Construction Recovery Stalled, But Still Expected
BMI View: The lack of growth in Q213 supports our view that the recovery in Taiwan's construction activity could be mild. As such, we are maintaining our construction real growth at 2.0% for 2013 and 2.9% for 2014. This is primarily due to our expectations of a steep economic slowdown in China, Taiwan's main trading partner, over the near-term. Over the long-term, we expect Taiwan's construction sector to outperform its 10-year historical average, though we remain concerned about Taiwan's demographic profile and its lack of progress in achieving greater innovation in the tech sector and greater economic integration with China.
In our November 2012 analysis of the Taiwanese construction sector, we stated that the sector could finally see growth in Q412, and that this recovery could last into early-2013. This view had played out in Q113. Latest figures from the National Statistics Bureau showed that Taiwan's construction sector grew by 2.5% year-on-year (y-o-y) in Q113, the first positive growth since Q211.
However, the recovery in Taiwan's construction sector has since stalled, with latest figures from the NSB showing activity in the sector back in contractionary territory at -0.6% in Q213. We had previously cautioned that this recovery could be mild due primarily to the imbalances in China's economy. Although the recent resurgence in credit aggregates has once again greased China's economic machinery, we believe that it will not last and China's structural downturn will come back into focus in 2014 ( see 'Another Credit Binge Will Not Cure Economy', September 12 2013). The structural deficiencies within the Chinese economy (shaky financial system, overvalued property market, expensive infrastructure build-up, and huge industrial overcapacity) still remain, and could flare up in the near-term, causing a deep slowdown in China's economic activity.
|Back In Contraction|
|Taiwan Quarterly Construction Industry Value Data|
Such a scenario would have major implications to Taiwan's construction sector. China is Taiwan's largest source of tourists, accounting for nearly 40% of all tourist arrivals. China is also currently the country's main driver of exports (accounting for around 58% of Taiwan's total export order) as demand from Europe and the US remains weak. Should our expectations of a slowdown in China's economy take place over the near-term, it could reduce trade and tourist volumes. This would not only decrease the demand for transport links that support the export sector (eg, expansion of Taiwanese ports), but deter export-oriented businesses from carrying out their capital expenditures plans such as the construction of new manufacturing facilities. The decline in trade activity could also diminish the government's ability to finance public construction projects as less tax revenues will be collected.
|Taiwan - Monthly Visitor Arrivals, By Geography, '000 (LHS) And Total Export Activity, By Geography, US$mn (RHS)|
Mild, But Not Out
Despite this downside risk from China and the poor Q213 performance, we still expect construction activity in Taiwan to remain positive for the full-year of 2013 and to improve in 2014. This outlook is due to three factors and is reflected in our forecasts - we are maintaining our full-year construction real growth at 2.0% for 2013 and 2.9% for 2014.
|A Better Decade Due To China|
|Taiwan - Construction Industry Forecasts|
Pro-Growth Policy Environment: We expect Taiwan's monetary policy to remain fairly accommodative due to the uncertainties in China's economy, Taiwan's largest trading partner. At present, we expect the benchmark interest rate to remain unchanged at 1.875% for the rest of the year. The low borrowing costs could encourage companies operating in Taiwan to take up new construction projects or carry out capital-intensive construction works. The Taiwanese government also announced in late-May 2013 that it would ease regulations to let insurance companies invest TWD100bn (US$3.3bn) in infrastructure projects, as part of a broader package to boost the economy.
Power Sector Rebalancing: The adverse sentiment surrounding nuclear generation since the Fukushima crisis has caused the Taiwanese government to revise its energy policy. It has halted plans to increase its nuclear generation capacity and will hold a referendum in September 2013 to decide the fate of the US$8.9bn Lungmen nuclear power plant. As such, there is a growing need to meet future electricity demand through thermal and renewable capacity. While we saw little to no development in the country's renewable energy sector in 2013, we have seen tangible attempts by the government to implement new large-scale thermal power plants, such as the Talin coal-fired power plant in southern Taiwan and the Tunghsiao gas-fired power plant in northern Taiwan ( see 'Thermal Remains Favoured Despite Price Mismatch', September 9 2013 ). We believe both projects boosted construction activity in Q113, and should continue to do so for the rest of 2013.
Transport Infrastructure Projects Move Forward: Taiwan remains keen to expand and improve its inter- and intra- transport systems and we have seen some of these projects - namely a new high-speed railway station in Yunlin County, the south runway expansion project at the Taoyuan International Airport, the Kinmen Bridge project, the Tamsui light rail network and the Kaohsiung circular light rail project - move into the construction phase.
Long-Term Uncertainties: China And Demographics
For the long-term outlook of Taiwan's construction sector , our 10-year average growth forecasts for 2013-2022 - at 3.0% per annum - is still higher than the 10-year historical average, which was 0.7% per annum between 2003 and 2012. This is because of four main factors.
Economic Connection With China: The potential for greater cross-strait economic integration with China remains a major driver for construction and infrastructure activity. For example, Taiwan's Council for Economic Planning and Development (CEPD) approved a TWD66bn expansion plan for the country's international ports in mid-August 2012. The programme will last for five years, and is aimed at boosting trans-shipment business from China's second-tier cities to Taiwanese ports. Tourist arrivals from the mainland are expected to increase as well - a July 2013 survey carried out by Taiwan's Tourism Bureau showed that the country's foreign exchange revenues from tourism reached a record high of US$11.76bn in 2012 last year, up by 6.36% compared with 2011.
Having said that, we have yet to see Taiwan execute any major regulatory changes (such as reforms to remove protectionist policies and free up trade, foreign labour and investments) that maximises the potential for greater cross-strait economic integration with China ( see 'Construction In Recovery, But Weak And Potentially Unsustainable', November 28 2012). Meanwhile, China's imminent rise in the global tech sector is a major threat to non-residential building activity in Taiwan ( see 'China's Economic Shift A Looming Threat', June 28 2013). This is because Taiwan's export economy is heavily leveraged to the lower-end of the tech sector value chain (such as semi-conductors and flat-panels) as the country's push for greater R&D expenditure has stagnated in recent years, and Chinese tech exports could erode competitiveness of these sectors.
|Taiwan - Export Profile, %|
The lack of reforms and innovation are not only eroding the country's business environment, but also deterring other foreign investors from using Taiwan as a springboard into the mainland. This is reflected by the steady decline in foreign direct investment (FDI) received by Taiwan. FDI inflows into Taiwan are currently the lowest in Asia, with FDI into the construction sector in H113 amounting to a paltry US$21mn.
|Taiwan - Foreign Direct Investment By Construction Industry, US$mn|
Transport Links: The government also remains determined to improve the country's transport links and we have seen some progress in implementing these projects - namely the rehabilitation of its high-speed railway network, the TWD4.6bn (US$155mn) Tamsui-Taipei expressway, the expansion of the Taoyuan International airport and the development of develop several urban railway systems in major cities such as in Kaohsiung, Taipei and Taichung.
|Taiwan - Key Population Ratios|
Healthcare Facilities: Taiwan's population is aging rapidly, and the demand for healthcare facilities will increase rapidly over our forecast period. Not only is Taiwan's population expected to start its decline in 2025, but more than 14% of the population could be 65 years of age and above starting from 2017, officially meeting the criteria for an ageing population. That said, it appears that the government's plan to increase healthcare capacity is not progressing well. In March 2013, Taiwan legislators said that there was unfinished work left over from the first stage of the government's 10-year care plan (2007-2016). The first stage of the plan was originally scheduled to be completed by 2011, and involves the construction of elementary facilities and infrastructure to support healthcare services as well as the training of professional care workers.