West African Construction: Mixed Performance


BMI View: The construction industries of West Africa will experience steady growth over 2012, yet we see large discrepancies in the pace of expansion as political and macroeconomic conditions differ across states. Saying this, we note a number of trends that encapsulate each of the economies, including a significant reliance on resource extraction, maintaining ties with China, and significant downside political risks. Growth in the residential and non-residential sector remains strongly correlated to the rate at which governments are diversifying economies away from mining and hydrocarbon receipts - a rate which varies according to a number of political and economic factors.

Ghana And Angola: Leading Industries, Different Paths To Growth

We expect the residential and non-residential sectors of Ghana and Angola to outperform the rest of West Africa over 2012. Saying this, we believe that political and economic conditions will dictate that Ghana's sector experiences the most broad-based and far reaching expansion.

It is the view of our country risk team that the Ghanaian economy will enjoy strong economic growth over the medium term, propelled by the nascent Oil & Gas sector. Indeed, Ghana's abundant natural resources, fast growth trajectory and relative political stability augur for strong foreign investment inflows. Indeed, we are beginning to see signs that huge investment into the burgeoning energy sector is encouraging politicians and developers to capitalise on the growth stories of the oil-led renaissance of the port city Takoradi by bolstering residential stock and improving social infrastructure. ( see our online service, July 18, 'Oil Wealth Spurs Satellite Town Development').

However, there are signs that Ghana's social infrastructure plans are failing to match the significant potential offered by the country's fundamentals. In January 2012, ex-President John Atta Mills announced that the US$10bn STX housing project was to be re-tendered, effectively burying the project after it had collapsed. Whilst the decision to privately procure the project was a brave attempt to develop Ghana's public-private partnership (PPP) market, the result underscores our initial view that scale and lack of precedent would undermine the build.

Furthermore, in terms of government support for construction spending, Ghana's current account deficit will remain a key structural weakness. While our country risk team believe that both the fiscal deficit and debt levels (both domestic and external) have stabilised, it is our view that the budget deficit has the potential to inflate to levels higher than we had previously anticipated, due to profligate spending on infrastructure, especially in the run-up to 2012 elections. This mismanagement of oil revenues - stemming from a relatively immature institutional environment - has the potential to dent investor's perceptions in the long run.

Ghana & Angola - The Best Of The Rest
West Africa - Construction Industry Value, US$bn

As with Ghana, we believe that growing oil exports and high investment in the country's energy sector will see Angola will remain one of the world's fastest-growing economies in 2012, and that the newly re-elected government of President José Eduardo dos Santos will continue to prioritise lucrative mining and engineering contracts over residential and non-residential construction.

As such, although we are forecasting real GDP expansion of 12.8% and construction industry growth of 7.6%, investment in the sub-sector will be curbed by acute political-demographic issues. We note that, across the region in general, but evident in Angola in particular, government corruption and cronyism remain both pertinent risks for investors, and perpetuators of huge socio-economic inequalities ( see our online service, October 2, 'Continuity The Theme In Cabinet Reshuffle').

Saying this, Luanda will continue to benefit from the country's growth as the city's luxury market remains buoyant. However, we believe that housing for the majority of the capital's 16.5mn will be markedly slower in being constructed. Although positive steps are being taken to address Angola's vast housing deficit - through the government-backed National Housing Programme - red tape and funding issues weigh heavily on our forecast.

Furthermore, although Angola's government have developed firm ties with China, in terms of project financing the opaque tendering process, a large infrastructure deficit and weak demand-side dynamics will likely deter investors in the medium term.

It is therefore our view that, on a scale larger than Ghana, growth in residential housing will be curbed in the relatively poor prospects for the Angolan consumer. Investment in social infrastructure will be severely curtailed, as long as the risks to investors outweigh the gains that are achievable from other countries in the region, such as Ghana and Nigeria. We expect investors will instead veer towards capital-intensive, multi-year oil contracts, which continue to perform.

CHINA BUILDING A REGIONAL LEAD
Domicile and Number of Contractors In West Africa, 2011
Source: BMI, ENR
Spain France Italy Other Europe China North America Latin America Middle East India # Major Intl Contractors
Gabon 2 2 1 0 6 2 0 0 0 13
Cameroon 2 2 0 4 8 1 0 1 0 18
Ghana 0 3 2 3 8 0 0 2 1 19
Cote d'Ivoire 0 2 2 1 3 0 0 2 0 10
Angola 5 2 4 5 22 3 2 1 0 44
Nigeria 0 4 7 4 12 3 0 4 0 34

China's Journey To The West

A common thread underlying the majority of West African countries is the growing volume of Chinese-backed projects. The unflagging interest shown in West Africa's oil & gas sector has been critical in unleashing the funds of international construction firms in the region, and in this respect, Chinese government-backed firms have significantly outperformed.

Although a greater slowdown in the overall Chinese economy provides a downside risk to our outlook, we expect the country's corporations to maintain a steady volume of investment in West Africa's infrastructure space - with the region's infrastructure deficit so high, and funding relatively scare, we see China filling a vital gap for governments looking to construct, in the face of the ongoing developed market debt crisis ( see our online article, October 2, 'Chinese Coffers Continue To Support Africa Strategy').

