Construction In Recovery, But Weak And Potentially Unsustainable
BMI View: The renewed demand for housing and the increase in trade activity has given us cause to believe that construction activity in Taiwan could see a short-term recovery despite our expectations of a deep economic slowdown in China, Taiwan's main trading partner , in 2013. We are forecasting construction real growth to be flat in 2012 (compared to the previous forecast of 1.2%) and to recover modestly to 4.9% in 2013 (previously 7.3%). Over the long-term, we are growing increasingly concerned about Taiwan's demographic profile and the lack of progress with achieving greater economic integration with China. Both factors could create a dour investment climate for construction, and we have revised down our long-term forecasts to reflect this outlook.
We believe the latest figures from the National Statistics Bureau have given some cause for near-term optimism in Taiwan's construction sector. Although real growth for the sector is in its fifth straight quarter of contraction - 0.1% year-on-year (y-o-y) in Q312 (July - September) - the rate of construction has slowed significantly from previous quarters. In fact, media reports on the ground suggest that construction companies were ramping up activity in Q312. According to a spokesman from the Housing Monthly (cited from the Taipei Times), new construction volumes were at its highest in eight years in September 2012, with developers and construction companies aiming to launch TWD290bn of new homes between September and October 2012. This a 55.5% increase from the same period in 2011.
|Taiwan Quarterly Construction Industry Value Data|
We believe that the construction sector could finally see growth in Q412 and that this recovery could last into early-2013. Besides greater residential building activity (brought on by renewed demand for housing), Taiwan's economic activity has picked up momentum in recent months due to greater trade activity with China, the US and the Eurozone ( see our online service, November 21 2012, 'Recovery In Place, But Not For Long'). Although this recovery is not expected to last due to our expectations of a slump in Chinese economic activity in 2013, this short-term increase in trade activity has the potential to boost activity in both the infrastructure and non-residential building sectors. It would not only increase the demand for transport links supporting the export sector (e.g. expansion of Taiwanese ports), but attract export-oriented businesses to carry out their capital expenditures plans such as the construction of new manufacturing facilities. For example, Taiwan's Council for Economic Planning and Development (CEPD) approved a TWD66bn expansion plan for the country's international ports in mid-August 2012. The programme will last for five years, and is aimed at boosting trans-shipment business from China's second-tier cities to Taiwanese ports.
In addition, the adverse sentiment surrounding nuclear generation since the Fukushima crisis has caused the Taiwanese government to revise its energy policy. It has scrapped plans to increase its nuclear generation capacity and is now looking to meet future electricity demand through thermal and renewable capacity. While we have seen little or no significant development in renewables generation in 2012, we have seen tangible attempts by the government to implement new large-scale thermal power plants, namely the Talin coal-fired power plant in southern Taiwan and the Lin Kou coal-fired power plant in northern Taiwan. This could also boost construction activity in Q412 and 2013.
Therefore, even though we have revised down our full-year 2012 forecasts to reflect the new Q312 data, we expect construction real growth to be flat in 2012 (compared to the previous forecast of 1.2%) and to recover modestly to 4.9% in 2013 (previously 7.3%).
|Taiwan - Construction Industry, Old And New Forecasts|
Uncertain China Connection
This quarter, we have decided to re-evaluate our long-term forecasts for Taiwan's construction sector over the next decade, with real growth for the sector revised down to average 4.0% per annum between 2013 and 2021 (previously 5.6%). In our past analysis on Taiwan's construction sector, we have often stressed the potential for greater cross-strait economic integration with China to drive construction and infrastructure activity ( see our online service, September 3 2012, 'Construction Sector: Still Lacklustre'). Although this view remains valid as we continue to expect Taiwan to remain increasingly reliant on China for trade and tourism over the coming years, we believe that this connection with China might not be as great a catalyst as we had previous expected.
|Taiwan - Monthly Visitor Arrivals, By Geography, '000 (LHS) And Total Trade Activity, By Geography, US$mn (RHS)|
Despite the improvement in Taiwan-China relations, investment flow between both countries has, for the most part, been a one-way street. While the Taiwanese government may have overtly expressed an intention to welcome greater Chinese investment, its actions suggest otherwise. Four rounds of regulatory reforms to free up trade and investments have failed to garner any material change in Chinese inflows, and while the pro-China policies may be in place, a slow and arduous approval process is currently hampering further progress ( see our online service, October 25 2012, 'Political Divide To Curb Cross-Strait Investment Impact'). To be sure, approved Chinese investments into Taiwan from beginning-2012 up till September amounted to a meager US$9.5mn, compared to the US$8.6bn of approved outbound investments into China (till October).
Furthermore, it remains to be seen if the Taiwanese government will be able to sustain its efforts in liberalising investment inflows with China over the coming years. While we may have begun to witness an easing in cross-strait investment, the ruling Kuomintang's liberalisation efforts face stiff resistance from both the opposition parties as well as the public. The public and private sectors continue to harbour protectionist inclinations, particularly towards China, and this is not only eroding the island's business environment, but also deterring other foreign investors from using Taiwan as a springboard into the mainland. This is reflected by the steady decline in foreign direct investment (FDI) received by Taiwan. FDI inflows into Taiwan are the lowest in Asia, with FDI into the construction sector amounting to just US$43.7mn in the first nine months of 2012.
|Taiwan - Foreign Direct Investment By Construction Industry, US$mn|
To compound the problem, Taiwan's worsening demographics picture is also likely to reduce the demands for infrastructure and building facilities, as well as reduce the government's ability to finance construction projects. According to the government's own estimates, Taiwan is slated to become a rapidly ageing society in the decades ahead. Not only is Taiwan's population expected to start its decline in 2025, but more than 14% of the population could be 65 years old and above starting from 2017, officially meeting the criteria for an ageing population. Both trends would see Taiwan's active population decline rapidly, prompting a slowdown in economic activity and forcing the government to increase welfare expenditure (an additional weight on the government's fiscal burden).
|Taiwan - Key Population Ratios|
All Infrastructure Affected
These concerns would have a major impact on the growth potential in the transport infrastructure sector and the energy and utilities (E&U) sector over the long-term. A decline in population growth and economic activity would mean a decline in the demand for electricity and intra-city transport services (such as urban rails), while a decline in foreign investment and trade activity would dampen the demand for cross-border transport links such as ports and airports.
|Transport The Long-Term Outperformer|
|Taiwan Transport, Energy and Utilities Infrastructure Industry Value Real Growth, % chg y-o-y|
This outlook is reflected in our forecasts. Real growth for the transport infrastructure sector is forecast to average 3.4% per annum between 2013 and 2021 (previously 4.9%), while real growth for the E&U sector is forecast to average 2.3% per annum over the same period (previously 3.4%). Our forecasts for transport infrastructure sector is relatively homogenous over the coming years, except in 2015, where we expect the launch of the Taoyuan International airport expansion project and several urban railway projects (such as the Kaohsiung and Taipei circular lines) to boost activity in the sector.