Global Infrastructure Investing: A Center of Gravity Shift

Author: Aaron Visse
Date: May 14, 2015
Category: Infrastructure
Tags: , , , , , , , ,

An evolution is underway in the world of global infrastructure. Two distinct and separate events—the collapse in oil and gas prices and the creation of the Asian Infrastructure Investment Bank (AIIB)—will have meaningful implications for global infrastructure investment. Combined, I think these events will lead to better mid- to long-term global economic growth, but they will cause a major center of gravity shift in future investment trends. Mainly, this shift will come from a change in focus from North America to emerging markets. Overall, I see a positive investment environment emerging for global infrastructure.

Lower energy prices, higher GDP
Lower oil and gas prices imply a reduced trajectory for North American energy infrastructure investment spending but also higher global gross domestic product (GDP) growth.

The precipitous decline in oil and gas prices has not gone unnoticed by higher cost producers—to put it mildly. Bellwether exploration and production company EOG Resources has responded to the collapse in oil and gas prices by slashing its planned investment spending this year by 40% and will reduce the number of completed wells by almost half as compared to 2014. Likewise, rig counts have fallen for 21 consecutive weeks in the face of lower oil and gas prices and are down over 50% from one year ago. While the shale revolution in North America has come under short-term pressure from the drop in commodity prices, the global economy is likely to see a boost from the impact of lower energy prices. The silver lining in the current environment is that demand has remained steady-to-growing, meaning that the decline in prices came from a supply shock as opposed to weakening demand. As a result, global growth should accelerate.

“Historical estimates suggest that a 30% oil price decline (as expected, on an annual average basis, between 2014 and 2015) driven by a supply shock would be associated with an increase in world GDP of about 0.5% in the medium-term.” 1
-World Bank Publications, 2015

The creation of the Asian Infrastructure Investment Bank
Emerging market countries, led by China, are expanding their infrastructure investment capabilities with the creation of new financing entities. Increased infrastructure investment has been shown to positively impact productivity, output and long-term economic growth. Studies suggest that a 1% increase in physical infrastructure stocks can boost GDP growth by 1%-2%.

In the context of future planned infrastructure investment, consider the following:

  • More than 50% of global GDP now comes from developing countries2
  • 97 out of every 100 births now occur in developing countries3

Existing institutions such as the International Monetary Fund (IMF) and the World Bank (WB) arguably do not reflect current economic reality in light of these trends. Both were creations of a different time and era, born out of the Bretton Woods Conference in 1944; they are perhaps a bit slow to adapt to the ever-changing world order. Consider the following charts that detail the five largest developed economies and the five largest developing economies. Developed markets contribute approximately 29% of total global GDP in comparison to the five largest developing markets, which contribute approximately 31% of total global GDP on a purchasing power parity basis. The five largest advanced economies hold 36% and 37%, respectively, of WB and IMF voting rights. Meanwhile, the five largest emerging economies have a much more limited say in these institutions, controlling only 14% and 11%, respectively, of WB and IMF voting rights.

forward-funds-blog-visse-global-infrastructure-gdp-voting-power

Perhaps partly in response to these existing inequities, as well as the practical need for more funding vehicles to plug a massive infrastructure investment spending gap, China has given rise to the Asian Infrastructure Investment Bank (AIIB). The Asian Development Bank, which facilitates economic development in Asia, estimated that there is a need for $8 trillion in infrastructure investment throughout Asia between 2010 and 2020. The AIIB will be modestly capitalized initially ($50 billion), but with over 50 countries currently on board (many of them key U.S. allies), there is potential for the AIIB to grow substantially.

“This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
– Former Treasury Secretary Lawrence Summers, April 2015

The AIIB is far from China’s only effort to bolster infrastructure investment. Last year, China announced the creation of the Silk Road Fund to improve trade and transport links in Asia, and in 2013, the New Development Bank was created to focus on economic development in the BRIC nations (Brazil, Russia, India and China). India has also recently announced its own plans to start a special purpose facility to invest in transportation and power assets across southern Asia and Africa. The creation of these structures is critical for infrastructure financing and development. Well-conceived and executed infrastructure investment plans can provide a platform for more robust, long-term economic growth.

Should these developments spur a wave of infrastructure investments in emerging markets, the impact will go well beyond those developing economies and will feed into the world economy as well.

1World Bank Group, Global Economic Prospects, January 2015: Having Fiscal Space and Using It, Washington, DC: World Bank, 2015
2ThinkAdvisor, Emerging Markets Dominate Global GDP, May 9, 2014
3United Nations Population Statistics

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Aaron Visse has earned the right to use the Chartered Financial Analyst designation. CFA Institute marks are trademarks owned by the CFA Institute.


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