New Market Research Report: South Africa Infrastructure Report Q4 2013

World Cup excesses, heavy bureaucracy and continuing political wrangles have weighed heavy on South Africa's previous impressive industry growth rates. However, we did highlight the industry had hit bottom and would return to growth in 2012. This played out and 2012 real growth data came in as expected at 2.5%, lending credence to our longer term outlook. We now see a slower return to positive territory than we previously anticipated in light of tough macro-economic conditions, with a real construction industry growth of 1.9% forecast for 2013. The positive growth story remains however, although the risks are still plentiful: policy uncertainty, cumbersome bureaucracy, intense credit rating pressure and ongoing labour issues across the country.

Though South Africa's construction industry appears to have bottomed out and is now seeing a slow return to growth, it is important to note that South Africa is still lagging behind many of its sub-Saharan peers. Following the 2010 World Cup government finances were pushed to the limit in order to complete projects on time. Hence, a drawback in funding and subsequent activity was noticed almost immediately after the tournament. Real growth decelerated from 7.8% year-on-year (y-o-y) in 2009 to 0.9% y-o-y in 2010, and continued to weigh heavily on domestic construction companies in 2011, which resulted in falling share prices. That said, growth levels are unlikely to ever return to those seen before the World Cup, as they were driven by an artificial stimulus and a front-loading of the project pipeline.

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However, with economic growth now ticking up, we are seeing a gradual improvement within the wider South African construction sector. This has also been underscored by the measured improvements seen in the performances of numerous South African construction companies. Hence, our outlook for the country's construction sector is one of cautious and modest growth, with a forecasted average annual growth of 3.6% between 2013 and 2022. This figure has been revised downwards from 3.8% last quarter in light of high inflation and a poorer macro-economic outlook over the medium term, with interest rate increases expected in 2014.

Many of the grand infrastructure programmes proposed by President Zuma draw upon huge capex schemes by the country's state-owned infrastructure operators, including Eskom, Transnet, Prasa and Sanral. They all have multi-billion dollar plans in the pipeline; but, financing has proved and continues to be a major obstacle. Eskom and Transnet have made progress in issuing bonds to raise capital, but Sanral in particular continues to struggle with huge debts, which threatens investment into the road sector. The rail and port sectors are a key source of growth in our forecasts as Transnet has front loaded its spending plans with huge capacity expansion projects, for examples a new dug-out port in Durban.

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