The spark in ASEAN’s future growth
ARUN NAVARATNA, SENIOR ECONOMIST, ANZ | MAY 2019
Growth in south-east Asia amidst surging population growth and shifting lifestyle expectations is creating an unprecedented demand for energy. But reform and investment will be required to support that evolution. What will power future growth in the sector?
In the Cambodia, Lao PDR, Myanmar and Vietnam (CLMV) sub-region alone electricity and natural gas demand in the region are set to triple by 2035. Half the increase in ASEAN (Association of Southeast Asian Nations) gas demand in that time is projected to come from Vietnam.
Representing just below 1 per cent of global GDP, the CLMV region is projected to account for 5.6 per cent of the increase in global electricity demand and 3.0 per cent of increase in global natural gas usage.
Over $US20 billion in investment financing will be required annually to fund the large capacity additions in the region’s power and gas sectors. The fiscal headroom for enhancing public spending on large infrastructure projects and the ability to raise highly concessional finance will be increasingly constrained.
The region should look to attract greater private participation in infrastructure investment and also prepare domestic infrastructure companies for fund-raising from commercial banks and institutional investors. This will require significant reforms in their legal framework, macroeconomic policies and capital market regulations.
Consistent 6 per cent plus real gross-domestic product growth over the last two decades has enabled greater economic convergence in the south-east Asian region. The per-capita GDP of the ASEAN six nations, which used to be almost five times larger than the CLMV economies in 1999, is currently 2.5 times larger.
During the same period, as with any rapidly growing region, CLMV energy requirements have more than quadrupled. The combined primary energy consumption in the CLMV region is now roughly the same as that of Malaysia.
“The combined primary energy consumption in the CLMV region is now roughly the same as that of Malaysia.”
The region has a share of 12 per cent in ASEAN’s GDP and accounts for more than 15 per cent of ASEAN’s energy consumption. Imported oil and petroleum products have been key primary energy sources in the past and are used mostly in the transport sector.
While still significant this share has been falling across the CLMV amid increased use of hydro resources, coal, natural gas and other renewables.
The use of natural gas as a primary source of energy in the form of piped gas/LNG is limited in the region and is expected to remain so. Most of the action in the energy sector in the CLMV region has been and will continue to be concentrated in the power sector, which includes the development of sources for electricity generation.
The mining and utilities sector is a key economic growth driver in the region, contributing as much as 17 per cent and 12 per cent to the Gross Value Added (GVA) of Lao PDR and Vietnam, respectively.
Lao PDR, Cambodia, and Myanmar have been expanding their hydro generation capacity significantly over the past decade. However, the development of large-scale hydro projects is increasingly facing a host of social and environmental challenges.
Lao PDR, which has successfully tapped its hydro resources in recent years with Chinese investment, is now in the midst of a diversification to coal-fired generation and also looking to tap into renewable sources.
The large capacity expansions in the CLMV energy sector will require significant investment. A recent World Bank study on Vietnam estimates power sector requires investment of $US152 billion to $US185 billion between 2016 and 2030 across generation, transmission, and distribution.
Other independent projections prepared for Myanmar, Lao PDR, and Cambodia peg the cumulative power sector investment requirement over 2015 to 2049 at $US167 billion – an average of $US4.8bn annually, likely be front-loaded over the period.
The above estimates include generation CAPEX, grid electrification, off-grid investment, and energy efficiency in billions of real 2014 $US and represent a business-as-usual scenario in which no additional efforts have been made to achieve a near-100 per cent renewable-energy sector.
Traditionally, the financing of energy infrastructure creation in the CLMV economies has relied mostly on public investment. Governments have been on-lending concessional, foreign currency-denominated funds from international financial institutions (IFIs) and development partners, to state-owned enterprises (SOEs).
Governments have also been guaranteeing SOEs direct borrowing from domestic and foreign commercial banks. Most infrastructure projects have been developed by local and foreign private companies, under the build-operate-transfer (BOT) arrangement.
Upstream gas exploration and production have been facilitated through production-sharing contracts between SOEs and foreign petroleum and gas majors, while midstream infrastructure projects have been completed through BOT contracts with foreign infrastructure firms.
Given the sheer size of investment requirements, energy infrastructure financing will come under increasing pressure in the coming years. The fiscal space available to run higher deficits and raise public debt levels is running out.
Vietnam’s debt is nearing the statutory debt limit of 65 per cent of GDP and fiscal consolidation is underway in Lao PDR as well. While Cambodia has low public debt levels, it has rising fiscal deficits and is constrained by a low savings rate.
With income levels rising, Vietnam’s access to highly concessional finance will also become increasingly constrained. In addition, with most countries trying to push renewable energy investments, the need for long-gestation financing at favourable terms will increase.
Increasingly, the CLMV region will have to start mobilising alternative sources of finance and cannot rely completely on traditional sources.
One such method for raising finance is direct participation by private players in infrastructure projects. Since 2008, Vietnam and Lao PDR have cumulatively received $US14.9 billion and $US13.9 billion worth of private investment, respectively.
Most investment commitments have come through in recent years and have been concentrated in the energy sector.
Energy projects may also have to increasingly tap domestic and foreign commercial banks on non-concessional terms, as well as institutional investors, such as pension funds and insurance companies.
The latter group of investors have longer-term liabilities and have been looking at funding emerging market infrastructure lately. Governments can continue to play a key role in facilitating such investments through blended or viability-gap financing.
Arun Navaratna is a senior economist at ANZ
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