Construction: Monetary And Infrastructure Driving A Bullish 2013
BMI View: The major ramp-up in public construction investment see in the Philippines in 2012 has validated our long-held view that conducive monetary conditions and robust government spending would bring real growth in the country's construction sector back to positive territory. We expect these conditions to continue to flourish in 2013, as the country's economy remains in a sweet spot of strong economic growth and well-behaved inflation. Furthermore, the government's Private-Public Partnership Programme continues to move up the gears, providing a solid base for infrastructure activity. Therefore, we remain bullish towards the Philippine construction sector, with real growth forecasted to reach 8.0% in 2013 and 7.2% in 2014.
The Philippine government made good on its promise to ramp up capital expenditure in 2012. Latest data from the Philippine National Statistical Coordination Board (NSCB) showed that the country's construction sector grew by 18.4% year-on-year (y-o-y) in Q412, bringing full-year construction growth for 2012 to an impressive 14.4%.
Looking at the breakdown for the construction sector, the rapid growth in 2012 was primarily driven by an increase in investment from the public sector. Public construction investment, which accounted for around 25% of total construction investment in 2012, surged by 32.4% in 2012, versus a growth of 8.6% in private construction. We note, however, that base effects played a role in this impressive performance. The Philippines' construction sector contracted by 7.3% in 2011. This means that the Philippines' construction sector only grew at average rate of 3.6% per annum between 2011 and 2012.
|Q4 2011||Q4 2012||% chg y-o-y||FY 2011||FY 2012||% chg y-o-y|
|Source: BMI, National Statistical Coordination Board|
|Construction (Public Investment)||34159||36830||7.8||98308||130186||32.4|
|Construction (Private Investment)||90036||111024||23.3||362079||393178||8.6|
Overall, the robust 2012 performance supports our view that that the Philippine construction sector is set to see significant growth over the coming years. As such, we are maintaining our forecasts for real construction growth to peak at 8.0% in 2013, and decline slightly to 7.2% in 2014. This baseline view is underpinned by four main factors.
|Philippines Construction (And Sum-Components) Industry Forecasts|
Firstly, we believe that accommodative monetary conditions in the Philippines could reignite private sector interest for construction in 2013. The Philippine central bank has been pursuing a looser monetary policy since mid-2011, with the benchmark interest rate at a record low of 3.50% since October 2012. With inflation still at moderate levels (2.9% y-o-y in December 2012), we believes there is scope for monetary conditions to remain loose for 2013. Furthermore, the lagged impact of monetary easing means that the positive implications of this easing will only start to translate in H113. At present, we are forecasting the benchmark interest rate to remain at 3.50% at the end of 2013.
This means that borrowing costs for construction companies operating in the Philippines will remain at record lows, making them more inclined to take up new projects or carry out capital-intensive construction works. Indeed, we have already seen private construction investment pick up significantly since Q312, growing by 21.4% y-o-y in Q312 and 19.1% in Q412.
|Philippines - Reverse Repo Rate & Headline CPI, % chg y-o-y|
Secondly, we believed that the Philippine government remains committed to investing heavily in infrastructure in 2013. The government had recently passed an aggressive expansionary budget for FY2013, with a record PHP404.6bn (US$10.0bn) dedicated to infrastructure development (a 19.3% increase from 2012's budget). The bulk of these funds would likely be channeled towards public works projects such as sanitation, roads, and flood prevention infrastructure, as well as towards supporting a number of the government's other long-term projects, including an allocation of PHP15.9bn towards the construction of new schools.
While it remains to be seen whether the government is able to carry out this plan, there is a strong likelihood that it will go ahead as the increase in infrastructure spending appears unlikely to cause a deterioration in the Philippines' improving structural fiscal position. The country's budget plans for 2013 indicate that borrowing to cover the shortfall between revenue and expenditures will hit a manageable 2.0% of GDP in 2013, meaning that the government's debt load as a proportion of GDP will continue to decline.
|Scope To Spend|
|Philippines - Total Government Debt, % GDP (LHS) & Fiscal Balance, % GDP|
Thirdly, the country's political environment has stabilised under the leadership of President Benigno Aquino III. The president remains popular, adeptly driving economic activity and regulatory reforms, and has enjoyed particular success in clamping down on corruption. In an August 2012 survey conducted by Social Weather Stations, Aquino enjoyed a net satisfaction rating (the difference between those responding that they were satisfied or dissatisfied with the president) of 67, scoring well across all income and geographic groups. With another three years to Aquino's six-year term (Philippine presidents are limited to one term) and a strong likelihood for a comfortable victory during the 2013 Philippine mid-term elections, we do not foresee a major change in Philippine policy before 2016's general elections.
