China Making Good On Investment Pledges

BMI View: In light of Serbia's broader economic position, we see Chinese investment continuing to look particularly attractive in developing the country's aging infrastructure. Chinese companies have established themselves in the geographically strategic market and look set to use the country as a base for further expansion within Europe. The EU candidate country will continue to receive funding from the rest of Europe to promote integration, but the no-strings attached funding of China will look increasingly attractive over the short-term as the country struggles with austerity measures.

Building on an increasingly strong relationship despite Serbia being on the path to European Union (EU) membership, China continues to invest in the country, with the announcement of new deals for power and transport projects as part of a US$10bn credit line for Eastern Europe. Serbia's infrastructure is in need of huge investment to update its Soviet era transport and power networks and with the country garnering the attention of both European and Chinese development assistance, we expect the construction sector to become increasingly active over the coming years.

In a deal first floated over a year ago, China Machinery Engineering Corp. (CMEC) has now signed a US$716mn deal to build Serbia's first new coal-fired power plant unit in 23 years. The new power generation unit at the Kostolac power plant beside the Danube in central Serbia will be 85% funded by a loan from China Export-Import Bank. Kostolac is already being refurbished by CMEC to bring it in line with EU regulations, after the company signed a deal with the state-owned Electric Power of Serbia (EPS) in April 2013 ( see 'Over-Reliance On South Stream Creates Downside', July 15). Parliamentary approval for the borrowing and state guarantee for the loan is expected by the end of the year, with construction to start in early 2014 and commissioning scheduled for 2019. The 15-year loan has a 3% interest rate and a five-year grace period. Serbia needs to add 2,000MW of installed energy capacity to its existing 8,360MW after failing to make significant additions to output for almost three decades.

Loans Key As Economy Struggles
Real GDP and Fixed Capital Formation Growth, % change year-on-year

BMI View: In light of Serbia's broader economic position, we see Chinese investment continuing to look particularly attractive in developing the country's aging infrastructure. Chinese companies have established themselves in the geographically strategic market and look set to use the country as a base for further expansion within Europe. The EU candidate country will continue to receive funding from the rest of Europe to promote integration, but the no-strings attached funding of China will look increasingly attractive over the short-term as the country struggles with austerity measures.

Building on an increasingly strong relationship despite Serbia being on the path to European Union (EU) membership, China continues to invest in the country, with the announcement of new deals for power and transport projects as part of a US$10bn credit line for Eastern Europe. Serbia's infrastructure is in need of huge investment to update its Soviet era transport and power networks and with the country garnering the attention of both European and Chinese development assistance, we expect the construction sector to become increasingly active over the coming years.

In a deal first floated over a year ago, China Machinery Engineering Corp. (CMEC) has now signed a US$716mn deal to build Serbia's first new coal-fired power plant unit in 23 years. The new power generation unit at the Kostolac power plant beside the Danube in central Serbia will be 85% funded by a loan from China Export-Import Bank. Kostolac is already being refurbished by CMEC to bring it in line with EU regulations, after the company signed a deal with the state-owned Electric Power of Serbia (EPS) in April 2013 ( see 'Over-Reliance On South Stream Creates Downside', July 15). Parliamentary approval for the borrowing and state guarantee for the loan is expected by the end of the year, with construction to start in early 2014 and commissioning scheduled for 2019. The 15-year loan has a 3% interest rate and a five-year grace period. Serbia needs to add 2,000MW of installed energy capacity to its existing 8,360MW after failing to make significant additions to output for almost three decades.

We have been monitoring Chinese interest in the Serbian market since 2009/2010, which saw a deal struck for China Road and Bridge Corporation to build a new bridge over the Danube River, becoming the first major multi-million dollar Chinese infrastructure project on the European continent. The bridge is due for completion by end-2014. Since then, a number of transport projects have been undertaken and others are in the pipeline - all of which follow the trend for Chinese financial assistance to open doors for Chinese construction firms. These include:

  • Environmental Energy Holdings and the Shenzhen Energy Group are in talks on developing the Nikola Tesla coal power plant, at an estimated cost of US$2bn.

  • China Machine Engineering Corporation's deal to build a US$704mn bypass road around Belgrade.

  • Sinohydro construction two sections of the US$2.1bn Highway 10.

  • Two projects in the pipeline and set to be funded by the US$10bn made available to Eastern Europe are the realisation of a planned railway between Budapest and Belgrade and a section of the important Corridor 11 motorway.

Loans Key As Economy Struggles
Real GDP and Fixed Capital Formation Growth, % change year-on-year

Serbia is currently undertaking austerity measures, which are severely limiting the ability of the government to invest in developing its economy and infrastructure ( see 'Struggle To Consolidate', October 7). Considering that European funds will be more tightly linked to economic and political reforms, we expect that Chinese money will be increasingly attractive to the cash strapped nation over the short-term at least. However, Serbia's EU ascension, as we are witnessing in Croatia, will unlock billions of Euros of investment for the country's infrastructure sector and open the market to more competition from European firms such as Strabag, which will support long-term growth in the sector ( see 'Ascension To Unlock Considerable Growth Potential', July 4). That said, China has now established itself as a construction player in the region and will likely use its position to springboard its construction companies into other developing markets in the region, thanks to Serbia's prime geographic location in-between Turkey, the Balkans and the lucrative EU markets.

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Sector: Infrastructure
Geography: Serbia
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