Japanese corporates face bumpy ride in SE Asia infrastructure projects, warns S&P

TOKYO –A confluence of Southeast Asia’s need for new investment in infrastructure and Japanese Government efforts to crank up Japan’s economy is encouraging Japanese companies to pursue infrastructure projects in the region – but there are challenges ahead, says ratings agency Standard & Poor's in a new report.

“Infrastructure requirements in Southeast Asia include power plants, transmission and distribution facilities, and intra-city transit systems,” says the report. “Such projects are a promising source of income for Japanese corporates at a time when most domestic technology companies are losing their competitiveness in export-oriented high-tech hardware businesses.
“Because infrastructure projects have become larger and more complex, Japanese companies are working together, in consortium, to secure more contracts in the region. However, Southeast Asia's growing infrastructure business is attracting plenty of competition from larger Western rivals, which have stronger customer bases and better track records, and from highly cost-competitive Chinese and Korean rivals.
“Standard & Poor's believes Japanese capital goods companies, core players in consortia, will need to strengthen their risk management systems and improve their profit margins, with a shift to more stable operational and after-service business from hardware sales, to offset higher business risk in such projects and to maintain their creditworthiness”.
The report says that, until now, Japanese consortia have raised adequate financing in the form of project loans from lender banks, including Japanese megabanks, and direct lending from export credit agencies.
“However, as funding requirements grow to meet the demands of larger projects, new regulatory requirements may force key Japanese banks to become more cautious and restrict funding in the medium term, S&P says. “Consequently, finding new sources of financing would become a fresh challenge.
“Recently, we have seen signs that Japanese pension funds and second-tier banks aim to enter the market as new funding providers. However, we believe they will find this difficult and will take time to realise their aspirations.”  www.standardandpoors.co.jp (ATI).