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Chile Infrastructure Report Q4 2010
Business Monitor International, Oct 2010, Pages: 79
Chile Infrastructure Report provides industry professionals and strategists, corporate analysts, infrastructure associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Chile's infrastructure industry.
Although the release of new real data from Chile’s national statistics agency showing that construction output contracted by a further 1.5% in Q110, following a deeper than anticipated recession in the sector in 2009, we nevertheless maintain our strongly positive outlook for the sector in the short to medium-term. Our expectation that Chile’s construction industry value will grow by around 5.7% in 2010 in real terms is predicated on our view that investment in reconstruction projects, as well as a number of concession projects in the pipeline will help to boost growth in Chile's construction industry value through 2010.
Key themes in this quarter’s report include:
- The announcement in June 2010 that plans are afoot to resurrect the US$635mn Santiago- Valparaiso high-speed rail concession – consigned to the back burner following the February 2010 earthquake – is a positive sign for the country’s concessions market. It lends support to our assertion that the efficient progress of reconstruction efforts seen so far indicates that the sector is now ready for many of the projects deemed non-essential in the quake after-math. With around half of the required post-earthquake construction already completed, according to Chile's concessionaires association (Copsa), we expect the number of concession contracts in the pipeline – both yet to enter the construction phase and yet to be awarded – to boost construction growth over the second half of 2010.
- The Chilean government’s strong commitment to infrastructure development continues to provide construction industry growth with crucial impetus. In August 2010, Chile’s Public Works Minister announced that the government aims to spend US$14bn on infrastructure through 2014, with US$6bn coming from the state budget and a further US$8bn sought from the private sector. In addition, a recently announced US$8bn concessions package by the government is currently awaiting the tendering process.
- The main risks to our outlook continue to come in the form of external threats. Firstly, given the central role that private procurement is expected to play in Chile's development of infrastructure assets, the ongoing freeze in global capital markets has the potential to hamper the ability of major projects to meet financial close. Though the domestic banking sector has registered a good recovery from the credit crunch and domestic banks should be able to buttress economic growth,
BMI notes that new lending going into the economy is to slow considerably, compared to precrisis levels. Further downside risk stems from Chilean peso weakness – arising from Chile’s reliance on copper exports as a major source of revenue (it contributes two thirds of the country’s total) – leaving it heavily exposed to fluctuations in global copper demand and, in particular, to any slowdown in China’s economy.
The February 27 2010 earthquake wreaked considerable devastation on Chile's infrastructure, with the government valuing the damage at between US$20bn and US$30bn. Consequently, all but the most essential new infrastructure projects were placed on hold in order to focus attention on reconstruction efforts – something we highlighted as a slight downside risk to our short-term positive outlook for the sector. However, the news that plans for the public-private US$635mn Santiago-Valparaiso rail concession are starting to gather speed once more, alleviates concerns over this downside risk, indicating that non-essential infrastructure projects are also in the pipeline. Adding further support to this positive view is the news that a second terminal, costing US$350mn, at the port of Valparaiso is due to be built following the launch of a tender in August 2010. The tender was announced despite the fact that the country’s freight industry is still suffering the effects of the earthquake damage; once more indicating that the numbers of non-essential projects are likely to increase through 2010.
Despite the external risks arising from currency weakness and global credit conditions, we believe Chile to be better equipped to deal with such obstacles compared to most of its Latin American counterparts given the attractiveness of its business environment and, in particular, its attractive regulatory environment and concessions framework. Indeed, a new concessions framework signed into law by Chile's former president Michelle Bachelet in January 2010 will cement Chile’s position as a regional leader in terms of its concessions model.
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