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Central and Eastern Europe should look to Asia for inspiration in building debt capital markets to fund infrastructure, a senior banker has said.
“The key question is the development of local capital markets,” Massimiliano Castelli, managing director and head of strategy for global sovereign markets at UBS Global Asset Management, told Emerging Markets. “If you look at Asia, they have made great progress. But here, excluding Poland and other parts of the EU, there is still room for growth, no doubt about that.
“So my view is they should look at the Asian experience, where they pretty much started from zero yet achieved a decent-sized local debt market where bonds can be traded.”
The gap between infrastructure spending and regional requirements has been a constant theme in the build-up to the EBRD’s annual meetings, with a focus on methods of attracting private institutional capital to invest in the region’s infrastructure. “A number of challenges are limiting greater participation from institutional investors: poor project selection and planning, a lack of bankable projects, limitations around investment regulations, a lack of liquidity, and limited investor protection,” said Mauricio Janauskas, partner at McKinsey & Company. He estimates that institutional investment in infrastructure globally stands at between $1.5-2 trillion, and could climb as high as $5-8 trillion: “A significant step in the right direction, but not enough.”
Clearly depth in local capital markets is not the only reason institutional capital has been largely absent from CEE projects. “It’s about regulation, about creating the right conditions, and about the development of an institutional sector to buy the bonds,” Castelli said. “The most natural buyer of local currency bonds would be local institutional investors who have liabilities in the same currency. Here, the institutional sector is still weak.”
Others feel there is a need for a demonstration effect: projects that have successfully been funded through the markets. “There is a need to build at a country level,” said Richard Chenga-Reddy, head of regulatory affairs at Standard Chartered. “As one or two significant projects are seen to be well structured and well organized, it starts to build credibility. It’s about developing that pipeline.”
Chenga-Reddy also highlighted the need for transparency, policy certainty, investor and creditor rights, and the need for a degree of standardization in structures and debt instruments. But he said that, for bank lending and debt markets alike, there ought to be great potential for more involvement. “We have been a very low interest rate environment and many investors are searching for yield,” he said. “It begs the question why there is such a funding gap. There is a great deal of demand for infrastructure finance, but a much more limited pipeline in terms of bankable and investable propositions for investors.”
