Construction Outlook Threatened By China And Elections

BMI View: The lack of growth in Q313 indicates that the recovery in Taiwan's construction activity is proceeding slower than previously expected, prompting us to revise down our full-year growth projections for 2013 from 2.0% to 1.1%. Looking at 2014, we are concerned that the structural deficiencies within the Chinese economy and the municipal elections in Taiwan could hamper construction activity. Given this unfavourable investment climate, we have revised down Taiwan's construction growth forecasts for 2014, with real growth for the sector expected to reach 1.9% (previously 2.9%).

The Taiwanese construction sector continues to be in a contractionary phase, though the resurgence in China's economic activity in Q313 and the construction of new homes has helped to slow the rate of decline. Latest figures from the National Statistics Bureau showed that Taiwan's construction sector contracted by 0.1% year-on-year (y-o-y) in Q313, slower than the preceding quarter (which contracted by 0.4% y-o-y in Q213) and the same quarter in 2012 (1.1% y-o-y in Q312).

Nevertheless, the recovery in Taiwan's construction activity is proceeding slower than previously expected. As such, we have revised down our growth projections for 2013 for the country's construction sector from 2.0% previously to 1.1%.

Slow Recovery
Taiwan Quarterly Construction Industry Value Data

Construction Outlook Threatened By China And Elections

BMI View: The lack of growth in Q313 indicates that the recovery in Taiwan's construction activity is proceeding slower than previously expected, prompting us to revise down our full-year growth projections for 2013 from 2.0% to 1.1%. Looking at 2014, we are concerned that the structural deficiencies within the Chinese economy and the municipal elections in Taiwan could hamper construction activity. Given this unfavourable investment climate, we have revised down Taiwan's construction growth forecasts for 2014, with real growth for the sector expected to reach 1.9% (previously 2.9%).

The Taiwanese construction sector continues to be in a contractionary phase, though the resurgence in China's economic activity in Q313 and the construction of new homes has helped to slow the rate of decline. Latest figures from the National Statistics Bureau showed that Taiwan's construction sector contracted by 0.1% year-on-year (y-o-y) in Q313, slower than the preceding quarter (which contracted by 0.4% y-o-y in Q213) and the same quarter in 2012 (1.1% y-o-y in Q312).

Slow Recovery
Taiwan Quarterly Construction Industry Value Data

Nevertheless, the recovery in Taiwan's construction activity is proceeding slower than previously expected. As such, we have revised down our growth projections for 2013 for the country's construction sector from 2.0% previously to 1.1%.

Dampened By Near-Term Risks
Taiwan - Construction Industry Forecasts

Going into 2014, we are concerned that the Chinese economic recovery might not last, with a possibility for China's structural downturn to come back into focus in 2014 ( see 'Another Credit Binge Will Not Cure Economy', September 12 2013). The structural deficiencies within the Chinese economy (shaky financial system, overvalued property market, expensive infrastructure build-up, and huge industrial overcapacity) still remain, and could flare up in the near-term, causing a deep slowdown in China's economic activity.

Such a scenario would have major implications to Taiwan's construction sector. China is Taiwan's largest source of tourists, accounting for around 35% of all tourist arrivals. China is also currently the country's main driver of exports (accounting for around 25% of Taiwan's total export order). Should our expectations of a slowdown in China's economy take place over the near-term, it could reduce trade and tourist volumes. This would not only decrease the demand for transport links that support the export sector (e.g. expansion of Taiwanese ports), but deter export-oriented businesses from carrying out their capital expenditures plans such as the construction of new manufacturing facilities. The decline in trade activity could also diminish the government's ability to finance public construction projects as less tax revenues will be collected.

China Reliant
Taiwan - Monthly Visitor Arrivals, By Geography, '000 (LHS) And Total Export Activity, By Geography, US$mn (RHS)

Besides the risks posed by the mainland's economy, we highlight that Taiwan is set to hold elections in five major municipalities in 2014. At present it is unclear if the ruling Kuomintang (KMT) party will be successful during the elections. Investors could therefore wait for greater political clarity before taking on new construction projects. Furthermore, most governments typically put on hold key decisions on large-scale infrastructure projects (such as project awards and approvals) until elections are concluded.

Given this unfavourable investment climate, we have revised down Taiwan's construction growth forecasts for 2014, with real growth for the sector expected to reach 1.9% (previously 2.9%).

2014 Still A Better Year Than 2013

We still, however, expect Taiwan's construction growth in 2014 to improve from 2013 levels, thought at a lesser extent. This is primarily due to 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 slightly increase from 1.875% at the end of 2013 to 2.00% by the end of 2014. The low borrowing costs could encourage companies operating in Taiwan to take up new construction projects or carry out capital-intensive construction works. The Taiwanese government also announced in late-May 2013 that it would ease regulations to let insurance companies invest TWD100bn (US$3.3bn) in infrastructure projects, as part of a broader package to boost the economy.

Power Sector Rebalancing: The adverse sentiment surrounding nuclear generation since the Fukushima crisis has caused the Taiwanese government to revise its energy policy. It has halted plans to increase its nuclear generation capacity, and plans to hold a referendum deciding the fate of the US$8.9bn Lungmen nuclear power plant are being discussed by lawmakers. 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.

Transport Infrastructure Projects Move Forward: Taiwan remains keen to expand and improve 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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