What’s behind Southeast Asia’s dwindling development finance

Development finance to Southeast Asia continued its decline in 2022, with support for renewable energy also falling, according to a recent analysis. Given the importance of external finance to development priorities in the region, the authors of the Southeast Asia Aid Map at Australia’s Lowy Institute think tank argued that a failure to reverse the trend could jeopardize the recovery from COVID-19 and development progress overall. Notably, on climate, they wrote “despite the apparent prioritisation of climate-related [finance] by a host of development partners, there remain several negative signs.” The aid map tracks development finance to the region from 2015 to 2022. It measures official development finance, or ODF, combining the grants and concessional loans of traditional official development assistance with other flows — such as semi or nonconcessional loans — that do not meet the criteria for ODA. Now in its second year, the initiative includes over 120,000 projects from 107 development partners across 11 Southeast Asian countries. The big picture Total ODF to the region saw a pandemic-inspired surge in 2020, but has since been on the decline. The flow of $26 billion in 2022 was down from an average of $32 billion between 2015 and 2022. According to the map, money is now tighter than it has been since at least 2015, when the reports measurements begin. Indonesia received the most ODF, accounting for 34% of the total, followed by Vietnam and the Philippines. On the donor side, China was the biggest provider over the period, accounting for 21% of flows ahead of the Asian Development Bank, with 16%; the World Bank, with 14%; and Japan, with 13%. Greening the Belt and Road Chinese development finance to the region may have hit its lowest level in eight years in 2022 — $3 billion compared to $9 billion on average in 2017-2018 — but the researchers believe it will remain the major infrastructure financier in the region. Alexandre Dayant, deputy director at the Lowy Institute’s Indo-Pacific Development Center, said that’s because for now there is still a gap of more than $70 billion between what China has promised and delivered in the region. Beijing is refining its offering to focus on “fewer, smaller, and more targeted projects,” he said. And the demand is still there. “Far from rejecting new Chinese projects, as some in the West had hoped, many ASEAN members continue to welcome them,” Dayant said when launching the report last month. China is involved in 24 out of 34 infrastructure megaprojects, the report found. “This matters because infrastructure projects are tangible — people can see them,” Susannah Patton, director of the Southeast Asia Program at the Lowy Institute, said at the launch. “And they provide prestige for political leaders in Southeast Asia.” Climate warning Overall, the researchers found that climate-related finance has eaten into rather than added to existing development support. And while financing for fossil fuel projects has declined, so too has financing for renewable energy projects. The region requires $210 billion in climate financing per year to 2030, according to the Asian Development Bank, but the Lowy report found that just $8.1 billion was disbursed annually from 2015-2022. And in 2022 the amount of climate-related finance fell by 15% on the previous year. The leading climate-related donors for 2015-2022 were Japan, the Asian Development Bank, China, and the World Bank. However, the researchers found that China is the leading provider of financing where addressing climate change is the principal objective. The World Bank was responsible for roughly $9 billion in climate-related development finance for 2015-2022, for instance, but $8.3 billion of that was for projects where climate was a “significant” rather than “principal” objective. China contributed $6.8 billion to projects with climate as a primary objective in the same period, though the report also noted environmental and debt concerns over hydro projects on the Mekong River. “China is looking to recalibrate and green its Belt and Road Initiative,” Dayant said, “which could consolidate Beijing’s role as the main partner for the region’s energy transition.”