6 August 2018

BRI-related opportunities for the insurance and asset management sectors in Singapore

Risk appetite for financing in less developed BRI countries means political, regulatory and credit insurance is critical. Singapore is one of the few financial centres across BRI countries that has world-leading capabilities across all of these areas.

Belt and Road’s (BRI) potential to transform Asia’s burgeoning infrastructure needs is well known; but the opportunities for the insurance and asset management sectors - particularly in Singapore - are a little less understood.

President Xi has described Belt and Road as “the project of the century” and, if delivered, the benefits will be immense to the recipient nations.

BRI has the potential to transform Asia’s burgeoning infrastructure needs.

In converting the BRI vision into a reality, China’s major state-owned commercial banks and multi-development banks are engaged in lending to support BRI projects.

Banks are also using their balance sheets to provide short-term and bridge financing of infrastructure projects as well as financial advice on structuring finance.

Beyond their balance sheet, a multitude of financial services is required: from strategic advisory and transactional banking services to risk management, project and export finance.

Similarly, risk appetite for financing in less developed BRI countries means political, regulatory and credit insurance is critical.

When seen against this backdrop, Singapore is one of the few financial centres across BRI countries, along with London and Hong Kong, that can claim to have world-leading capabilities across all of these areas.

The risks continue into the downstream aspects of these projects too.

Swiss Re estimates that BRI projects could generate an additional $USD23 billion in commercial insurance premiums by 2030.

And the downstream opportunities in life insurance and wealth management emanating from the additional 3 billion people entering Asia’s middle-class over the same period are potentially bigger still.

Again, Singapore’s well-developed insurance industry has a role to play.

Asset management and insurance to stoke local capital markets

For BRI to meet President Xi’s commitment of being truly sustainable, it will also certainly require the development of local capital markets.

While countries like China have the economic weight and markets to draw in private sector investors, others do not.

Developing local capital markets is essential to creating the capacity needed to support local economies.

In the meantime, Singapore is leading Southeast Asia with the sophistication and depth of its capital markets, which benefit companies across the region and beyond. This is also supported by its asset management ecosystem and role as a regional treasury centre.

Singapore’s role in making infrastructure investible for insurance companies

Infrastructure projects offer generally stable and predictable cash flows over long periods that suited to investment by life insurance companies.

But without proper risk-sharing and solid legal frameworks, private investors will not be willing to commit large-scale and long-term financing.

The key to creating a significant enough asset class to attract institutional investment is a well-defined pipeline of projects that are investable, legal, feasible and sustainable.

BRI will only succeed environmentally, socially and economically if appropriate assessment and governance frameworks are developed that satisfy investors and regulators.

Singapore is again leading in this area.

Earlier in June, Monetary Authority of Singapore (MAS) Managing Director Ravi Menon announced that it is working to develop investment benchmarks to make infrastructure an investable asset class. This will allow investors to compare the returns of privately-held infrastructure debt and equity against other asset classes.

Government and private sector cooperation to increase ‘investability’ of projects

What all this underlines is the value of extensive and lasting co-operation between governments, multilateral development banks, commercial banks and insurance companies.

The private sector would expect governments to align investment rules and guidelines to improve legal frameworks and settle cross-border disagreements, and provide better visibility of project pipelines to ensure investment alignment.

And we might ask governments to channel funds towards potentially more risky ‘greenfield’ projects so as to enable better risk sharing mechanisms.

It is, therefore, pleasing, to see the MAS’ June announcement also commit to developing an infrastructure debt distribution facility to securitise ‘brownfield’ project finance loans to help crowd in institutional investors.

Another thing that HSBC has been advocating is a multilateral Belt and Road Investment Accord to enable greater co-ordination between China and BRI countries. Amongst its responsibilities could be the identification of best practice.

A partnership of this nature was solidified when Singapore and China signed MOUs on BRI collaboration in April this year.

This cooperation includes building financial connectivity and joint training for officials from recipient Belt and Road countries to ensure they are co-builders of the projects, that the projects are bankable and the cost involved in the build is sustainable.

BRI is an unprecedented opportunity to overcome the bottlenecks and blockages that have prevented private sector investors from taking a greater interest in infrastructure in the developing world.

And at the same time, it can create excellent long-term opportunities for investors with reserves of capital searching for yields.

Amongst all of this, Insurance companies have a critical role to play in managing project risks, bridging the financing gaps, and protecting and growing the downstream wealth that will inevitably emerge across the BRI markets. Sitting firmly within this equation, is Singapore.

A contribution piece by Bryce Johns, Group Head of Insurance, HSBC, first published in the Business Times Singapore on 4 July 2018.

Read the full speech Belt and Road: capturing the opportunities and managing the risks (5-page PDF 232KB)