The populist leaders of India, Indonesia and the Philippines won office with promises of massive spending to upgrade their nation’s roads, railways and ports. Doing so, the thinking goes, would supercharge economic growth and emulate China’s success.
India’s Prime Minister Narendra Modi intends to spend a record $60 billion on infrastructure this fiscal year. Philippine President Rodrigo Duterte set an infrastructure spending goal of 7 percent of gross domestic product, while Indonesian leader Joko Widodo has added 7,000 kilometers of new roads and four new airports and last week vowed more.
In a global landscape starved of yield, foreign investment has poured in to help fund the ambitions, lured by young populations and some of the world’s fastest rates of economic growth. As a sign of their resilience, the trio have even shaken off interest rate hikes by the Federal Reserve, something that has tripped up many a developing nation in the past.
But now the Fed is set to embark into uncharted territory by shrinking its $4.5 trillion balance sheet and old vulnerabilities are starting to resurface. The problem the three nations face is that, unlike China, they lack the industrial, export and domestic savings bases needed to fund their plans.
To dig foundations and pour cement, heavy equipment must be imported, weakening current accounts just as faster growth is also swelling imports. And the cost of the projects is pressuring budget deficits, leaving the governments heavily reliant on foreign cash.
"Stepping up infrastructure investments in these large Asian emerging markets will likely widen the current account deficit and increase external debt," said Chua Hak Bin, a Singapore-based senior economist withMaybank Kim Eng Research. "Depending on the form of external financing, some emerging markets could become more sensitive to volatile foreign capital flows and currency mismatch risks."
India’s general government debt level is "significantly" higher compared with similarly rated countries, Moody’s Investor Service has warned. While the federal government aims to narrow Asia’s widest budget gap to 3.2 percent of GDP in the current fiscal year, from 3.5 percent, its top economic adviser said the outlook is "uncertain" given risks from slower growth and policy uncertainty.
Then there’s the risk of a blowout in India’s current account deficit, which the International Monetary Fund projects to be at its widest since 2013, when the Fed first signaled tightening after years of unprecedented stimulus. Defaults on bonds and syndicated loans by Indian companies are at a record of almost $2 billion so far this year, compared with $494 million for all of 2016, according to data compiled by Bloomberg.
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