Argentina Infrastructure Report Q3 2013 - New Market Report

Our previously held view that Argentina's construction sector will decelerate rapidly is playing out, with a contraction of 1.9% estimated for 2012. We have downgraded our outlook for 2013, to reflect a further deepening of the contraction, to -2.6% year-on-year (y-o-y). We believe the recession will last until 2014, when a contraction of 0.2% is anticipated.

The key trends in Argentina's Infrastructure sector are:

* Leading indicators for building permits show consistent contractions, as the industry runs out of steam under the pressure of heavy inflation, import restrictions, a funding squeeze and a slowing macro picture. The slump is being mainly driven by the impact of policies on the residential construction sector and falling industrial production; however, infrastructure should remain the one area of growth, as a number of projects progress. This will not be enough to reverse the trend of falling industry value however.
* We have for some time anticipated that Argentina's construction sector would experience an abrupt slowdown in 2012, following inflated growth of 9.1% in 2011, as a result of pre-election spending. However, as imbalances in the economy unwind, inflation ticks ever higher, the business environment continues to deteriorate and revenues decline, the slowdown has been far more abrupt than anticipated, based on leading construction sector indicators.
* Building activity has been in decline in y-o-y terms since April 2012, falling at an average annual rate of 5% in the first 11 months of the year. Consequently, we have downgraded our 2012 y-o-y growth estimate to -1.9%. We have also downgraded our outlook for the near term, with -2.6% expected for 2013, followed by -0.2% for 2014. The decline is being driven primarily by a crash in the residential construction sector, following a ban on dollar transactions and savings. The industry has been largely dollarised for some time, and as such, the ban has subsequently decimated the sector.
* Our Country Risk team forecast's that Argentina's economy will continue to slow this year, with real GDP growth falling to 1.6% from our estimate of 2.0% in 2012, as a currency devaluation pushes inflation higher, weighing on consumer and government spending, and liberalised import policies result in a greater net export drag on real GDP growth. That said, we forecast that base effects and greater competitiveness will boost real GDP growth to 3.0% in 2014.

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The key developments in Argentina's Infrastructure sector are:

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