China, India, and the Middle East as emerging development partners

Non-traditional development cooperation has emerged as a notable characteristic in Southeast Asia, with China, India, and Middle Eastern countries becoming significant contributors to official development finance (ODF) in the region. Their development finance accounted for about 21% of total ODF between 2015 and 2021. Of this, China provided the lion’s share, at around $5.5 billion a year or over 90% of non-traditional ODF. The Middle East accounted for around 5% with $300 million per year, three-quarters of which came from the Islamic Development Bank. India disbursed $488 million over this period, ranking third in the non-traditional group, though still only contributing 1% of total ODF disbursed in the region.

China, largest but decreasing development partner

As China’s power has grown, Beijing has been advocating for a restructuring of the global governance system to better align with its interests and values. As part of this effort, China launched several large-scale initiatives, such as the Belt and Road Initiative (BRI), Community of Shared Destiny, the Global Development Initiative, and the Global Security Initiative. Its aim is to position the country as a provider of global public goods, by offering Chinese resources and solutions to tackle development challenges.

The increasing importance of development cooperation in China’s statecraft is reflected in its activities in Southeast Asia. In 2015, China emerged as the largest bilateral development partner in the region. It held this position until the arrival of Covid-19 in 2020, after which it fell to fourth place in terms of annual disbursements.

Many Southeast Asian nations have become major participants in China’s BRI. In 2021, China significantly increased its BRI-related commitments in the region, with notable large-scale commitments in Myanmar ($7.6 billion for the Mandalay–Kyaukphyu railway project Mya051) and the Philippines ($2.9 billion for the PNR South Long Haul Project, specifically the Bicol section Php007). Some forecasts put Southeast Asia as the second-largest regional recipient of Chinese infrastructure funding between 2020 and 2030, with sub-Saharan Africa being the largest. Currently, four countries in the region (Indonesia, Malaysia, Thailand, and Vietnam) are among the top ten recipients of BRI investments. It is worth noting, however, that actual disbursements of Chinese ODF have generally trended lower than its commitments. Indeed, over the 2015–21 period, overall Chinese commitments were twice as big as its disbursements in the region.

The vast majority (72%) of all Chinese development projects in the region were financed through China’s two largest policy banks, China Development Bank (38%) and the Export–Import Bank of China (34%). Together, they accounted for 11% of all financing disbursed in Southeast Asia, second to the Japanese International Cooperation Agency (12%) and more than the World Bank’s International Bank for Reconstruction and Development (10%) and the Export–Import Bank of Korea (9%).

China’s development finance in Southeast Asia often takes the form of large infrastructure projects, many of which are part of the BRI. Examples include the Jakarta to Bandung high-speed railway in Indonesia Idn006-12345, as well as Malaysia’s East Coast Rail Link Mal001, both financed through Chinese loans. While China’s projects may offer benefits, maintenance funding and debt sustainability can present real challenges. For instance, in Laos, which the International Monetary Fund (IMF) has said is at high risk of debt distress, China accounts for 78% of the loans committed, or $7.8 billion, over the 2015–21 period. The country currently faces unprecedented financial difficulties, including $12.4 billion worth of public and publicly guaranteed debt, about half of which is owed to China.

The energy sector is the single largest recipient of China’s ODF in Southeast Asia. China is the most important funder of both renewable and traditional energy projects in the region. Some 62% of all projects involving clean energy — such as hydropower, solar power, and biomass — were funded by China between 2015 and 2021. During the same period, some 64% of all non-renewable energy projects in Southeast Asia were also funded by China. Examples of such investments include the Laos Coal Electricity Integration Project Lao021 and the Vinh Tan 3 Power Project Vnm011.

The transport and storage sector received 27% of China’s development financing in the region, making it the second-largest sector of China’s disbursed ODF. Beijing remains keen to enhance its presence and connectivity in the Southeast Asian market through the BRI. Indeed, China’s investment in high-quality railway facilitates easier access to new markets and promotes regional trade. In Southeast Asia, the BRI comprises four segments, beginning from Kunming in South China and extending to Vientiane in Laos, Bangkok in Thailand, and finally to Kuala Lumpur in Malaysia, and Singapore. The Thailand–China High Speed Rail Tha004, East Coast Rail Link Mal001, and Jakarta–Bandung High Speed Railway Idn006-12345 are notable examples of this infrastructure investment.

