The global outbreak of Covid-19 has highlighted the importance of sustainable and resilient infrastructure (healthcare, water, power, and telecommunications to name a few). Countries with fragile infrastructure have less capacity to handle crises. An increase of infrastructure investments will be crucial in the context of health security and rapid urbanisation, especially in emerging markets.
THE NEW SILK ROAD ROUTES
A significant first step in this direction was the Belt and Road Initiative (BRI, also referred to as the New Silk Road) proposed by the Chinese government in 2013 with the aim of promoting regional and global integration along two main conduits: the Silk Road Economic Belt (the ‘Belt’) and the New Maritime Silk Road (the ‘Road’). China’s global development project has continued to grow in the years since, with the BRI extended beyond infrastructure construction to embrace also technology infrastructure, the Digital Silk Road, and now the Healthcare Silk Road. The Digital Silk Road aims to upgrade internet connections with optical fibre cable, 5G networks and satellites in countries where technology infrastructure is underdeveloped or even non-existent. The Healthcare Silk Road is expected to lead to an increase in investment in healthcare and public health infrastructure.
It has been stated that more than 130 countries have officially signed collaboration agreements so far, representing more than 70% of the world’s population, 55% of global GDP, 75% of energy reserves and 30% of the world’s good and services.
With global trade tensions limiting growth opportunities, the BRI provides economic stimulus to participating countries and acts as a catalyst for new trade routes and growth across Asia, Europe, the Middle East and Africa. The Initiative represents an opportunity for China to increase its own exports, as well as strengthen its geopolitical and commercial influence, while for countries along the routes the programme represents the opportunity to fund their infrastructure deficit and provide capital injections via foreign direct investments (FDI) that will stimulate economic activity.
RISKS ON THE ROUTES
One of the main risks is related to financial viability, which is the risk that governments assume a huge amount of debt for (non-economic) projects that are not able to generate an adequate return to repay government debt, with negative implications for the country. Concerns about unsustainable debt burdens have eventually led some governments (such as Malaysia, Myanmar, Pakistan and Sierra Leone) to cancel or scale back some BRI projects.
This risk is now being exacerbated by the Covid-related shocks to economies. An important recent step toward debt sustainability is managed by the debt service suspension initiative (DSSI), which provides for the temporary suspension of debt repayments falling due between May-December 2020 for emerging countries in dire economic conditions. Projects are also likely to be increasingly sponsored by international agencies, favouring a better assessment of the financial, sovereign and geopolitical risks, and also paving the way for much greater private sector involvement. More, to handle BRI disputes, an International Commercial Courts (CICCs) is established.
Alongside debt, the negative impact on the environment caused by certain megaprojects is a big issue. Because the environmental damage can be so profound, it can offset the benefits of improved infrastructure in some cases. Last but not least, the trade war is a final risk to consider. Fostering a long-term view, China may focus on diversifying both its sourcing of inputs and end markets to reduce its reliance on the US. It should further boost the trade relationships between China and other nations, including those joining the New Silk Road project.
ROUTES FULL OF OPPORTUNITES
Opportunities surrounding the New Silk Road are numerous and spread among all participating countries. Especially those with a relatively large demographic dividend and a rapid urbanisation process. For these countries, spending under the BRI represents an opportunity to close their infrastructure gaps and contribute to broader economic development thanks to positive spill over effects from infrastructure and foreign direct investments. It is important to look at the sectors that are set to directly or indirectly benefit from the trade and economic growth the BRI will generate.
When looking for the most compelling opportunities, the demographic dividend is a key factor to consider among the broad list of countries targeted by the BRI. Some countries will have a greater likelihood of triggering self-reinforcing growth dynamics in a younger population. Urbanisation level is a second key factor. Demographic shifts generally lead to higher levels of urbanisation, which in turn result in higher levels of economic growth. The higher the rate of urbanization, the greater the investments in human capital and businesses, as the rapidly growing middle class is likely to push for infrastructure and technological progress.
Investing in countries along the New Silk Road means adopting an unconstrained, active flexible approach to access a varied set of opportunities across a range of sectors, geographies and asset classes. The same approach helps to exploit relative value opportunities across the capital structure of companies (choosing the most attractive combination of dividend and bond yields) and manage drawdown in different cycles. Within the fixed income space, investors may benefit from tactically choosing debt instruments denominated in either local or hard currency by any category of issuers. In conclusion, it is crucial for investors to ascertain some basis standards: financial sustainability, geopolitical stability and environmental protections to reach the maximum opportunities potential of the New Silk Road routes.
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