to occur amidst rising political risks associated with the strategy in participating markets. In 2018, Fitch Solutions observed several instances of newly elected governments suspending or cancelling BRI deals inked by previous administrations.

The report pointed out how in Malaysia, prime minister Mahathir Mohamad criticised the Chinese-backed East Coast Rail Link (ECRL) and Singapore-Kuala Lumpur High-Speed Railway Project during his election campaign before suspending these projects upon securing office.

Likewise, opposition leader Prabowo Subianto has called for the review of BRI projects after questioning their economic feasibility in the run up to the 2019 Indonesian presidential elections.

“Given the size of the infrastructure deficit in these countries and the lack of alternative sources of funding, we expect a continued reliance on Beijing and the BRI for the financing and construction of infrastructure projects, regardless of who is in power,” Fitch Solutions highlighted in its report.

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At the same time, these markets often fail to attract private financing due to riskier investment environment, as indicated by our project risk index scores, according to Fitch Solutions said in its report.

Meanwhile, the Chinese government is expected to implement changes to the BRI strategy following criticism on its over-reliance on Chinese labour and equipment and minimal foreign involvement despite construction sites being located in overseas jurisdictions.

“As technology is transferred and the required framework for the development of complex infrastructure projects have been set up, we expect the involvement of more local companies in BRI projects, shifting the competitive landscape from Chinese-dominated to a joint-partnership model,” Fitch Solutions highlighted.

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In terms of financing, the firm added that more involvement of multilateral development banks such as the Asian Infrastructure Bank and the ADB to fund projects can be expected as opposed to the majority of loans being disbursed by the Chinese government through its export-import banks.

“By doing so, Beijing may be able to alleviate fears of the supposed debt trap diplomacy which critics have accused it of engaging in,” Fitch Solutions added.