Construction And Infrastructure Growth To Accelerate

BMI View: We still expect the recovery in Taiwan's construction and infrastructure sectors to accelerate at a modest pace over 2014 and 2015, despite a slow start over the first half of 2014. Our positive outlook is due to a relatively conducive monetary environment for construction, changes in the country's energy policy and the government's desire to improve transport links.

The recovery in Taiwan's construction sector has become rather tepid after a relatively strong pick-up in growth in late-2013; however, we still expect growth to accelerate in 2014 and 2015. The latest figures from the National Statistics Bureau showed that Taiwan's construction sector expanded by just 0.5% year-on-year (y-o-y) in Q114. This was significantly lower than the growth of 3.3% y-o-y in Q413 and 2.6% y-o-y in Q113.

Nevertheless, we still expect the recovery in Taiwan's construction and infrastructure to accelerate at a modest pace over the short term. We are maintaining our forecast for construction real growth to reach 1.8% and 2.5% in 2014 and 2015, compared to 1.2% in 2013. Meanwhile, infrastructure real growth is expected to reach 3.0% and 3.9% in 2014 and 2015 respectively, compared to 1.5% in 2013.

Slow Recovery
Taiwan Quarterly Construction Industry Value Data

Construction And Infrastructure Growth To Accelerate

BMI View: We still expect the recovery in Taiwan's construction and infrastructure sectors to accelerate at a modest pace over 2014 and 2015, despite a slow start over the first half of 2014. Our positive outlook is due to a relatively conducive monetary environment for construction, changes in the country's energy policy and the government's desire to improve transport links.

The recovery in Taiwan's construction sector has become rather tepid after a relatively strong pick-up in growth in late-2013; however, we still expect growth to accelerate in 2014 and 2015. The latest figures from the National Statistics Bureau showed that Taiwan's construction sector expanded by just 0.5% year-on-year (y-o-y) in Q114. This was significantly lower than the growth of 3.3% y-o-y in Q413 and 2.6% y-o-y in Q113.

Slow Recovery
Taiwan Quarterly Construction Industry Value Data

Nevertheless, we still expect the recovery in Taiwan's construction and infrastructure to accelerate at a modest pace over the short term. We are maintaining our forecast for construction real growth to reach 1.8% and 2.5% in 2014 and 2015, compared to 1.2% in 2013. Meanwhile, infrastructure real growth is expected to reach 3.0% and 3.9% in 2014 and 2015 respectively, compared to 1.5% in 2013.

Recovery To Continue
Taiwan - Construction And Infrastructure Real Growth Forecasts

Our outlook is primarily driven by three factors:

Pro-Growth Monetary Environment: Despite the potential for cut-backs in quantitative easing by the US, we expect Taiwan's monetary policy to remain fairly accommodative over the near term, with the benchmark interest rate projected to remain at 1.875% over 2014 ( see 'Monetary Policy to Remain Growth Supportive', May 12 2014). The low borrowing costs could encourage companies operating in Taiwan to take up new construction projects or carry out capital-intensive construction work.

We highlight that greater domestic private sector participation in Taiwan's construction and infrastructure sectors is crucial to the growth of both sectors. This is because the government is keen to cut down expenditure and instead rely on private sector funding to develop its construction and infrastructure plans.

In May 2014, the National Development Council, a cabinet-level ministry in charge of economic planning, announced that the planned budget for public construction would continue to decline for the third year in a row, reaching TWD163.6bn or 8.86% of the government's overall expenditure in 2015, an all-time low (cited from the Taipei Times). In the same month, the Ministry of Finance said that the private sector had signed agreements with the government to invest in TWD43.1bn worth of public construction projects between January and May 2014, higher than the TWD15.5bn signed over the same period in 2013.

Power Sector Rebalancing: The adverse sentiment surrounding nuclear generation since the Fukushima crisis has seen the Taiwanese government to revise its energy policy. It has halted plans to increase its nuclear generation capacity, while existing plants faced difficulties in remaining operational ( see 'Shelving Nuclear Plant Carries Economic Risks, Highlights Political Deterioration', May 6 2014). As such, there is a growing need to meet future electricity demand through thermal and renewable capacity. While we saw little to no development in the country's renewable energy sector in 2013, we have seen tangible attempts by the government to implement new large-scale thermal power plants, such as the Talin coal-fired power plant in southern Taiwan and the Tunghsiao gas-fired power plant in northern Taiwan ( see 'Thermal Remains Favoured Despite Price Mismatch', September 9 2013). These projects could support construction activity in 2014 and 2015.

Transport Infrastructure Projects Move Forward: Taiwan remains keen on expanding and improving its inter- and intra- transport systems and we have seen some of these projects - namely a new high-speed railway station in Yunlin County, the south runway expansion project at the Taoyuan International Airport, the Kinmen Bridge project, the Tamsui light rail network and the Kaohsiung circular light rail project - move into the construction phase.

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