Investment in infrastructure development will likely be one of the key drivers of sustainable growth in emerging markets after the COVID-19 pandemic subsides, according to a report from the Swiss Re Institute.
Emerging markets are projected to invest US$2.2 trillion in infrastructure annually over the next 20 years, equal to 3.9% of gross domestic product. The energy sector (renewable energy especially), smart and resilient infrastructure, and healthcare facilities are expected to attract strong investment, according to the report. Swiss Re Institute estimated that emerging-market infrastructure represents an annual investment opportunity of US$920 billion for long-term investors, including insurers.
“The construction and operational phases of infrastructure projects will also generate new demand for insurance solutions, with engineering, property and energy lines of business set to benefit most,” Swiss Re Institute said.
“Spending on infrastructure could be one of the ways to kickstart parts of the economy after the COVID-19 pandemic and help drive strong and sustainable growth over the next decade,” said Jerome Jean Haegeli, group chief economist at Swiss Re. “Most infrastructure spending will be emerging in Asia, which we also expect to be the engine of global economic growth.”
Many emerging markets had already started multi-year infrastructure projects before the COVID-19 outbreak, and the associated investments aren’t expected to drop off to the same extent seen in previous crisis periods, according to the report.
“The pandemic has also shown the urgent need for more investment in healthy infrastructure in many emerging markets,” Swiss Re Institute said. “Beyond the recession shock inflicted by the COVID-19 pandemic, emerging markets are forecast to grow by around 4.4% annually over the next decade, slower than the yearly average of 5.5% in 2010-19, but much faster than the projected 1.8% growth in advanced markets.”
The institute warned that in the aftermath of COVID-19, the global economy will face headwinds from impaired supply chains and production capacities, higher unemployment, bankruptcies, and other debt burdens. When global growth does resume, it will do so only at a subdued level, the institute said. Emerging markets need to become more resilient by improving productivity and increasing infrastructure investment.
“The realities of today, including an increasingly pervasive digital technology, the clear impact of climate change and the need to build more resilient societies, will increase demand for and shape the direction of infrastructure development in emerging markets,” Haegeli said.
The report estimates that the largest share of estimated investments in emerging markets will be in energy infrastructure (34%), with a focus on renewable energy.