Infrastructure financing in Central Asia
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The countries of Central Asia - Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan - need long-term private capital to finance infrastructure. Local governments and international financial institutions cannot cover all requirements, nor should they, especially since there are a significant number of value-for-money projects across the region.
Moreover, given the high probability of elevated long-term inflation uncertainty in most Central Asian countries, that is, the difficulty of predicting the value of local currencies over a longer period, there are no well-developed local bond markets.
Despite the uncertainty, the finance ministers of the Central Asian countries are not ceasing to look for ways to raise long-term funding. Repeated international financial crises reveal over and over the need to cultivate domestic bond markets to decrease reliance on foreign-currency financing and minimize exposure to exogenous capital-market volatility.
As such, the upcoming Central
South Asia: Regional
Connectivity, Challenges and Opportunities Summit in Uzbekistan (July 15-16) is an opportunity to make the case once again that Central Asia is worth investing in.
The summit is not only about regional integration but about "financing connectivity" on terms that harmonize the development objectives of these sovereign nations with those of external stakeholders without giving away their sovereignty.
The summit, focusing on economic, security and cultural issues, is drawing the world's attention, and the president of Uzbekistan, Shavkat Mirziyoyev, should be congratulated for his leadership.
Central Asia's leaders, overcoming historical grudges about one thing or another, wish to advance their socio-economic integration. But they also aim to solidify ties with the US, the European Union, Russia, Iran, Turkey, China, India, Pakistan and Azerbaijan, among others.
Everyone knows that without Central Asia, connectivity across Eurasia is largely a meaningless fiction. To say otherwise is to have one's head in the sand.
The leaders of Central Asia agree that the development of reliable and affordable infrastructure is a priority. Removing barriers to capital flows and trade will be front and center issues at the summit.
One of the key questions remains: How will these countries, including Afghanistan, tap capital markets to finance long-term infrastructure? Whether through publicprivate partnerships (PPP) and/or foreign direct investment (FDI), what tools are available to attract financing?
While countries in the region have made remarkable advances in the regulatory and investment environment, we believe it makes sense to go full throttle on developing the local-currency bond markets, irrespective of howls from some quarters to the contrary.
Moreover, Central Asia should question those who argue that it will be cheaper to finance longterm infrastructure assets in foreign currencies like the US dollar than in local currency; it won't be cheaper for Central Asian governments.
There is a persistent misconception about the assumptions underpinning the risk-reward metrics associated with "fixed income," that is, debt financing versus equity financing.
To assume automatically that fixed income, that is, "plain vanilla" local-currency bonds that carry significant interest costs to cover for currency-depreciation expectations, is cheaper than equity leads to making wrong choices that turn out to be both costly financially and detrimental policy-wise for the governments and people of the region.
To avoid these problems, the countries of Central Asia should focus on offering in the first instance long-term local-currency inflation-linked bonds not dissimilar to US Treasury InflationProtected Securities (TIPS).
For example, Uzbekistan, Afghanistan and Pakistan have announced plans to construct the Trans-Afghan Railroad from Uzbekistan to the Arabian Sea. Rather than issue US-dollar-denominated fixed coupon instruments, which most likely will be negatively affected by devaluation, financing could be arranged by issuing inflation-indexed long-term bonds (much longer than three years) denominated in three separate currencies, the som, afghani and rupee.
Following such a route would also help develop the local-currency bond market.
Only a slice of the instruments could be issued in hard currency, tracking the hard-currency portions of the expected cash flows.