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Asian developing countries expect mutual investment boom

Asian developing countries expect mutual investment boom

Frederic Neumann

One of the heads of the Asian economy research in the banking holding HSBC

Frederick Neumann, one of the leaders of research on the Asian economy in the HSBC banking holding:

- The world is changing again. For years, developing countries, or as they say today, “emerging and frontier markets,” received the bulk of funding from multilateral organizations, such as the World Bank or the Asian Development Bank, or directly from the governments of more industrialized countries. With the beginning of the liberalization of the financial market in 1980's. private capital flow has added importance, regardless of the form - whether it is direct investment or financial instruments. Now there is another source of financing - from similar emerging economies.

Take the recent announcement of the BRICS countries (Brazil, Russia, India, China and South Africa) about the intention to create a New Development Bank. Filled with part of the currency reserves of the organization's member countries, the BRICS Bank, which is scheduled to open in Shanghai and which Indians will be leading at the beginning, is being created with a view to financing infrastructure and “continuous development projects”. It will have a certain weight: secured by 50 with billions of dollars of capital, the bank will be able to give loans that total this figure. Over time, when the number of countries participating in the organization increases, the bank’s capital may increase to 100 billions of dollars. The World Bank last year invested slightly more than 52 billion dollars in capital.

This is not the only news in this area. Another recent agreement on the creation of a pool of conditional foreign exchange reserves will allow 100 billion dollars to be counted on those economies of the BRICS countries that have faced financial difficulties. This money will form a kind of "airbag", which will release funds for more pressing purposes. This agreement is similar to the existing “Chiang Mai Initiative” - a system in which bilateral channels of exchange were created between the fastest growing markets in Asia and the recently reached the next highest 240 billion dollars. In the meantime, China proposed the creation of an Asian Infrastructure Fund, duplicating the functions and form of the Asian Development Bank. This organization can get up to 100 billions of start-up capital, and thus instantly become a rival to ADB's existing 50 for almost years in the area of ​​loans.

These formal agreements complement the process in which independent capital funds have taken over part of the functions of large interstate investments. Instead of injecting currency reserves exclusively with easily convertible financial instruments in developed markets, these organizations are increasingly more strategic in investing in companies, both public and private, and infrastructure projects in emerging markets.

Too much good?

What conclusions can we draw from the growing trend of mutual investment in developing countries? In principle, this is a positive trend. For the common good, capital should be where it makes the most profit. This is possible in economies that are in the initial stages of development, where there is not enough cash. Nevertheless, a large share of foreign exchange reserves remains in the markets of developed countries, primarily the United States. This is partly due to the fact that such markets are very mobile and volatile, and in the event of unforeseen circumstances assets can be quickly converted into currency with only small losses.

At the same time, the growth of foreign exchange reserves in many emerging markets may exceed the level required for prudent considerations. Given the relatively strong fundamentals, a very small number of economies will be faced with the need to instantly liquidate all their assets, if such a situation occurs at all. The surplus can be invested in more profitable, albeit less convertible, venture capital. Infrastructure and other projects in emerging markets are among the options, the attractiveness of which is constantly growing for lenders and borrowers.

The possibilities are enormous. By some estimates, by 2030, the developing countries in Asia will need 11 trillions of dollars in investment in urban infrastructure. For example, India. The newly elected prime minister, Narendra Modi, voiced the acceleration of economic growth as a priority goal. This can be achieved only by spending more on all the essential components of the functioning of the Indian economy - roads, ports, energy, as well as logistics and irrigation systems. However, Indian treasuries are empty, and savings are insufficient even to finance existing investments. Accordingly, foreign capital will have to play a more serious role.

However, not everything is concentrated around currency flows. Bilateral and multilateral investment in development projects is accompanied by the necessary expertise. Ambitious infrastructure projects, as a rule, are partially outside the competence of local governments, which leads to unnecessary errors and delays in execution. What defines organizations like the World Bank is not financial strength at all, but experience that has been carefully accumulated over decades of work. For example, now his projects are under much greater pressure in connection with the protection of the environment and various social phenomena than before. The World Bank and similar institutions also embody relatively stringent management standards to make the tender process and the entire project transparent.

Of course, much more can be done to ensure sustainable and socially responsible implementation of projects. Even the World Bank's functioning scheme continues to evolve. However, with regard to the above-mentioned factors, over the past decades it has made great progress. However, there is a risk that new credit institutions appearing on the market will not take advantage of the accumulated experience. Motivation should be not only to increase profits, but also to constantly benefit local societies. The more effective use of the accumulation of developing markets in development projects is a historic opportunity. We must make sure that it will not be lost.

Translated by Mikhail Botvinnik exclusively for

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