Construction Sector: Firmly In Recovery
BMI View: We continue to expect a recovery for Thailand's construction sector in 2012, with the underlying assumptions for a recovery (such as the implementation of flood prevention measures, robust building construction activity and conducive monetary conditions for construction) still holding firm. Indeed, strong reported performance in Q212 has prompted us to revise up our 2012 forecasts for Thailand's construction sector, with real growth expected to reach 5.0% in 2012, from a previous forecast of 4.0%. Looking ahead, we believe that the factors supporting out bullish 2012 outlook will spill over in 2013. This, combined with increased access to infrastructure financing and a large pipeline of infrastructure projects, should keep construction activity relatively robust over the coming years. We are forecasting construction real growth to reach 4.5% in 2013 and to average 3.2% between 2014 and 2017.
We have long highlighted that a modest recovery in Thailand's construction activity was on the cards for 2012. This is due to the reconstruction effects following the devastating floods of 2011 and the implementation of flood prevention measures, which include the dredging of canals, elevation of roads, construction of dams, repair work on sluice gates and the designation of water-retention areas.
This view is being realised as construction activity continues to trend higher in Q212. Data from the Thailand National Economic and Social Development Board shows that real growth for the country's construction sector reached 6.9% year-on-year (y-o-y) in Q212, significantly higher than the 0.8% in Q112 and a complete reversal from the -7.6% in Q211.
|Thailand Quarterly Construction Industry Value Real Growth, At 1988 Prices, % chg y-o-y|
2012: On The Right Path
We expect this recovery in construction activity to continue for the rest of 2012. This is because of several factors:
Long-Term Flood Preventive Measures: Although we believe that the immediate flood prevention projects have been completed by the Thai government, many large-scale projects that are aimed at preventing floods over the long-term have not yet been completed. Thailand had previously announced in August 2012 that it was seeking a consortium to oversee the country's water management plan - the plan involves 14 large-scale projects, worth a combined THB300bn (US$9.5bn) - and we believe this tendering process is still ongoing.
Monetary Conditions Still Conducive: As expected, the central bank of Thailand cut its benchmark policy rate by 25 basis points (bps) from 3.00% to 2.75% in mid-October, maintaining a monetary policy that is conducive for construction activity over the rest of 2012.
|Monetary Conditions Growing Conducive|
|Thailand - Policy Rate, % & Headline CPI % y-o-y|
Scope For Building Activity: Although residential building activity has picked up significantly over the first half of 2012, we believe that a sizeable portion of the building projects that received permission to start construction have not yet been completed. Building permits issued grew at an average rate of 40.4% y-o-y per month since January 2011, while the amount of new housing only grew by 12.6% y-o-y per month during the same period. In our opinion, this divergence between new housing and building permits indicates that there is still significant scope for building activity to remain robust over 2012 and 2013.
|Divergence Between Activity And Permits|
|Thailand - Total New Housing (LHS); Construction Areas Permitted in Municipal Zone, '000 sqm (RHS)|
These factors, combined with the strong Q212 performance, have prompted us to revise up our 2012 forecasts for Thailand's construction sector, with real growth expected to reach 5.0% in 2012, from a previous forecast of 4.0%.
|Thailand Construction Industry Data|
2013: Growth To Continue
Looking ahead, we believe that the factors supporting out bullish outlook for Thailand's construction sector in 2012 will spill over in 2013. We expect construction activity for the buildings sector and the water utilities sector to continue to grow in 2013. Meanwhile, there is a strong likelihood that Thailand will keep the benchmark policy rate at 2.75% in 2013, as the uncertain outlook for the global economy will most likely keep economic activity in Thailand subdued.
