South Africa Infrastructure Report Q3 2012

Includes 3 FREE quarterly updates

BMI View: Following South Africa’s 2011 post-World Cup hangover, we are gradually seeing a return to slow but steady economic growth, with real GDP of 2.7% forecast for 2012. This positive trend is supported by Q112 construction data showing that the sector increased 2% year-on-year (y-o-y), indicating that the slump has finally reached its bottom. However, despite a concentrated effort on infrastructure investment in 2012, we believe the risks to this cautiously optimistic outlook are plentiful, ranging from policy uncertainty and cumbersome bureaucracy to intense credit rating pressure. This is prompting us to maintain our healthy, yet modest, construction industry real growth forecast for 2012 of 2.5%.

South Africa's construction industry experienced a severe hangover from pre-World Cup excesses. With government finances pushed to the limit to complete projects on time, 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) (2009) to 0.9% y-o-y (2010), and continued to weigh heavily on domestic construction companies in 2011, resulting in share prices falling. However, with economic growth slowly but steadily ticking up, and Q112 construction data having improved 2% y-o-y, we are seeing a gradual improvement within the wider South African construction sector. This has been underscored by the measured improvements seen in the performances of numerous construction companies. Our medium-term outlook for the country’s construction sector is a cautiously positive yet modest one, with 2.5% y-o-y real growth forecast for 2012. Growth levels are unlikely to return to those seen before the World Cup, as they were driven by an artificial stimulus and a front-loading of the project pipeline. Hence, the significant 2011 nominal growth of 17.1% in the construction sector should not be misinterpreted, with high inflation of 16% also forecast for the same period.

Nevertheless, in President Zuma's state of the union address, 2012 was dubbed the ‘Year of Infrastructure’ and five geographically focussed infrastructure development programmes were identified:

• Develop and integrate rail, road and water infrastructure centred around the Waterberg and Steelpoort areas of Limpopo, to unlock coal, platinum, palladium, chrome and other minerals.
• Improve the movement of goods through the Durban Free State Gauteng logistics and industrial corridor by prioritising a range of rail and port improvements, supported by Transnet over seven years.
• A new 'South Eastern node' in the Eastern Cape, to bolster industrial and agricultural development and export capacity. Including construction of a dam on the Umzimvubu river and a 16mn tonne/year manganese export channel through the Port of Ngqura.
• An initiative to expand transport and electricity infrastructure in the north-west of the country, including upgrading ten priority roads.
• A number of projects on the West Coast, including the expansion of the Sishen-Saldanha ironore corridor to 100mn tonnes.

However, much of this plan draws 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; however, financing has proved to be a major obstacle. With little government funding available, huge sums are required from the international financial community. For this reason, investment is far from assured and we have therefore only cautiously incorporated it into our forecasts.