As Gotabaya Rajapaksa boarded a Saudia plane from the Maldives on July 14, he was still Sri Lanka’s president. That changed after he arrived in Singapore — and resigned via e-mail — marking an ignominious end to his family’s multi-decade rule of the country he abandoned with inflation at a crippling 54.6% and a mountain of foreign debt on which it has defaulted.
Protesters who overran the presidential palace in Colombo were furious with Rajapaksa for precipitating the economic crisis with needless spending on grand infrastructure projects, ranging from convention halls to international airports and even cricket stadiums. The US$3.1 billion ($4.27 billion) spent on a port in Rajapaksa’s hometown of Hambantota, largely funded by China, drew particular ire. Now controlled by China, the port is seen as a key node of China’s Belt and Road Initiative (BRI) that aims to connect the entire Euro-Asia landmass and Africa.
To be sure, China’s share of funding stands at just around 10% of Sri Lanka’s total debt. Various creditors, including the Asian Development Bank (ADB), the World Bank, India, Japan and Western institutions, are owed similar amounts. Unfortunately, for all the potential of the Hambantota port serving as an additional alternative to Colombo’s, Sri Lanka is now seen as part of a growing list of emerging economies drawn into “debt-trap diplomacy” through which generous loans from China are used to fund projects with uncertain returns. According to the American Enterprise Institute, the value of China-led BRI infrastructure projects hit US$838 billion by the end of last year.
Following initial momentum, the pandemic has thrown many of China’s plans into disarray. As more recipients of China’s funding struggle to service their loans, China has found itself negotiating some US$56 billion in loans with borrowers in 2020 and 2021 — up three times from 2018 and 2019, estimates the US-based Rhodium Group.
At the same time, the quantum of new financing and investments for BRI projects has slowed, according to a study by the Green Finance & Development Center, an affiliate of Fudan University in Shanghai. For the first six months this year, just US$28.4 billion has been committed, down 40% compared to the first half of 2019.
The West may have sniffed out an opening. At the Group of Seven (G7) countries meeting from June 26 to 28, US President Joe Biden and his six counterparts announced the Partnership for Global Infrastructure and Investment (PGII) programme. Positioned as a counter to the BRI, this programme pledges to raise US$600 billion within five years to fund infrastructure in less developed countries.
While the world awaits specifics on the PGII, the West’s bid to curtail China’s growing geopolitical influence is creating an additional dimension of complexity for other countries — including Singapore — that are trying to chart their own course.
G7 makes move on Asean
Singapore publicly expressed support for the BRI early on, and although Prime Minister Lee Hsien Loong was noticeably absent from the BRI Summit in May 2017, an agreement between Singapore and China was inked the following year to signal close “bilateral cooperation” between the two countries on the mega project.
At the Second Belt and Road Forum for International Cooperation in 2019, Prime Minister Lee outlined Singapore’s participation in the BRI, which focused on four areas: infrastructure connectivity, financial connectivity, third-party collaboration and professional and legal services. These key focuses place Singapore as a financing hub and source of third-country partnerships in Southeast Asia for the BRI — not as a recipient of inward-flowing foreign direct investment (FDI) from China.
However, much of the world’s outlook has changed since 2019. China’s rigid zero-Covid policy has hamstrung its economic recovery in 2022, even as the rest of the world gradually emerges from the economic rubble of the past two years, leaving Beijing ill-positioned to continue financing its infrastructure projects abroad.
The PGII could be well-timed to make the most of the lapse in this aspect of Chinese foreign policy. “The G7 is clearly concerned about the inroads China has made in the developing world through its BRI,” says Stephen Olson, senior research fellow at the Hinrich Foundation. “The PGII signals that developed democracies do not want to cede further influence to China in less developed countries.”
One such region is Southeast Asia. In October last year, the Biden administration announced its Asean policy with US$150 million of new spending, of which US$20.5 million would be directed to the Southeast Asia Smart Power Program (SEA SPP) through the US Agency for International Development (USAID). When the PGII was announced at the end of June, it picked up the same programme, pledging a total of US$40 million in funding.
While promising, almost exactly a year before the PGII was unveiled, the G7 announced another economic and infrastructure initiative called the Build Back Better World (B3W), which has seen almost no follow-up news since, leaving recipient countries unsure if the G7 will deliver on their promises.
The “simple answer” is that the B3W has been “rebranded” as the PGII, says Richard Bullock, senior research analyst of geopolitics at BNY Mellon Investment Management. “The Biden administration’s failure to get the domestic Build Back Better bill passed through Congress has inevitably led to the international version’s rebranding to a more functional name,” he explains.
“However, it is also clear that the infrastructure programme has evolved in a positive way with enhanced coordination between government departments and real-life projects that have already been launched under the initiative across the target pillars of climate, digital economy, healthcare and gender equality,” adds Bullock.
