South Africa Infrastructure Report Q4 2012

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South Africa has for long boasted Africa’s best infrastructure; however, due to previous World Cup excesses, heavy bureaucracy and continuing political wrangles, we are now highlighting a significant relative decline. Though we note a slow return to growth, with a real GDP of 2.7% forecast for 2012 and construction industry real growth of 2.5%, the risks are still plentiful. Policy uncertainty, cumbersome bureaucracy, intense credit rating pressure and violent clashes in relation to several strikes at mines across the country, continue to weigh heavily on our outlook. Thus, we maintain our annual average construction industry real growth forecast of 3.9% between 2012 and 2016 (compared to a strong average of around 6% growth registered amongst its neighbour for the same time period).

Though we are seeing a slow return to greener territory, South Africa's construction industry is still lagging behind many of its neighbours following the severe hangover from pre-World Cup excesses, accompanied by continued political wrangles. 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) 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.

However, with economic growth slowly ticking up, 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 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.

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 the upgrading of 10 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; but, 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 only cautiously incorporated it into our forecasts.