Five Key Trends For Asia-Pacific Construction in 2013
BMI View: Our outlook for the Asia Pacific construction market in 2013 is relatively benign against the historical average, where lingering uncertainties towards the outlook for the global economy could create another challenging year for Asian construction players. We have identified five trends that we believe would play out in the Asia Pacific construction market in 2013 and they are:
the growing relevance of the more developed markets in Asia towards regional construction growth,
lower capital costs,
relatively robust government spending,
pertinent business environment risks; and
2012 has been a growth-neutral year for the construction market in the Asia Pacific region. The difficulties seen in filtering pledged investment into actual construction, coupled with the general slowdown in the global economy, have worked to stifle financing for new construction projects and slow the implementation of numerous major projects.
With numerous uncertainties still clouding the outlook for the global economy, 2013 could shape up to be another challenging year for Asian construction players. In this analysis, we will review the current prospects for the construction market in the Asia Pacific region, highlighting some of the key macroeconomic trends that we see unfolding over the course of 2013.
|Asia Pacific - Construction Industry Value Forecasts|
Developed States Increasingly Relevant: While we are projecting Asia's construction growth in 2013 to be relatively similar to the historical ten-year average (4.9% versus 4.8%), the composition of this activity has changed in recent years. Hong Kong, Singapore, South Korea, Taiwan, Australia, Japan, and New Zealand are becoming increasingly relevant to the region's growth performance. These markets are expected to account for 21.5% of construction growth in 2013, compared to a -2.6% average per annum between 2003 and 2012.
|Asia Pacific - Contribution To Construction Industry Value Real Growth, By Key Sub-Groups, Percentage Points|
We believe that this trend has arisen due to two factors: a sharp cutback in capital expenditure in China, the biggest contributor to construction activity among Asian emerging markets, but more importantly, increased opportunities among these markets. An unusually high number of natural disasters among the developed countries in 2011 have heavily damaged existing infrastructure and a large portion of the reconstruction effort, particularly in Japan and New Zealand, has yet to start. Australia's construction activity in 2013 is also expected to remain heavily driven by the energy commodities sector, where construction works for mining, oil and gas projects (as well as ancillary infrastructure such as railways, ports) will provide work for the industry.
Meanwhile, Taiwan, Singapore, Hong Kong are implementing major plans to improve inter- and intra-transport links after years of perennial underinvestment, while excess liquidity from China and the US is expected to increase the demand for speculative investments such as real estate in these countries, spurring residential building activity.
More Conducive Monetary Backdrop: We expect the cost of capital across Asia in 2013 to be lower than the past ten years. Most Asian countries have adopted a looser monetary policy to spur economic activity - India and Vietnam are expected to see the greatest decline in domestic lending rates among Asian economics - and this could reignite private sector interest for construction in 2013.
|Lower Capital Costs|
|Asia Pacific - Lending Rates, 2013 And 10-Year Historical Average (2003-2012), %|
Relatively Robust Government Spending: We expect government fixed capital expenditure in Asia to be relatively robust in 2013. Although the region is not expected to clock the highs seen during the stimulus-driven 2008-09 recovery (due to China's spending reductions on infrastructure), Asia's infrastructure needs are still massive and many Asian governments remain keen to address this deficit.
|Asia Pacific - Quality Of Infrastructure*, Rank Out Of 144 countries In 2012/13 (RHS)|
Most of the infrastructure-building programmes introduced by emerging economies in Asia (particularly in South East Asia) to attract private investors are gaining momentum - eg Indonesia's Master Plan for the Acceleration and Expansion of Indonesian Economic Development, and Malaysia's Economic Transformation Programme, and Philippines' Public-Private-Partnership Programme. These emerging economies have also ramped up capital spending for all types of infrastructure to record highs, while developing and developed countries in Asia are ramping up spending to address transport bottlenecks and rebuild disaster-hit infrastructure, respectively.
Despite spending reductions, China's capital expenditure plans will still be significant and will mostly likely dwarf allocations in all other emerging markets. For example, China has earmarked about CNY530bn (US$85bn) for railway construction projects in 2013, more than any other country in the world.
Lastly, many Asian governments (we highlight China, Singapore, Hong Kong and Malaysia) are channeling funds to public housing as record-high prices for housing is creating a social problem for these countries.
Business Environment Risks Remains Pertinent: We believe that business environment issues (such as red tape, land acquisition, environmental clearances and deficits in institutional capacity and regulatory framework) are still a major problem in several emerging markets in Asia. This is despite some countries taking significant steps to resolve these regulatory bottlenecks (such as the introduction of a new land acquisition bill in Indonesia) or making attempts to do so (such as the development of a national investment board to speed up infrastructure development in India). Many of these flaws are deeply ingrained in their bureaucratic system or require years to train the necessary human resources to boost instructional capacity. As such, these issues could take many years to be resolved.
|Investment Challenges Abound|
|Asia-Pacific - Ease of Doing Business Rankings, By Countries, 2012 and 2013|
Election Considerations: We believe that political risk remains a considerable threat to the growth potential of several construction markets in Asia, as several elections are set to take place over the next 18 months. We have long highlighted that political stability, which allows for continuity in government policies, is critical in ensuring the viability of infrastructure investment as a change in government could lead to a review of infrastructure projects (and regulations) approved by outgoing administrations. This typically results in the need for new feasibility studies and schemes, which could lead to project delays, revisions, or worse, cancellations.
|A Key Risk|
|Asia Pacific - Key Elections Time Table (December 2012 - July 2014)|
Furthermore, political parties during election season are typically keen on taking a populist stance, which usually means an increase in welfare subsidies. Such fiscal profligacy is a threat to government fixed asset investment plans across Asia. This is because most Asian countries are already running historically high fiscal shortfalls, making it more difficult and more costly for them to secure debt to support their subsidy schemes and capital expenditure plans.
|Asia Pacific - Budget Balance, 2013 And 10-Year Historical Average (2003-2012), % of GDP|