MARKETS & INVESTING | Staff Reporter, Hong Kong

Greater diversity of financing options required in Asia

Given the need for infrastructure development.

It has been noted that Asia, as well as Latin America, have significant needs for infrastructure development.

According to a release from Moody's Investors Service, in order to address the investment need a greater diversity of financing options is required, mainly from institutional investors. To attract them, the regions need to develop a creditworthy projects and multilateral development banks need to increase its participation via credit enhancement but also as facilitators.

"Infrastructure is a central government priority in both Asia and Latin America. However, funding diversity is limited in both regions and continued reliance on established sources of financing will not plug the roughly $1 trillion funding gap estimated by the World Economic Forum," says Ray Tay, a VP-senior analyst at Moody's.

The recent economic volatility is intensifying the need to diversify sources of funding for the sector. Some countries are suffering from an economic slowdown and the prolonged decline in commodity prices that is weighing on governments' ability to significantly increase funding to the sector.

Here's more from Moody's Investors Service:

The reliance on bank funding has been exacerbated by the risks and cash flows associated with infrastructure assets, which banks are better suited to assess, especially during the construction and ramp up periods. The dominance of bank lending in the sector is also indicative of underdeveloped domestic capital markets and limited access to international capital markets.

Moody's says the emergence of an appealing pipeline should encourage institutional investors to commit to infrastructure projects. Such a development could in turn create a virtuous circle in which the improved familiarity with the asset class will incentivize investors to commit to greater and more regular flow of institutional capital into the sector.

"For both regions, an attractive pipeline of projects will encourage institutional investors to commit resources to infrastructure investment opportunities," Adrian Garza, an AVP-analyst at Moody's says.

Multilateral development banks (MDBs) would be key in catalyzing the flow of private capital by providing direct funding and credit enhancement. Additionally, MDBs can offer other types of support such as policy
guidance and technical assistance.

Moreover, an increased role for MDBs will mitigate the challenges hindering the ability of both regions to attract long-term funding. These include economic volatility and political risk, still-evolving regulatory frameworks in certain countries, currency mismatch and interest rate risks and difficulties in design, planning, contracts and execute of projects.

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