Indeed, we believe that corporations will increasingly look to diversify their portfolios away from China, as investments in domestic fixed capital become riskier and demand weakens in the face of overcapacity. As such, it is our view that the country will continue to buck the trend, amongst many investors, of entertaining low levels of risk tolerance when it comes to Sub-Saharan Africa.

In Angola, China's largest source of oil in Africa, a strong relationship offers diplomatic backing for the state, but thus far progress in housing and commercial construction market has been patchy and, in most cases, unreflective of the actual requirements of the country.

The huge US$3.5bn Kilamba 'ghost town', large enough to house over half a million people yet currently empty and hugely unaffordable for the average Angolan is the most conspicuous example of this trend. Constructed by China's state-owned China International Trust and Investment Corporation (CITIC), Kilamba reflects the pitfalls facing the sector in the absence of institutions encouraging efficiency and transparency. The failings in Angola's business environment are highlighted by our Risk Reward Ratings, which position the country 13 th out of 16 African countries.

In addition to Chinese investment, we expect that avenues of investment will expand over the medium term as a variety of international players follow the Chinese example and look to tap the region's vast potential. Angola has been a major source of overseas revenues for Portuguese construction companies and (due to the linguistic advantage) increasingly Brazilian firms with global ambitions. Companies like Soares da Costa and Mota Engil have been in Angola for decades, while Brazilian companies taking their first strides are conglomerates Camargo Correa and Odebrecht. Furthermore, despite STX Group's failed US$10bn housing deal in Ghana, we see more scope for the involvement of East Asian developers - especially South Korean builders who are proving to be relatively less risk averse in residential construction investments across the continent.

Differing Fortunes
West African Countries - BMI's Construction Industry Forecast, Real y-o-y Growth (%)

Industrial Growth Foments Long Term Potential

The smaller francophone states in West Africa, Gabon, Cameroon and Cote d'Ivoire have offered fewer investment opportunities for large scale projects over 2012. Currently, European companies dominate the market, with Vinci and Bouygues having a long standing presence in all three.

In Cameroon, we expect that residential and non-residential builds will continue to be concentrated around Douala, Cameroon's economic hub. Reflecting the growing demands for raw materials in the region, the continent's largest cement manufacturer, Dangote Cement, recently restarted work on 1.5 million tonnes per annum (mtpa) plant in the city. Furthermore, we expect demand for housing between Douala and Yaounde as infrastructure - such as Cameroon's road system, which continues to benefit from Chinese investment in the region's export capabilities - develops to accommodate the uptick in regional trade.

However, we note that residential and non-residential construction will significantly lag investment in resource extraction and that industrial-led construction will be the main driver of the sector. Compounding our outlook are factors such as tight access to credit and weak property rights - which continue to inhibit FDI into the market. Although the stage is set for growth in social infrastructure investments through the government's 'Growth and Employment Strategy' for the alleviation of poverty, we refrain from factoring in a large uptick similar to Ghana and Angola until these issues are overcome.

Cote d'Ivoire's sector will benefit from reconstruction spending as the country's government - which had its budget boosted by the renewal of the [QUERY: pls check this] fiscal union and a debt forgiveness agreement with the IMF - look to consolidate last year's reunification. We estimate that spending on fixed capital formation surged by 40.0% in 2012 as the government began its attempts to repair damaged infrastructure and private investment returned to the country. In 2013 growth will still be high (we forecast 10.0% real expansion), but will be slower than in 2012. Projects such as the rebuilding of Abidjan's port by French engineering giant Bouygues, plus an improving macro picture will keep industry growth relatively robust over the coming years.

Furthermore, we believe that Cote d'Ivoire PPP Henri Konan Bédié Toll Bridge project - awarded to Bouygues under a 30-year concession under a Build Operate-Transfer (BOT) contract - could set a regional precedent for the use of the model; a move which, in the long run, may help gain increased social infrastructure investment across West Africa. However, despite optimistic figures being presented by the Ivoirian government, our forecast for 2013 growth is only 6.5%, reflecting our view that political tensions and a difficult business environment continue to hamper investment in construction in the medium term.

Representing the other side of the investment spectrum is Gabon. Although the country continues to benefit from high oil prices, and supports a relatively large middle-income population capable of driving demand for social infrastructure and housing construction, investment in infrastructure has been slow in coming and windfalls have not been channelled into the broader economy. As such, investment in the country's residential and non-residential space has been severely limited.

Although BDEAC Bank and ECOBANK of Libreville provided financing for the first phase of a US$320mn housing project in the country in September 2011, a general dearth of private financing options will significantly limit the realisation of projects within the sub-sector. Very few new projects have been announced over 2012, and this has led us to forecast real growth of just 1.6% year-on-year in 2012, shrinking to just 0.08% in 2013. Industry value is expected to rise negligibly from US$0.58bn in 2012 to US$0.63bn in 2016.

This article is tagged to:
Sector: Infrastructure
Geography: Africa, Angola, Cote d`Ivoire, Cameroon, Gabon, Ghana