Construction Recession To Persist In 2013, But Hope Over The Medium Term
BMI View: Following a contraction of -3.5% in the construction industry in 2012, we have downgraded our forecast for 2013 to -2.7%. After a major contraction of -17.9% in 2010, the rate of decline in the sector is slowly easing ; however , the industry remains in recession, with negative growth recorded in Q1 2013 - suggest ing a negative outcome for the industry again this year . However, we believe that the wors t could now be over. Signs of growth are expected in the transport sector from 2014, when we f orecast positive growth of 1.9 %, mostly driven by roads projects. This leads us to forecast a return to growth in the overall construction sector from 2014.
The contraction of -4% in Q1 2013 followed negative year-on-year (y-o-y) growth in the second half of 2012 (-2.5% in Q3 and -14.5% in Q4). This weak trend has prompted us to downgrade our forecast for 2013 to -2.7%. The weak performance of 2012 was reflected in a decreasing rate of new construction starts which began to decline in Q2 2012. Also, a reduction in the number of building permits issued in 2012 supports our view of negative growth for the industry in 2013.
|Industry Value And Real Growth|
We expect positive growth to return to the industry in 2014 with 1.2% real growth forecast. This will be driven by the transport sector which accounts for 30% of total infrastructure. Within the transport sector, road projects will lead the recovery over the medium term, as EU funds are expected to alleviate current limitations in the network. An example of this is the European Commission loan of US$359.48mn announced in March 2013 for the Sturma motorway development project in the southwest of Bulgaria. This joins several other projects in the pipeline, including the government's plan to expand the highway network to 1,600km by 2020. Consequently, we see potential for growth in the road sub-sector in 2014 of 2.6%. The amount of investment in Bulgaria's railway infrastructure remains comparatively low, however, despite having seen an increase in spending over recent years.
The Energy and Utilities sector dominates the industry, anticipated to account for 70% of total infrastructure in 2013. It should also support growth with 1.5% in 2014, driven by the construction of oil and gas pipelines. Although the renewable sector supported growth in 2011 and 2012, cuts to the country's Feed-in-Tariff (FiT) programme in 2012 have slowed their positive trend and thus we believe the power plants and transmission grids sector will only report annual average growth of 1% over the medium term (2013-2017).
One of the key risks to our outlook for a return to growth in 2014 is from political uncertainty, after a new socialist-dominated government won a parliamentary vote of confidence on May 29. Our Country Risk team anticipates that political instability is likely to be prolonged, posing a downside risk to our forecast for the construction industry. A negative investor sentiment towards the country will particularly affect the commercial property market (retail and office space) and macro-infrastructure projects for which the government has no capacity to fund.