|*Higher Score, Lower Risks. e/f = BMI estimate/forecast. Source: BMI, Department Of Finance|
Lastly, the government's Private-Public Partnership (PPP) programme continues to move up the gears. Approximately eight projects (mainly infrastructure) are undergoing their varying stages of the tendering process at the start of 2013, and we expect most of them to be awarded in 2013. This level of progress for the PPP programme is in line with our view, with most of the construction activity from the programme to take place in 2013 due to the time needed to complete pre-construction milestones (i.e. financial closing, land acquisition, equipment procurement).
|Project Name||Sector||Value (US$mn)||Status|
|Source: BMI, Philippines Public Private Partnership (PPP) Center (January 2013)|
|DaangHari - SLEX Link Road||Roads||47||Awarded|
|PPP for School Infrastructure Project (Phase I)||Social Infrastructure||389||Awarded|
|Mactan-Cebu International Airport Passenger Terminal Building (Phase I, II)||Airport||420||Under Tender|
|LRT Line 1 South (Cavite) Extension and Operation & Maintenance (O&M)||Rail||1250||Under Tender|
|Automatic Fare Collection System||Rail||43||Under Tender|
|NAIA Expressway Project (Phase II)||Roads||380||Under Tender|
|NLEX-SLEX Connector Road||Roads||629||Under Tender|
|CALA Expressway (Cavite and Laguna Side)||Roads||1000||Under Tender|
|Modernization of the Philippine Orthopaedic Center||Social Infrastructure||136||Under Tender|
|PPP for School Infrastructure Project (Phase II)||Social Infrastructure||425||Under Tender|
|O&M of Angat Hydro Electric Power Plant (AHEPP) Auxiliary Turbines 4 & 5||Water||28||Under Tender|
|Civil Registration System - Information Technology Project Phase II||Commercial Construction||na||Awaiting Approval|
|Vaccine Self-Sufficiency Project Phase II||Healthcare||11||Awaiting Approval|
|O&M of the Laguindingan Airport||Airport||43||Planning|
|New Bohol (Panglao) Airport||Airport||191||Planning|
|O&M of the Puerto Princesa Airport||Airport||na||Planning|
|Establishment of Cold Chain Systems Covering Strategic Areas in the Philippines||Commercial Construction||36||Planning|
|Grains Central Project||Commercial Construction||10||Planning|
|Logistics Support on the Agri-Fishery Products||Commercial Construction||9||Planning|
|Talisay City Plaza Complex Heritage Restoration and Redevelopment Project||Commercial Construction||na||Planning|
|LRT Line 2 East Extension and O&M||Rail||281||Planning|
|Rehabilitation of Quirino Highway||Roads||na||Planning|
|Regional Prison Facilities through PPP||Social Infrastructure||na||Planning|
|Integrated Transport System (ITS) Project||Urban Transport||na||Planning|
|New Centennial Water Supply Source Project||Water||596||Planning|
|EI Nido Solid and Liquid Waste Management Facility||Water||na||Planning|
|Bulacan Bulk Water Supply Project||Water||na||Planning|
BE Risks Still Pertinent
That said, we highlight that there are still significant business environment risks to investors in Philippines' construction sector. The Philippines fares poorly in several key areas that facilitate project development such as contract resolution, lending rights and investor protection. A lack of regulatory clarity and institutional capacity for preparatory work are also issues that have not been completely resolved, causing delays to project execution and the rolling out of the PPP programme. For example, in July 2012, the Philippine government had requested Philippines-based Ayala Corporation to revise the design of the Daang Hari-South Luzon Expressway link road project after the project was awarded.
|BE Risks Prevalent|
|Philippines - Key Indicators For Construction Project Completion|
More recently, in January 2013, the Philippine government announced plans to issue a new set of guidelines for the bidding of major airport projects such as the Mactan-Cebu International Airport Passenger Terminal project. The new guidelines are aimed at preventing airline companies and their affiliates from participating in the tender due to the potential for conflicts of interest. This change in regulations could lead to delays in the tendering process for airports in the PPP programme as local airlines such as Philippines Airlines and Cebu Air stated that they would contest these guidelines (GMA News reports).
|Boosted By PPP|
|Philippines Infrastructure Industry Forecasts|
Such scenarios could become a recurring theme for other infrastructure projects, leading to project delays and higher costs for companies seeking to capture the growth opportunities in Philippines' infrastructure sector. This expectation is reflected accordingly in our forecasts, with real growth for the infrastructure sector forecast to reach 8.9% in 2013 and 6.6% in 2014.