Future of SE Asia infrastructure projects uncertain

The future of infrastructure projects in southeast Asia remains uncertain as countries across Asia cut budgets and redirect funds to manage the impact of Covid-19.

Indonesia

The Indonesian government in April announced infrastructure budget cuts of approximately 40pc, with funds reallocated to fighting Covid-19. The revised road budget for the 2020 fiscal year that ends in December has been reduced to $1.96bn from $3.19bn, according to the Indonesian Road Development Association. This includes funds for road preservation, widening, construction and improvements.

Bitumen imports into Indonesia in April slipped from 77,542t in March to 74,733t, as volumes typically pick up just before the fasting month of Ramadan that lasted from the end of April to the end of May this year. Indonesian importers in March lifted cargoes that were diverted from China into southeast Asia, and this expanded inventories.

Indonesian domestic demand has been persistently soft in May-June, in part because of government-enforced lockdowns and the Eid holiday at the end of May. Demand was expected to pick up in June but road contractors have been forced to postpone road construction projects given tighter fiscal liquidity.

Industry participants pointed to difficulty in obtaining credit from banks, resulting in contractors delaying paving works until there is greater clarity on the payment timeline. Some single-year projects have been restructured to multi-year projects, potentially delaying payments to road contractors.

Provincial and municipal infrastructure budgets for roadworks have also been cut, further limiting the availability of funds for projects. The provincial and municipal budgets are typically announced in the second half of the year, and importers were waiting for the budgets to be released before deciding on spot volume needs. Buying interest has remained thin, with an inventory overhang and fewer road projects.

Thinner buying interest lowered price ideas, with market participants unwilling to secure cargoes above $300/t fob Singapore even as export offers for Singapore continued to climb on the back of tighter regional supplies. Importers remained uncertain about the resumption of road work projects, and most expressed pessimism about budgets for the second half of the year.

Preparations are underway for the next fiscal year's budget, with officials hoping to secure similar funds from earlier this year.

The bulk of budgets for roadworks typically come from taxes, so any planned government tax relief as part of pandemic recovery efforts would likely affect available funds.

Malaysia

Malaysia ended its Movement Control Order on 9 June after a three-month lockdown that halted most roadwork activities.

Bitumen imports to Malaysia fell sharply in April by 84.9pc from March and by 69.2pc from a year earlier and stood at 9,994t, reflecting weak demand. State-owned refiner Petronas and a private-sector refiner reduced refinery runs in April to ease inventory pressure, with Petronas also exporting cargoes to the region. Malaysian exports of 65,540t in April decreased by 15.1pc from March by and 50.7pc from a year earlier.

Petronas also kept domestic prices flat at around 1,200 ringgit/t ex-refinery ($280/t) for three consecutive weeks straight in April in light of slow bitumen sales. Domestic prices have surged to 1,800-1,900 ringgit/t ex-refinery ($420-444/t) for the week ending on 3 July, after the MCO ended, with firm demand and market supply tightness adding pressure as construction projects come back on line.

Bitumen demand has recovered but market participants pointed out that these were projects that were already approved under the 11th Malaysia Plan, which extends across 2016-2020. There are no plans to cut or reallocate funds for these projects, with the government planning to use these projects to stimulate an economic recovery.

The Ministry of Works is bidding for the allocation of funds, for future projects that have been identified for the 12th Malaysia Plan (2021-2025). The results of the bid will be disclosed in January 2021 after Malaysia announces in November 2020 its budget for the new fiscal year.

Bank Negara Malaysia estimates the country's gross domestic product growth to be between -2.5pc and 0.5pc. Funding for road infrastructure projects might take a backseat as the government focuses on easing the financial burden on citizens. "But we are still trying to convince the Government to keep on spending on infrastructure, especially on roads and railways, in order to stimulate the economy and create jobs for the population," said an official from the Highways Planning Division.

The Philippines

The Philippine government in April announced cuts to the Department of Public Works and Highways budget. The latest cut in May amounted to around 1bn Philippine pesos ($20.24mn), lowering the remaining amount available at P457.9bn, down from the earlier allocation of P580.9bn for 2020. Construction slowed significantly during the country's Covid-19 lockdown but has since picked up as the country gradually lifts restrictions.

Market participants pointed out that, despite the budget cuts, the government remains focused on road and infrastructure development under the administration's "Build, Build, Build" infrastructure programme. In the National Budget Memorandum issued in May, the Department of Budget Management laid out plans for the FY2021 budget with a proposed P1.131 trillion public infrastructure programme to support the completion of projects under the "Build, Build, Build" programme and stimulate economic growth.

Bright spots in Vietnam

Road projects have resumed in Vietnam at the record pace since the end of April. Vietnam was one of the first countries hit by the virus but also the first few to recover.

Bitumen imports into Vietnam in April fell by 47pc from March and by 43.8pc from a year earlier to stand at 35,865t, with high inventories and the wet weather dampening demand. But demand has firmed since then and contractors are trying to complete projects by the end of the year.

Domestic prices, which declined to around 7,000 dong/t, about $300/t ex-tank, in April are currently around $409/t. Prices rose on firm demand and supply tightness.

The government in March announced a $1.16bn stimulus package, which includes state spending on road infrastructure projects.

By Regina Koh and Liz Ng