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Brazil Infrastructure Report Q1 2014 - New Market Report

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2013-12-12 17:21:03 - New Construction research report from Business Monitor International is now available from Fast Market Research

We are maintaining our expectation that growth will reach just 2.8% in Brazil's construction industry in 2013, and although picking up in 2014 to 4.1%, will remain below potential. Over the medium term, we maintain our outlook that despite significant opportunities in Brazil's infrastructure market, full potential will not be realised until improvements are made in the institutional, regulatory and financial environment.

Even with construction costs moving negative, Brazil's construction industry continues to post weak growth. Despite the second growth acceleration programme running since 2010, a US$235bn concessions programme and investment into World Cup infrastructure, growth has remained persistently low.

The bottleneck appears to be on the public sector side, with institutional inefficiencies preventing projects moving forward, whilst constant changes to the

regulatory environment seems to delay tendering from moving forward. The concessions programme will be a key test for the government's ability to improve the regulatory environment, and more importantly, convince investors that Brazil is an attractive investment environment; however, it is off to a bad start, with frequent changes in regulations having been made in the run up to the first tenders, and a mixed result in the first highway concessions. Consequently, we are not encouraged that the programme will reach full potential and anticipate only partial take up by private investors, with a slant towards domestic companies and port projects.

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Residential construction should rebound:

Despite continued growth in the housing market over 2012, with house prices and mortgage applications reporting strong expansion, the construction of new residential properties stagnated. Housing starts fell by 37% y-o-y in 2012. This trend has reversed in line with expectations over the course of 2013, as homebuilders rebuild their balance sheets, improving cash flow and cost pressures ease allowing them to focus again on subsidised mortgage housing. This end of the market is crucial for homebuilders considering that interest rates are now being hiked following a steep easing cycle in 2012. As of the first seven months of 2013, housing starts are up 45%, however, we expect this to slow into 2014 in line with declining affordability of mortgages.

Events align to boost infrastructure growth:

The coinciding of the final year of the BRL959bn PAC II investment package and the presidential elections in 2014 should work to boost infrastructure industry value. The same interlinking of events precipitated an 11.7% rise in construction sector growth in 2010, as PAC I projects were pushed through to meet the deadline and pre-election spending took hold.

In addition, 2014 will also see the hosting of the FIFA World Cup. Slow implementation of World Cup projects to date will necessitate a last minute boost in construction. As of July 2012, only 5% of projects related to the tournament were completed. Whilst projects have moved forward, some of the less essential projects have been dropped altogether, and thus, we have significantly downgraded the impact of this on growth given that only essential projects are being built. We could see some boost to 2013 growth in the second half, as the government seeks to complete the six outstanding stadia by the December 2013 deadline.

Transport Concessions & Power Auctions:

Over the third quarter of 2013, progress was made on the government's US$235bn concessions programme. Initial investor appetite for the concessions programme was mixed based on the first two highway tenders, with only one successfully auctioned. At the same time, the first pre-salt licensing round received tepid investor interest, although was also successfully auctioned.

Uptake has been in line with our expectations, which were based on the multiple regulatory changes made ahead of auctions, and the questionable rate of return on offer versus the cumbersome business environment burden of operating in Brazil. For this reason, we have also seen, as expected, greater involvement from Brazilian companies than international.

On the other hand, the first two (A-5 and Reserve Energy Auction) of four power auctions received strong interest, indicating that investors are improving their opinion toward the sector following the concession debacle in 2012. The second two auctions (A-3 and second A-5) are also expected to garner significant interest.

Airport, rail and more road concessions are expected to take place in late 2013 and early 2014, with a similar mixed outlook for their success. A high level of selectivity is expected, and therefore high competition and high prices for those attractive assets - with Brazilian companies the most likely winners due to the lower margins they can accept.

Financing options being expanded:

The government will continue to extend financing to allow necessary infrastructure projects (social and economic) to be realised. BNDES has extended its emergency credit line, and has pledged to expand funding over the short term. The development bank plays a crucial role in providing low cost, long term financing for infrastructure projects.

At the same time, the FGTS (Brazil's severance pay fund) has committed to providing US$115bn in financing for social and economic infrastructure projects, the majority for Minha Casa, Minha Vida projects. Plans to expand the use of infrastructure debentures are also being implemented, with the first launched in late 2012 with considerable appetite noted.

About Business Monitor International

Business Monitor International (BMI) offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities, across 175 markets. BMI offers three main areas of expertise: Country Risk BMI's country risk and macroeconomic forecast portfolio includes weekly financial market reports, monthly regional Monitors, and in-depth quarterly Business Forecast Reports. Industry Analysis BMI covers a total of 17 industry verticals through a portfolio of services, including in-depth quarterly Country Forecast Reports. View more research from Business Monitor International at

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Bill Thompson
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