The Infrastructure Construction Market in Brazil - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2016: Market Profile
- Language: English
- 29 Pages
- Published: April 2012
- Region: Brazil
BMI View: Brazil's construction industry growth continues to disappoint, and consequently this quarter we have further downgraded our 2012 real growth outlook, to 2.2% y-o-y. However, fundamentally the opportunities remain significant. Further, the need for improved infrastructure is desperate, and has eroded growth historically. With Brazil's economy on shaky ground, we expect that the government's explicit goal of boosting growth could be the catalyst to finally address the significant institutional and bureaucratic obstacles to efficient project procurement, or in the least, bypass them over the short term.
Consequently, with a significant amount at stake, including high profile sporting events, elections in 2014 and economic growth pressures, we anticipate activity will pick up in 2013 and 2014 as the Brazilian government ensures what needs to be done, gets done.
Brazil's construction sector continues to underperform its significant potential. Following a poor growth performance in 2011, the industry has unexpectedly remained in a slump, leading us to downgrade growth for 2012 twice (the latest from 4.2% to 2.2%). High costs due to prohibitive local content requirements,
high tariffs, as well as complex permitting, tax, HR, legal and capital structures are weighing on profitability and access into heavy industry sectors. Projects are not progressing efficiently, poor project planning or opaque tendering is resulting in many being re-tendered due, or suspended part way through. Ineffective institutions have thus prevented government funding for infrastructure projects
(accounting for 80% of the PAC II) from filtering through to actual projects whilst a poor business environment is deterring the private sector.
Deadline To Prompt Action
With the 2014 World Cup colliding with the presidential election and the final year of the PAC II, we expect a boost to growth similar to that seen in 2010 (without the base effects from 2009's recession).
This will be driven by an expected improvement in disbursement of funding and the awarding of contracts. Indeed, already in H2 2012 we are seeing a raft of new concessions, tenders and projects hitting the market, as the government ups the ante. With infrastructure crucial in supporting potential in the oil and gas, agribusiness, and mining sectors, as well as general economic growth, the higher echelons in the Brazilian government will likely push through projects crucial to catalysing this growth potential. With President Dilma Rousseff showing that growth above all else is guiding policy, we believe this should translate into movement on the infrastructure side.
The impact will be notable from 2013, when base effects from weaker than anticipated 2012 growth,
boosted by government stimulus measures, including sharp cuts to interest rates (positive for homebuilding) and cuts in tariffs filter through to the wider economy, and the construction sector specifically. This coupled with a push for World Cup related projects should drive growth to a more robust level of 5.8%. This growth level will accelerate in 2014 (6.3%), as PAC projects are pushed through ahead of the election, and late running World Cup projects are completed.
Beyond 2014, a modest slowdown is expected, with growth remaining around 5-6%, a more sustainable level for an industry the size of Brazil's (BRL205bn in 2011). Projects for the 2016 Olympics will have only a marginal impact on growth, and therefore much more will depend on a continuation of government infrastructure spending plans, which will be heavily impacted by the outcome of the 2014 presidential election.
Risks If Improvements Not Made
Despite this generally positive outlook for the near term, we highlight that significant risks are present.
The prospect that the government is not able to push projects through is very real. If current inertia and project delays continue, and cost and capacity issues are not addressed, only the bare minimum will be completed ahead of the World Cup, and the country's overall infrastructure quality will not improve to the level required to support growth.
Over the longer term, the risk that obstacles are glossed over to meet deadlines provides a risk that fundamental shortcomings in the industry as a whole are not addressed. Regulatory improvements,
institutional efficiency and addressing the overreliance on government and development bank funding will be necessary in order to exceed our current moderate growth outlook. SHOW LESS READ MORE >
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