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He says that while US$600 billion is an “extremely ambitious” target to be mobilised by 2027, the Biden administration and other G7 countries have spent the last 12 months since the announcement of the B3W trying to refine the details of its successor, the PGII. “The fact they can already point to a number of specific projects is encouraging,” says Bullock.
From a geopolitical perspective, notes Hinrich’s Olson, this is another effort by the Biden administration to draw clear dividing lines between “democracies and autocracies”, adding that it is “striking to note” the emphasis placed on this programme being a “values-driven initiative among like-minded partners”.
“Not surprisingly, the Chinese government has already criticised the initiative as an attempt to export values,” says Olson.
Private funding, public uncertainty
Aside from its “values-driven” approach, the PGII also includes the novel aspect of private investments forming a significant proportion of the eye-watering amount pledged by Biden, who is loath to ignite domestic voter concerns about large US government spending abroad. As he described the PGII at its announcement: “This isn’t aid or charity; it’s an investment that will deliver returns for everyone, including the American people.”
With the private investment angle in consideration, Olson says it is important to note the PGII is still “purely aspirational” at this stage.
“It remains to be seen how much money will actually be deployed. It is not uncommon to see a wide gap between the funding levels committed to by leaders in lofty declarations issued at international gatherings and the amount of money that is ultimately dispensed,” he explains.
Olson believes this is especially relevant for the PGII because it will depend heavily on private-sector investments, which governments “can encourage but cannot compel”, adding that the bottom line should lie with watching for “actual investments rather than amorphous investment pledges”.
However, Bullock believes that there are reasons for developing countries to be “cautiously optimistic” about the PGII and the participation of the private sector, which he says generally has a “superior record” at allocating capital to areas of higher productivity and economic growth, which will benefit the programme.
“As private-sector capital from pension funds to private equity participates in these projects, there will be a greater focus on environmental, societal and governance [objectives], with governance and transparency an important component,” explains Bullock.
“Corruption is a challenge in certain developing countries, but as projects flourish in those with higher governance levels, there should be better incentives for countries wishing to attract infrastructure investment to deal with their own corruption challenges first,” he adds.
But Richard Yarrow, visiting research fellow in the East Asian Institute at the National University of Singapore, warns that without “quality guarantees” such as the absence of “rampant” corruption and nepotism, the allocation of capital cannot ensure economic growth.
“People have a tendency to think wherever there is money, there will be economic growth,” he says. “But genuine, meaningful economic growth requires a broader structure of activity within society in order for resources like capital and equipment to behave properly.”
In the BRI’s case, Yarrow says that spending has occurred mostly on heavy infrastructure for capital goods — “white-elephant projects” such as power facilities and roads in Pakistan or the Hambantota port in Sri Lanka, which have not “necessarily been useful”.
China, having funded many of such projects, has come forward to state it is willing to provide support and assistance within its capacity to new Sri Lankan President Ranil Wickremesinghe, with Chinese President Xi Jinping saying he attaches great importance to the development of China-Sri Lanka relations, and believes the country would be able to “overcome temporary difficulties” and advance its economic and social recovery.
In an interview with Bloomberg Television on July 15, Sri Lanka’s ambassador to China Palitha Kohona revealed that Colombo is asking Beijing for a loan of US$1 billion to repay an equivalent amount of Chinese debt due this year. It is also seeking a US$1.5 billion credit line to pay for Chinese imports and the activation of a US$1.5 billion swap, he added.
For developing countries in Asia, as in the case of Sri Lanka, Yarrow believes that FDI influx — a textbook answer to lift an economy — can often bear little fruit for economic growth. “The problem is not a shortage of money; the problem is, where is the money going?” he says.
With specific details regarding the G7’s programmes still scant, there is little assurance that the PGII will be better managed than the way China has implemented its BRI — which has been far from perfect, but benefits from a decade long headstart.
Not a ‘zero-sum’ game
Whether or not guarantees on either side of funding are in place, one thing is certain: large swathes of emerging Asia are in need of infrastructure funding.
In its 2017 report Meeting Asia’s Infrastructure Needs, the ADB forecast that developing Asia, including Asean, will need to invest US$1.7 trillion per year in infrastructure until 2030 to maintain its growth momentum, tackle poverty and respond to climate change — almost double the US$900 billion per year that the region currently invests.
BNY’s Bullock notes that many Asean countries have very large infrastructure requirements in the coming years, both in the PGII’s four valuesdriven areas but also in more conventional “cement and steel”-based infrastructure which has “traditionally” been China’s strength.
“A sizeable portion of the infrastructure requirement for the region is for climate change mitigation and adaptation, which the PGII directly aims to address. However, the region also needs substantial traditional infrastructure investment, including roads, bridges, power plants and telecommunications infrastructure which China can provide,” he says.
