Construction To Benefit From Greater Policy Certainty


BMI View: As expected, we are seeing signs that the current construction cycle has reached its peak, with construction growth in Q112 the lowest in five quarters. This outlook is primarily due to falling demand for residential and non-residential buildings, as well as financing risks in the infrastructure sector. Having said that, the electoral victory by the ruling party means that uncertainties surrounding Malaysia's economic investment plans are dissipating. This improvement in the investment climate has prompted us to revised up our outlook for Malaysia's construction sector over the short-term, with our forecasts for construction real growth revised up to 10.1% in 2013 (previously 9.1%) and 6.7% in 2014 (previously 6.5%).

Malaysia's construction sector continues to grow at a slower rate, supporting our view that we are seeing the peak of the current construction cycle. Preliminary figures from the Malaysian Department of Statistics showed that real growth for Malaysia's construction industry grew by 14.7% year-on-year (y-o-y) in Q113. This was weaker than the 15.4% seen in Q112 and the 17.6% seen in Q412.

Peaking
Malaysia Quarterly Construction Industry Data

This slowdown was seen in the work done for residential building and non-residential building sectors, but not in the civil engineering sector (in BMI 's terms, the civil engineering sector includes construction works in the transport and utilities infrastructure sectors as well as the commodities sectors). The residential and non-residential building sectors continues to be on a steadily decline since reaching their peaks in Q112 and Q312 respectively. On the other hand, work done in the civil engineering sector, supported by infrastructure activity, grew by 56.0% y-o-y in Q113, highe r than the 45.9% y-o-y in Q412.

Residential/Non-Residential In Decline
Malaysia - Construction Work Done Growth, By Quarter, By Sector, % chg y-o-y

This strong growth in the civil engineering sector means that the slowdown is not as severe as we had expected. As such, we have revised up our outlook for Malaysia's construction sector over the short-term, with our forecasts for construction real growth revised up to 10.1% in 2013 (previously 9.1%) and 6.7% in 2014 (previously 6.5%).

Still Strong
Malaysia - Construction Industry (and its Components) Value Forecasts

Policy Certainty

We have also revised up our forecasts due to the improving investment climate in Malaysia. Uncertainties surrounding Malaysia's economic investment plans - namely the country's 10-year Economic Transformation Programme (ETP) - are dissipating following the electoral victory by the ruling Barisah National (BN) coalition. Although the ruling party has conceded a greater number of seats to the opposition as compared to the previous election in 2008, it continues to hold a simple majority in parliament, ensuring policy continuity.

Status Quo
Malaysia - 13th General Election Results By Parliamentary Seats

This is a major tailwind for the construction and infrastructure sector as the ETP is very much focused on creating growth opportunities in these two sectors, be it new affordable housing, roads, ports, manufacturing hubs and urban railways. To be sure, the Malaysian Construction Industry Development Board in February 2013 stated that it expects the industry to secure about MYR110bn worth of projects in 2013 - slightly lower than the MYR120bn secured in 2012 - a relatively positive figure. Some of the major targets under the ETP are to provide housing for 1mn new residents in the Greater Kuala Lumpur (KL)/Klang Valley area by 2020, develop a MYR48bn (US$16bn) mass rapid transit (MRT) system in Greater KL, and develop a MYR60bn refinery and petrochemical integrated zone in Johor.

Economic Transformation Programme - Key Construction Entry Point Projects
Sectors Entry Point Projects
Source: BMI, Pemandu, Economic Transformation Programme Annual Report 2012
Greater Kuala Lumpur/Klang Valley High-Speed Rail Connection to Singapore
Building an Integrated Urban Mass Rapid Transit System
Revitalising the Klang River into a Heritage and Commercial Centre
Creating Iconic Places and Attractions
Creating a Comprehensive Pedestrian Network
Developing an Efficient Solid Waste Management System
Oil, Gas and Energy Building a Regional Storage and Trading Hub
Building Up Renewable Energy and Solar Power Capacity
Deploying Nuclear Energy for Power Generation
Tapping Malaysia's Hydroelectricity Potential
Increase Petrochemical Outputs
Wholesale and Retail Developing Makan Bazaars
Setting Up Wellness Resorts
Transforming Kuala Lumpur International Airport into a Retail Hub
Developing Big Box Boulevards
Palm Oil and Rubber Developing Biogas Facilities at Palm Oil Mills
Tourism Designating Bukit Bintang-Kuala Lumpur City Centre Area as a Vibrant Shopping Precinct
Establishing Premium Outlets in Malaysia
Developing an Eco-Nature Integrated Resort
Dedicated Entertainment Zones (DEZ)
Improving Rates, Mix and Quality of Hotels
Education Scaling up International Schools
Building a Hospitality and Tourism Cluster
Launching EduCity@Iskandar
Healthcare Developing a Health Metropolis: A World-Class Campus for Healthcare and Bioscience

Residential/Non-Residential Weakness

Our expectation of a construction slowdown in 2013 is underpinned by our expectation for continued headwinds from a weakening global economy, despite the pickup in economic activity in Q412 and early 2013. This could dampen demand for residential and non-residential buildings, which is reflected in our forecasts. We are expecting real growth for the buildings sector to reach 8.2% and 5.8% in 2013 and 2014 respectively, lower than the 18.6% seen in 2012.

Residential Construction: We expect housing demand in Malaysia to weaken in 2013. This is due to the oversupply situation, the introduction of new government measures to curb speculation in the property market ( see our online service, February 27 2013, 'New Cooling Measures In Sight For The Property Market' ), and a renewed slowdown in the Chinese economy. Property purchases in Malaysia, particularly at the high-end market, have been primarily driven by overseas buyers, particularly from China, and our call for a slowdown in the Chinese economy could see demand stall.

