New Study: South Korea Infrastructure Report Q2 2016

We have downgraded our growth forecast for South Korea's construction sector on the back of new mortgage rules from early 2016 , which will dampen the residential construction market from 2016 onwards. With a struggling non-residential building sector, it is the infrastructure sector, and notably the energy and utilities sub-sector, which will boost South Korea's overall construction industry growth into weak but positive territory.

Latest Updates And Structural Trends

We expect a slight expansion in South Korea's construction sector of 1.41% in real terms for 2016, down from 1.98% over 2015. For 2017, we maintain our growth forecast of 1.32%. Overall construction industry growth in South Korea will remain in positive territory over our forecast period to 2025, despite being in the low 1-1.5% real growth bracket.

With negative growth rates in the non-residential building sector and weak long-term growth in the residential building sector, overall building industry real growth will remain in negative territory over our forecast period 2016-2025.

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We downgraded residential building real growth rates this quarter on the back of new amortised loan rules and tougher lending rules to take effect in 2016. In addition, the lack of significant income increase, an ageing population and an increasing oversupply of new homes provide a weak long-term picture for the residential building sector.

Infrastructure spending is set to remain in positive territory over the forecast period, after several years of difficulty. Growth in the infrastructure sector will help counter declines in the building industry and boost South Korea's overall construction industry growth into positive territory. Key to South Korea's infrastructure sector positive growth is the energy and utilities sector, the best performing sub-sector in the country's overall construction industry. Its performance is attributed to the Power Plants and Transmission Grids infrastructure industry growth, which will pull forward overall infrastructure spending in South Korea.

Despite the continued focus on thermal projects, there are large opportunities in the nuclear infrastructure sector in South Korea in future. The need to replace old reactors, growing energy demand, the cost-competitiveness of nuclear and efforts to reduce greenhouse gas emissions will see more new nuclear plants coming online in South Korea. The new nuclear projects, which are high cost, will drive forward infrastructure spending, along with thermal power projects.

Risk/Rewards Index

South Korea has achieved third place in our Asia Pacific RRI, with a score of 64.8 out of 100. Growing external uncertainties are weakening South Korea's export-orientated economy, reducing the amount of fiscal funding for infrastructure projects, while constraining demand for residential and non-residential building projects.

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