Unlocking Local Finance For Sustainable Infrastructure

Investment Rating - The report does not explicitly provide an investment rating for the industry. Core Insights - The infrastructure financing gap is substantial, with annual investments totaling approximately $2.7 trillion in 2020, leaving a shortfall of $0.7 trillion. This gap widens when considering various country targets to achieve net-zero emissions by 2050, as the energy and transport sectors account for around 60 percent of emissions. The private sector's role in bridging this gap becomes increasingly vital, especially given the fiscal constraints of emerging markets and developing economies (EMDEs) exacerbated by the COVID-19 pandemic and geopolitical tensions [39][63]. - Local Currency Financing (LCF) is emerging as a pivotal tool for unlocking financing for sustainable infrastructure development that adheres to the Green, Resilient, Inclusive Development (GRID) approach. Well-developed LCF markets can shield an economy from volatile foreign capital flows, reduce the burden of hard currency repayments, curb the accumulation of foreign debt, and tap into new domestic capital sources for development [40][66]. - The study aims to address gaps in research related to commercial financing challenges in LCF for sustainable infrastructure, focusing on credit/banking markets and the need for innovative solutions to bridge the infrastructure gap [41][42]. Summary by Sections Chapter 1: Background and Rationale - The study is part of a broader program supported by the Public-Private Infrastructure Advisory Facility (PPIAF) to address challenges in mobilizing LCF commercial lending into infrastructure and climate projects [53]. - The rationale behind country selection includes high savings rates and financial development as key factors enabling LCF of infrastructure [57]. Chapter 2: Scope and Objectives - The report identifies significant challenges for infrastructure and climate investments, including the reliance on hard currency financing despite most project revenues being in local currency [65][66]. - Key constraints identified by domestic financiers include underdeveloped domestic markets, limited risk mitigation instruments, and asset-liability mismatches due to the short tenors of deposits versus the long tenors required for infrastructure finance loans [65][66]. Chapter 3: LCF Analytical Framework - Robust ecosystems conducive to infrastructure and climate investments are characterized by a stable macroeconomic environment, high levels of contractual savings, deep and liquid capital markets, and adequate enabling regulatory frameworks [78]. - The key enablers for a robust LCF market include the scale of private savings, the ability of local credit markets to provide long-tenor debt, and the capacity for structuring and credit evaluation skills for sustainable infrastructure financing [82].