Residential Slowing
Malaysia - Residential Property Under Construction And Planned Supply, '000 unit (LHS); And Housing Price Index, 2000=100 (RHS)

Non Residential Construction: Weakness in the Chinese economy is also expected to dampen demand for non-residential buildings over the short-term. We expect Malaysian exporters (a major component in Malaysia's economy) to continue to face a challenging economic environment for most of 2013. This is mainly due to the country's close trading ties with China - Malaysia's trade exports to China as a share of GDP has surged from 14.4% in 2008 to 23.1% in 2011, the highest among our group of ASEAN countries. We expect this slowdown in exports to dampen the demand for industrial and office buildings in 2013, and have already seen weakness in the planned supply for such buildings.

.....Along With Non-Residential
Malaysia - Non-Residential Buildings By Sector, Planned Supply

We highlight that there are some positive factors for building activity in 2013 and beyond. Malaysia's petrochemical and resource-related manufacturing sector could provide support to non-residential building activity, while the affordable housing segment and the potential increase in speculative foreign capital inflows could provide support to residential building activity. However, we do not believe these factors would be sufficient to offset the bearish factors listed above, at least for 2013.

Infrastructure The Outperformer…

We expect a slowdown in the infrastructure sector as well, though not as dramatically as the buildings sector. Real growth for the infrastructure sector is forecast to reach 14.4% in 2013, lower than the 29.1% in 2012. In fact, we believe that infrastructure activity could outperform buildings activity over the next decade, with real growth for the infrastructure and buildings sector to average 6.9% and 5.2% per annum between 2013 and 2022.

Still Bullish
Malaysia - Construction Industry Value Real Growth Forecasts, By Sub-sector, % chg y-o-y

This is because several large-scale infrastructure projects are scheduled to start construction in 2013, with more large-scale projects in the pipeline over the coming years. This robust pipeline is reflected in the total value of work yet to be done in the infrastructure sector. Latest data from the Malaysian Department of Statistics showed that a sizeable portion of Malaysia's civil engineering projects had only completed around 21-40% of their construction works in Q113.

Plenty Infrastructure To Build
Malaysia - Value of Construction Work Done By Stage Of Project Completion, By Sector, Q1 2013, MYRmn

Key examples of these infrastructure projects are:

Urban Railways: A notable example is the Greater KL MRT development, the largest infrastructure project currently being developed in Malaysia. The Malaysian government has started construction works on the first line of the 156km MRT project and is expected to finalise details of the second line by the end of 2013.

Power Plants: Another notable example is the power sector, where fears of a power shortage in Peninsular Malaysia have prompted the government to award contracts for the construction of several large-scale thermal power plants. The latest development was in April 2013, when Malaysia's Electricity Commission shortlisted several consortiums for the tender exercise for two new coal-fired power plants with a combined generation capacity of 3000MW.

Roads: Several large-scale road projects have also been recently awarded. In March 2013, the Penang state government awarded a US$2.6bn contract to build a nd operate construct several road and undersea tunnel projects on the island to a joint venture consisting of China's Beijing Urban Construction Group an d Malaysia's Consortium Zenith .

High-Speed Railways: There are also opportunities in the high-speed railway sector. On February 9 2013, Singapore and Malaysia jointly announced plans to construct a high-speed railway line between the city state and Kuala Lumpur under a PPP format.

Islamic Financing An Edge

Another reason for our bullish outlook for Malaysia's infrastructure sector is the country's continued success in securing financing for its infrastructure projects through the use of Islamic bonds, known as sukuk . For example, the retail sukuk offering for the first KL MRT line was oversubscribed by 0.61 times.

We expect Malaysia to continue to enjoy success with securing infrastructure financing through Islamic bonds. The country recently enacted the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA). Both acts are expected to come into full force in the second half of this year and are an indication that the country is keen to reinforce its position as a leader in the Islamic banking industry by establishing the world's first comprehensive legal framework on Islamic banking.

….But Not Without Downsides

However, we highlight that there are downside risks to our outlook for Malaysia's infrastructure sector. Besides the sluggish growth in the gl obal economy, these risks are:

Financing: Despite Malaysia's success with sukuk offerings, a deterioration in the country's fiscal position could turn investors increasingly cautious about providing project financing. We also believe that the government's ability to finance construction projects could be limited by its budget plans for 2013. The government has unveiled a generous budget for its citizens - including cash handouts for lower income groups and wage increases for civil servants - while delaying a nationwide goods and services tax ( see our online service, April 15 2013, 'Fiscal Outlook: Assessing Election Risks' ). These budgetary plans would require an expansion of the budget deficit or a cutback in other expenditure plans such as fixed investment. This is because we expect a weak demand for Malaysian exports (particularly for oil and gas exports) to reduce the amount of taxes collected, placing a greater strain on central government revenues. At present, we are forecasting Malaysia's fiscal deficit to widen from 4.4% in 2012 to 4.9% of GDP in 2013.

Revenue Failing To Keep Up With Spending
Malaysia - Fiscal Revenue And Expenditure, MYRmn (LHS) & Balance, MYRmn (RHS)

Profitability: There is also significant political risk associated with Malaysia's toll road and power generation sectors, where policies are often changed to suit the government's needs. Malaysia is revising the power purchase agreements for first-generation independent power producers (IPPs), requiring them to bear a greater burden for increases in fuel costs. This would significantly reduce the rate of return for these IPPs, making them much less profitable. Meanwhile, there is a lack of market competitiveness within Malaysia's toll road sector, which has been brought about by government interference in toll charges.

This article is tagged to:
Sector: Infrastructure
Geography: Malaysia, Malaysia, Malaysia, Malaysia

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