Infrastructure Sector Heading For Recovery

We currently forecast 1.3% real growth in Bulgaria's construction industry for 2014, representing a return to positive growth after five consecutive years of contraction. The industry's recession, which started in 2009 and saw the sector register a contraction of 17.9% in 2010, continued throughout 2013, with newly released official data reporting -1% real growth for the year. However, we believe that the worst is now over and expect that the transport infrastructure sector will perform well over 2014, mostly driven by road projects.

           

Transport Infrastructure Leading The Recovery

Turning The Corner
Construction Industry Value LHS And Real Growth RHS (2009-2019)

We currently forecast 1.3% real growth in Bulgaria's construction industry for 2014, representing a return to positive growth after five consecutive years of contraction. The industry's recession, which started in 2009 and saw the sector register a contraction of 17.9% in 2010, continued throughout 2013, with newly released official data reporting -1% real growth for the year. However, we believe that the worst is now over and expect that the transport infrastructure sector will perform well over 2014, mostly driven by road projects.

           

Turning The Corner
Construction Industry Value LHS And Real Growth RHS (2009-2019)

Transport Infrastructure Leading The Recovery

We forecast a return to positive growth in the construction industry in 2014, mainly driven by the transport sector, which accounts for over 35% of Bulgaria's total infrastructure industry value. Within the transport sector, road projects will lead the recovery over the medium term, as EU funds are set to flow into the country in an attempt to better integrate Bulgaria with the rest of Europe. For example, in March 2013 the European Commission (EC) loaned USD359.5mn for the Struma motorway project in southwest Bulgaria. With several other projects in the pipeline, including the government's plan to expand the highway network to 1,600km by 2020, we forecast average annual growth of 2.9% in the road sub-sector between 2014 and 2018.

Aligning with this trend, the municipality of Sofia and the European Investment Bank (EIB) signed a EUR50mn (USD68.97mn) loan agreement in October 2013 - to fund a transport infrastructure programme between 2013 and 2016. The project includes construction, reconstruction, expansion and rehabilitation works for 22 small road schemes in the capital, totalling around 56km. Tram tracks and catenaries will be modernised as well.

In terms of tangible progress within the transport sector, we note the completion of a number of important road projects. In Q3 2013, the fourth section of the Trakia highway was completed, connecting the capital Sofia with Burgas on the Black Sea coast. This 360km road had been under construction for 40 years. In addition, lot 1 of the Struma motorway and 8km of the Hemus highway were also completed in August 2013.

Mixed Outlook For The Energy Sector

We expect the energy and utilities sector to grow by 1.5% in 2014, supporting overall industry growth with the construction of oil and gas pipelines. Bulgaria has the potential to become a key transit country for Russian oil and gas heading for Europe. Although the renewables sector supported growth in 2011 and 2012, cuts to the country's Feed-in-Tariff programme in 2012 and a 20% fee on revenue from wind and solar power installations effective from 2014 have deterred further investment in the sector.

Bulgaria is involved in two rival gas pipeline projects: Russia's South Stream pipeline and the EU-backed Nabucco pipeline for which the environmental permit has been approved. As for the South Stream pipeline, Gazprom announced that it had begun construction on the Bulgarian stretch in October 2013, with progress having accelerated following the failure of Nabucco West pipeline to be chosen by the Shah Deniz consortium to deliver gas from Azerbaijan into Europe. The South Stream pipeline will be 2,380km long and it will transport natural gas produced in Russia through the Black Sea and into South and Central Europe. Total capacity upon completion of this USD19bn project is estimated at 63bn cubic meters. The Bulgarian section of the pipeline - which is to cost EUR3.5bn (USD4.8bn) - is expected to begin its first delivery in December 2015, though the Russian firm did not state the amount of gas South Stream would send to Bulgaria.

However, despite the favourable political outlook for South Stream to move forward we remain cautious on its actual completion. On the one hand, the route for the pipeline is still unclear and the project is yet to receive EU clearance to allow construction. With tensions between Moscow and Brussels high as in light of the Ukrainian crisis, Bulgaria's endorsement of South Stream could further complicate relations with its EU peers. Having said that, a consortium comprising Russian Stroytransgaz and Bulgarian Gazproekt Jug AD was awarded the design and construction of the 541km section of South Stream in Bulgaria in May 2014.

We highlight that the project continues to face opposition from the local communities which are concerned about noise and pollution to the environment in the underwater portion of the pipeline which crosses the Black Sea.

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Related sectors of this article: Infrastructure, trend analysis
Geography: Europe, Bulgaria, Europe
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