Themes For EMEA Infrastructure 2013
We expect activity in the infrastructure sector to pi ck up momentum over 2013 in EMEA, with our forecasts suggesting that real growth in construction is going to accelerate across all regions.
Highest growth will come from Sub Saharan Africa , with outperformers Cameroon , Angola and Botswana driving growth in the region.
We anticipate that most private capital will be diverted to brow n field and privatisations in Europe (especially as the programmes in Greece and Portugal are implemented), therefore Africa will remain dependent on multi - lateral donor assistance for capital projects. Eastern European markets will outperform Western European ones for another year.
In the Middle East , the large public spending programmes will continue in Qatar, Saudi Arabia , Bahrain and Abu Dhabi and therefore place pressure on local capacity (labour, administrative, financial, bureaucratic) to see the projects through the pipeline as planned. We are factoring in a revival in Dubai ' s residential and non-r esidential construction sector as well, though a risk of a 2014 'funding cliff' is moderating our expectations. North Africa especially is propelling in the region with some mega-spend planned for Algeria and Libya n reconstruction getting underway.
Amongst the major emerging markets we are bullish on Turkey (not least due to its project finance prospects) and bearish for South Africa and Poland, though both will record higher growth in 2013 tha n in 2012.
|Activity Picks Up Over 2013|
|Real Construction Growth, % y-o-y|
Dubai Confidence Up, Mega-Spending Status Quo In The Region
Our forecast for the UAE's residential and non-residential construction sector has been buoyed over the past few quarters by a revival of the country's tourism sector and the relative stabilisation of the Dubai's real estate market. Accompanying this, we forecast a gradual resumption of stalled projects, with firms adopting more sustainable market strategies in the long term. Although we believe that these builds will face a number of hurdles before reaching completion - the foremost being a lingering, possibly bloating, oversupply - we forecast a gradual uptick in construction activity over the long term, with real growth forecast at 4.75% in 2013. An overreliance on government spending provides downside to our forecast, and we are adding a new risk we are mindful of, the 2014 'funding cliff' ( for the full analysis of the 2014 'funding cliff', see our online service, 13 November 2012, '2014 funding Cliff Looms Large'), which though still largely undetected in the general market discourse, we believe has the potential to cause a fresh round of market jitters towards the end of 2013 if not properly managed.
|Gaining Traction Again|
|UAE - Value of Projects Planned and Under Construction, Total = US$41.1bn|
Elsewhere in the Middle East we see the status quo in mega scale public spending continuing, and that includes Algeria ' s massive US$286bn infrastructure plan, Saudi Arabia ' s US$385bn infrastructure programme, and Qatar ' s US$150bn infrastructure plan. These public spending programmes span several years, and have been factored in to our long term forecasts for the markets.
Low Yields Push Capital Further Into Infrastructure
We maintain a bullish view o n the role that cash-rich pension funds will play in the infrastructure finance sphere . Regulated assets in the European and North American markets will be th e sectors and regions of choice in our view, especially with the privatisations in Greece and Portugal in both transport and utilities expected to take place in 2013 . Low bond yields are the main reason for portfolio diversification for several of the large fund managers.
BMI ' s global macro strategists expect interest rates to remain anchored near zero for the foreseeable future, thus (in tandem) keeping bond yields in negative territory in real terms. Based therefore on BMI's long term forecast for policy rates in Europe and North America, we expect that an increasing number of pension funds will actively pursue higher-yield, alternative asset class investments. The long dated maturity and inflation-linked, stable returns from infrastructure assets (especially regulated utilities in OECD markets), match the mandate and risk profiles of the pension funds industry.
|Bond Yields Looking Unattractive|
|Central Bank policy rate, % end of period|
With large institutional investors eager for EM returns (though most often constrained by the investment-grade caveat) w e believe that Turkey is the market to watch for a boom in the project finance market in late 2013, when the country is expected to achieve full investment-grade rating. We have long identified the asset-liabilities mismatch in the domestic financial sector as a crucial impediment to the development of the Turkish project finance market. If , and when , investment grade status is achieved we see developments for project finance moving at a very rapid pace, with institutional investors rushing to enter the market.
