Infrastructure to be main growth driver: Sigma report
Investment in infrastructure development is set to be one of the main drivers of sustainable growth in the emerging markets after the COVID-19 crisis subsides, according to Swiss Re’s latest sigma report. Emerging markets will invest USD2.2 trillion in infrastructure annually over the next 20 years, translating to 3.9 percent of gross domestic product (GDP), according to estimates in the report.
The energy sector, in particular renewable energy, smart and resilient infrastructure, and healthcare facilities are expected to attract strong investment. The sigma estimates that emerging market infrastructure represents an annual investment opportunity of USD920 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.
Prior to the COVID-19 outbreak, many emerging markets had already put multi-year infrastructure projects into motion, and the associated investments are not expected to drop off to the same extent as seen in previous crisis periods. The pandemic has also shown the urgent need for more investment in health infrastructure in many emerging markets.
Based on current spending trends and economic growth forecasts, sigma estimates that the largest share of the estimated investment in emerging markets will be in energy infrastructure (34 percent), with a core focus on renewable energy. As many countries increase their efforts to reduce their greenhouse gas emissions, investment is expected to pivot toward smart and resilient infrastructure – in which data and digital technology come together to improve monitoring and managing of connected networks such as public transport, utilities and waste disposal systems, as well as facilities like power stations and grids. Building and upgrading of existing infrastructure to become more resilient to climate change impacts will also be a key area of sustainable investment.
Traditionally, emerging markets have relied mostly on public funding for their infrastructure needs. With government budgets under strain, the private sector will play a bigger role via public-private partnerships, and with finance-embedded risk transfer solutions. The benefits of private-sector participation (PPP) include innovation and efficiency gains and by using PPP, governments can outsource day-to-day operations and reallocate budget and resources.
Insurers can further support sustainable growth in emerging markets by closing the infrastructure gap in different regions. With interest rates set to remain low, infrastructure projects can deliver attractive yields to help insurers match their long-term liabilities. These projects also offer an opportunity for regional and asset class diversification, and for investment in environmentally and socially-responsible initiatives.