The most striking trend in China’s ODF in Southeast Asia between 2015 and 2021 is the decline in China’s relative importance as a partner. In 2015, China provided some 24% of the region’s ODF. By 2011, this had fallen to 14%. A number of factors could explain this decline. The advent of the Covid-19 pandemic saw a significant increase in ODF by some of the region’s other traditional partners, usually delivered in the form of direct budget support. But the pandemic also disrupted large infrastructure projects in the region, which, as already noted, is the way that China has typically delivered its ODF in Southeast Asia. While China did make significant ODF commitments in 2021, the lingering effects of the pandemic will likely continue to disrupt its ability to actually disburse those investments.

India has emerged as the second-largest non-traditional partner

India is the second-largest non-traditional bilateral development partner of Southeast Asia, with a yearly average of $70 million disbursed in the region. Although India’s development cooperation has traditionally focused on its neighbours in South Asia, a substantial part has gone to the region under India’s Act East policy. India’s Development Partnership Administration (DPA) states that India’s development cooperation in Southeast Asia aims to strengthen economic ties with the region, encourage integration and connectivity, and contribute to sustainable development.

From 2015 to 2021, India disbursed $490 million in grants and loans to Southeast Asia. Just two countries — Myanmar and Cambodia — received almost 90% of the funding. The development cooperation programs offered by India encompassed a broad range of sectors, including infrastructure development, capacity building, agriculture, health, education, information and communication technology, and disaster management.

One of the main channels for India’s development cooperation is the Indian Technical and Economic Cooperation (ITEC) program, which provides training and capacity building in various fields to professionals and government officials from Southeast Asia.

India has also been involved in several infrastructure projects in the region. Those are often financed through India’s state-owned Export–Import Bank, such as the $36 million Stung Sva Hab/Slab Water Resources Development Project in Cambodia IND001, which will store excess rainwater to reduce flooding risks.

India differentiates itself from other non-traditional partners by also financing large infrastructure projects through grants, such as the $484 million Kaladan Multi-Modal Transit Transport Project IND009, which seeks to improve transport links between India’s north-eastern states and Myanmar’s Sittwe port. This project is being constructed by India under the Grant in Aid Scheme, fully financed by Delhi.

Growing importance of Middle Eastern development finance

ODF from the Middle East — encompassing contributions from Middle Eastern countries, along with that of multilateral institutions such as the Islamic Development Bank — averaged $343 million per year over the 2015–21 period.

Saudi Arabia’s development finance focused on education, most notably through the provision of scholarships, accounting for 91% of all education projects financed by Middle Eastern countries in the region. They were financed through grants from the Saudi Development Fund or the Ministry of Education. The remainder of Riyadh’s development funding went to health projects, such as the construction of two university hospitals in Sebelas, Indonesia 2016990207 - 0526/08.

A third of Kuwait’s development program to Southeast Asia went to the energy sector, notably the funding of power transmission lines in Laos 2018000157 - LOAN796. Another third was allocated to the agriculture, forestry, and fishing sector, mostly to irrigation infrastructure in Vietnam and Laos. Virtually all Kuwaiti projects were financed by the Kuwait Fund for Arab Economic Development and provided in the form of concessional loans.

Türkiye has maintained strong ties with the Muslim-majority nations of Southeast Asia — Indonesia, Malaysia, and Brunei — through the Organisation of Islamic Cooperation (OIC). A third of Ankara’s regional development finance goes to these countries, mostly in the education sector. Türkiye has also been a large provider of humanitarian aid to Myanmar, allocating 65% of its development finance in the country to immediate crisis response.

Qatar is the smallest Middle Eastern partner in the region, accounting for only 1% of the group’s ODF disbursements over 2015–21. The Qatar Fund for Development, responsible for two-thirds of Qatari’s ODF, is mostly used for humanitarian purposes, but also to provide food aid during Ramadan in Muslim-majority countries.

The most significant Middle Eastern development partner in volume terms is the Islamic Development Bank (IsDB), which disbursed $1.8 billion in ODF during 2015–21. The IsDB accounted for 65% of all Middle Eastern development finance in Southeast Asia. It provided support to seven of the region’s eleven countries, but 99% of its funding went to Indonesia. Most IsDB funding to Indonesia was in the form of non-concessional loans, focused on agriculture and education.