Although a large part of the G7’s motivation for the PGII is to compete with China’s BRI, the two programmes need not be viewed as “zero-sum” from the perspective of Asean, says Bullock, adding that the launch of the PGII will ultimately give Asean countries more options and avenues for FDI and infrastructure development.
Olson notes that although the PGII at large is geared primarily towards developing countries — and thus less likely to be directly “impactful” for Singapore and other developed economies — the SEA SPP could prove to be “quite interesting” for Singapore.
But he also points out that details of the programme are lacking at present, with a “paltry” pledge of US$40 million. “It is the right programme for the right part of the world, but the devil will be in the details and the number of zeroes in the dollar amounts deployed,” says Olson.
Bullock adds that the “small headline figure” of US$40 million suggests the SEA SPP is not geared towards “financing the complete renewable energy transition” for Asean nations. Rather, it is intended to help “catalyse” the process of transition and to “enhance energy integration” between countries in the region.
He believes that USAID will help to mobilise knowhow and technology to foster energy partnerships across the region over the next five years. The agency’s target is that the initiative will result in the deployment of 2 gigawatts (GW) of advanced energy systems through the mobilisation of US$2 billion in clean energy finance and will lead to a 5% increase in intra-regional energy trade, he explains.
“Singapore is well-positioned to play a leading role in the initiative, given the technological leadership that many Singapore-based companies enjoy in clean energy,” adds Bullock.
It remains to be seen how Singapore will respond to the PGII, its SEA SPP or any other initiatives in the region. But given the Singapore economy’s dependence on trade, with an annual trade value that stands at over three times its GDP, and its pole position on digitalisation and sustainability in the region, Singapore should be expected to play a leading role in programmes that facilitate greater intra-Asean trade.
In an interview with The Edge Singapore, Enterprise Singapore chairman Peter Ong says that with any infrastructure initiatives in the region, Singapore wants to offer what it already possesses, such as its “capabilities” in financial and engineering services — “high-end services” anchored on infrastructure.
“We want to offer that to anyone who is open to partnering with us. We look at the multiplicity of initiatives as something positive that will give [Singapore] companies more opportunities,” says Ong.
On Aug 1, Prime Minister Lee during a meeting with US Speaker Nancy Pelosi, who is leading an American delegation on a high-profile tour of Asia, said he welcomes the commitment expressed by the US for a strong engagement of the Asean region. He reiterated the importance of stable US-China relations for regional peace and security, with both sides discussing ways to deepen the US’ economic engagement of the region through initiatives such as the Indo-Pacific Economic Framework.
Singapore launched its own Infrastructure Asia programme, a partnership between Enterprise Singapore and the Monetary Authority of Singapore, in October 2018.
While Singapore can make attempts to become a nexus for infrastructure funding in Southeast Asia, Asean members will continue to pursue their own trade and economic ties independently. Indonesia’s President Joko Widodo, seen as taking a sudden interest in foreign affairs, was the first foreign leader to visit China since Beijing hosted the Winter Olympics in February. OCBC Bank’s economist Wellian Wiranto believes that from the Indonesian perspective, Indonesia’s “topmost agenda” in discussions with Chinese leaders will be economic ties, with trade and FDI boosts in mind.
Wiranto notes that China’s investment in Indonesia has also grown considerably in recent years, with realised FDI by Chinese companies ranking second in 2Q2022 figures, just behind Singapore’s.
“While infrastructure projects such as the Jakarta-Bandung high speed rail dominate headlines, the clean energy space has been at the forefront too. China’s major battery producer, Contemporary Amperex Technology Co, has plans to build a US$6 billion mining-to-batteries venture, for example, leveraging Indonesia’s vast nickel reserves,” he says.
Although these pursuits may circumvent the possible Singapore nexus of FDI inflow into Asean, East Asian Institute’s Yarrow believes that from Singapore’s perspective, greater economic stability and prosperity in its neighbouring countries Malaysia and Indonesia is of “spectacular importance” to its long-term security.
“Some of the threatening politics in either country comes down to insecurity around economic growth,” says Yarrow, who adds that there is a “growing gap” between Singapore and its neighbours.
“If Indonesia and Malaysia feel that they have greater reason to be optimistic about their future economies, that could possibly turn down some of the regional tensions,” he says.
Much more will be needed to effectively traverse geopolitical tensions on a global scale. Biden has maintained the hostile direction set by former US President Donald Trump, who ignited the trade war with China and soured ties, even if his domestic politics differ from that of his predecessor.
Southeast Asian governments, businesses and people are finding themselves caught in a balancing act between American and Chinese foreign interests. Over the past several years, as ties have worsened between the US and China, Singapore has repeatedly urged both sides to stay constructively engaged and not to put Southeast Asian nations in a bind by forcing them to take sides.
The good news is that a successful outcome is not beyond the realms of possibility. “Provided Asean countries can successfully navigate the great power competition between China and the US and remain neutral, they should be able to benefit from twin sources of FDI,” says BNY’s Bullock.