Access to financing in Thailand's infrastructure sector could improve by 2013 as four of Thailand's state-owned companies look set to raise a combined THB100bn in 2013 through a proposed infrastructure fund (see our online service, October 31, 'Monetary Conditions Improving With Funds And Cuts'). We have long highlighted that these funds are necessary to improve the attractiveness of Thailand's infrastructure sector as the country has been increasingly overshadowed by other markets in the South East Asia region. These funds are also necessary for the government to attract the necessary capital to realise its infrastructure ambitions. Thailand does not have sufficient funds to meet its entire infrastructure spending needs and is already planning to borrow THB1.6-2trn over the next six months for infrastructure investment.
|Capping Infrastructure Spending|
|Thailand - Total Public Debt, THBbn (LHS) & % of GDP (RHS)|
Lastly, Thailand has a robust pipeline of infrastructure projects that are scheduled to start construction over the next decade. Some of the key projects are:
In August 2012, The Thai government announced that it would launch a commercial tender for the construction of a new high-speed railway network in Q113. The THB400bn tender will involve the construction of four new railway lines and encompass a total of 250km. Construction of the network is scheduled for completion by 2018.
In August 2012, the Mass Rapid Transit Authority of Thailand announced plans to develop six additional lines on Bangkok's urban railway system. The six lines are expected to cover a distance of 200km and require a combined investment of THB600bn between now and 2020. At present, five lines are already under construction and three lines are undergoing their tendering process.
In September 2012, Thailand's Energy Regulatory Commission announced that it is due to launch a tender for the construction of six new power plants in late-2013. The plants, to be developed under the independent power producer scheme, are expected to have a combined capacity of 5400MW and cost a total of approximately US$10.8bn.
In October 2012, state-owned Airport of Thailand (AoT) announced that it is moving full steam on the second phase of the Suvarnabhumi Airport expansion project (the Nation reports). The THB62bn (US$2.0bn) second phase is expected to be completed by December 2016, with design and documentation activities already underway.
Therefore, we remain relatively bullish towards Thailand construction sector over the coming years and reflect this in our medium-term forecasts. Construction real growth is forecast to reach 4.5% in 2013 and to average 3.2% between 2014 and 2017.
Risk to Outlook
There are several risks to our outlook for Thailand's construction sector.
Labour and Material Shortages: There are growing indications that Thailand does not have sufficient workers and construction materials to complete its growing pipeline of construction projects, which could dampen construction activity over the coming years. In October 2012, Chakporn Oonjitt, the executive director of the Construction Institute of Thailand, said that Thailand's construction sector was unable to grow any faster due to a shortage of 300,000 workers (as reported by the Bangkok Post). In the same month, the Thai Home Constructions Association (THCA) said that activity in the self-built home market in Q312 was not as high as previous years due to a shortage of workers as well as a rise in material prices and wages.
Fiscal Flagrancy: Thailand's total outstanding debt has increased substantially in recent years from around 24% of GDP in 2008 to 31% as of August 2012. The latest announcement of plans to increase government borrowing - besides seeking funds for infrastructure investment, the Thai government plans to borrow funds for its rice pledging scheme - means that this figure is set to head towards 40% of GDP by 2014. Although we acknowledge that Thailand's fiscal position remains relatively benign in comparison to the wider region, we believe that the government's failure to implement a long-term plan to address this imbalance could eventually result in a loss of investor confidence in the country's debt markets, leading to higher borrowing costs in the future.
Global Economy Worsens: Global economic conditions could make it difficult for Thailand to acquire the necessary financing, even with the formation of infrastructure funds. Many developed economies continue to see slow growth (e.g. US) or negative growth (e.g. the eurozone), while major emerging markets such as China and India experience a slowdown in economic growth. Such an adverse investment climate could deter investors from providing long-term financing for infrastructure projects with questionable viability.
Political Turmoil: Political risks also represent a downside risk to project financing over the medium term, dampening investor sentiment towards Thailand. The ruling party, the Puea Thai Party, is keen to amend the constitution in an effort to bring ousted former Prime Minister Thaksin Shinawatra back into power. This move is viewed in a negative light by the royalist establishment and could bring back another period of political turmoil plagued by violent protests and fears of a military coup.