|Strong Upside For Financing Risk Profile Score|
|BMI Project Finance Ratings, Turkey Vs Central Eastern Europe|
We therefore see very strong upside risk for our Turkey Project Finance Ratings ( BMI's proprietary matrix of indicators that quantifies and weighs 18 different risk factors present throughout infrastructure assets' life-cycles), stemming from an upward revision of the financing category score, which is in turn made of scores for its long term borrowing capabilities and banking sector sophistication, availability of capital and liquidity in the market, and cost of capital. All those factors would be tremendously bolstered by investment grade status, which in turn would be reflected in a much better score for the Turkey's project finance risk ratings.
Turkey Shines As South Africa and Poland Struggle To Recover
Accompanying our view on Turkish project finance for 2013 is our bullish view on the Turkish infrastructure market. We pick Turkey as an outperformer in EMEA infrastructure in 2013. Turkey, South Africa and Poland were the three linchpins of emerging market infrastructure growth in the three regions (not taking into account the massive public capital program me s in the GCC financed through hydrocarbon windfalls), but the end of tournament-linked construction in South Africa and Poland took away all momentum from the construction market in those countries and effects have lingered into 2012. We believe they will post higher growth in construction and infrastructure industry value growth in 2013 compared to 2012, but they will underperform in their regions (South Africa will have the lowest growth in SSA after the Sudans and Gabon; Poland is amongst the lower CEE). In contrast, our forecasts suggest that Turkey will post the second highest growth in construction in CEE over 2013.
|Change In Trends|
|Infrastructure industry value real growth, % y-o-y|
Natural Resource Boom Drives SSA Infrastructure Investment
Botswana, Angola and Cameroon are forecast to have the highest growth rates in Sub Saharan Africa (SSA) in 2013, though we note that real construction industry value growth in small markets like those in SSA (with the exception of South Africa) has been very volatile, with major peaks and troughs.
Much of the construction industry growth is being driven by the mining industry. Southern Africa in particular is seeing strong investment into coal mining as growing Asian consumption drives investment into relatively unsaturated SSA markets, with Mozambique and Botswana the primary beneficiaries. Consequently, both will continue to post strong growth over 2013 and the medium term as investment into export routes and electricity capacity continues.
Botswana is expected to post the highest construction industry growth in SSA in 2013, at 15.9% y-o-y, driven primarily by investment into electricity capacity, utilising indigenous coal resources, providing electricity to the mining sector and reducing reliance on South Africa.
|Mining Industry Growth Drives Construction Sector|
|Africa Mining Industry Value, US$bn And SSA Construction Industry Value Real Growth|
We are also seeing strong investment into infrastructure in West Africa to support the region's nascent mining sector. Whilst political risk is reducing some investment on behalf of mining companies (especially in Guinea), the need for infrastructure is so desperate we expect investment to remain strong. China is increasingly playing a role in the region's infrastructure build out, replicating a strategy seen already in East and Southern Africa. Oil wealth and new exploration in West and East/Southern Africa is also supporting investment into infrastructure.
At the same time, governments are focusing on infrastructure investment to boost competitiveness and attract further investment. Programmes such as Namibia's three-year US$2.3bn TIPEEG and Cameroon's 10-year economic development plan have a heavy infrastructure component. Investment is being supported increasingly by infrastructure bonds, and we expect an increase in sovereign infrastructure bond issuances over the course of 2013 with many likely oversubscribed.
However, those countries in SSA which are unable to leverage natural resources to attract private sector capital, pose prohibitive risks to private investment, or are unable to access international bond markets, will be starved for capital. Consequently, they will rely solely on the multi-lateral development organisations such as the AfDB, the World Bank and increasingly European banks, for infrastructure development. These countries will be the underperformers over the medium term.