2012-05-17 07:34:16 - New Construction research report from Business Monitor International is now available from Fast Market Research
BMI View: We remain confident that Brazil's construction industry will post strong growth over the medium term, fuelled by the government's commitment to improving infrastructure to support economic growth and prepare the country to host two major sporting events. However, growth will be capped below double digit rates as access to finance and cumbersome bureaucracy weigh down on project progress.
As the hype surrounding Brazil continues despite a sharp slowdown in construction industry growth in 2011 (estimated at 3.6% by BMI), we continue to highlight the risks to investment. The opportunities on offer are undeniable, and this is driving our optimistic growth outlook, with average growth of 6.8% anticipated between 2012 and 2016. This figure could be much higher if all
investment pledged eventuates; however, we believe that the multitude of risks endemic in Brazil's infrastructure sector will erode growth.
Full Report Details at
- www.fastmr.com/prod/384806_brazil_infrastructure_report_q3_2012. ..
Potential Hard To Ignore
Brazil's infrastructure and construction sectors are attracting significant attention as a result of the huge investment planned. We estimate that there are US$150bn worth of projects under way or in the planning phase, whilst the government's growth acceleration plan (PAC II) is calling for investment totaling BRL959bn (US$518bn) between 2011 and 2014. With the added urgency of the two sporting tournaments to be hosted in the next few years, the country is feverishly upgrading infrastructure to meet strong demand from a growing population and economy.
Investment is being driven by a number of factors:
* The PAC II includes BRL958.9bn (US$518bn) to be invested in infrastructure between 2011 and 2014, with a further BRL631.6bn (US$341bn) to be invested beyond 2014. The plan includes provisions for housing, transport and energy, as well as social welfare measures such as electrification and water provision. Of the planned investment, 80% is expected to come from public funds (including state-owned companies), whilst 20% will come from the private sector, supported by below market rate loans from BNDES.
* Brazil's natural resources are in high demand, and this is precipitating investment into infrastructure to support production and export. The ports and freight rail sectors are seeing considerable expansion in order to meet growing demand from mining, soybean production and sugar production. At the same time, the exploration of subsalt oil will place pressure on pipelines and export terminals. Finally, huge growth in power demand from industrial users across the production chain is adding to existing pressure of electricity generation and transmission lines.
* Brazil is hosting both the World Cup in 2014 and the Olympics (in Rio) in 2016. Both events are of huge importance for the reputation of Brazil and we expect infrastructure projects associated with events to be prioritised and pushed through. The construction of stadia is generally on schedule, although costs have escalated, and airport auctions - which saw huge premiums paid for the operation of the country's busiest international airports - went through successfully. Construction of hotels and urban transit is also progressing, although a last minute rush is expected and fewer projects than planned will be completed.
* The housing sector should continue to experience strong growth. A focus on homebuilding through the 'Minha Casa, Minha Vida' low income housing programme has been announced by the finance minister, with 600,000 new homes planned in 2012, up from 457,000 in 2011. Around BRL40bn has been assigned for the programme under the 2012 budget. At the same time, both Caixa Economica Federal and Banco do Brasil are upping their mortgage funding for 2012, whilst the government continues to cut the benchmark rate to encourage lending. Housing loans grew 44% in 2011 and strong growth is expected to be repeated in 2012.
Risks To Keep An Eye On
Despite undeniable potential for growth, we believe that a number of pitfalls will make accessing these opportunities difficult for international investors. At the same time, there are difficulties that could derail potential investment. These concerns are capping growth below its huge potential, and we see little improvement likely at least over the medium term.
* The first is access to financing. A lack of depth in the domestic banking sector means that commercial loans for infrastructure projects are difficult to secure. At the same time, the motivation to use commercial debt is eroded by the attractive interest rates on offer from the state development bank (BNDES), with around 7% interest on loans compared to the 9.75% selic rate. Overreliance on BNDES for infrastructure finance has, however, raised some concerns on a fiscal level, and we believe it is an unsustainable source of finance. We have noticed a rise in private equity focused on the sector and this could open up crucial sources of new funding for the sector from private equity funds and pension funds.
* Costs have risen drastically over 2011, hitting the bottom lines of a number of companies. This is notable both in building materials - steel prices have been elevated, but also the cost of labour, with a shortage of skilled labour placing upside pressure on wages. Whilst we expect costs of raw materials to ease over 2012, as commodity prices come off the boil, a pickup in demand domestically could erode some of these gains.
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