Oil Unlocks Chinese Funds To Fuel Construction Recovery
BMI View : The resumption of the flow of oil between South Sudan and Sudan underpins ou r outlook for the construction industry in Sudan. Underlining this view is a US$700mn loan from China to Sudan to build a new international airport in Khartoum on the premise that oil will be used as part payment. Whilst there is a heightened risk that relations between South Sudan and Sudan may lead to oil flows being stopped once again, China's commitment to Sudan should see the project realised.
Chinese involvement in Sudan continues unabated , in spite of the international sanctions on Khartoum , with a US$700mn loan to fund the construction of a new international air port on the outskirts of Khartoum. In a five year loan agreement with the Chinese Export-Import Bank ( China Exim ) , which will be mainly paid for in oil, Khartoum will gain a 6.8mn annual passenger capacity airport which is expected to begin construction by the end of 2013 and take forty months to complete. The work will be carried out by China Harbour Engineering Company (CHEC) , which exemplifies the long noted trend for Chinese companies to be given preferential treatment when Chinese development loans are being used. In this instance though, 20% of the contracting companies and labour must be Sudanese which may be in part due to the rising anti-Chinese sentiment we are witnessing on a grass-roots level across Africa where China has built up a large presence through oil-for-loans agreements . The project will also include a hotel, conference centre and an 8,000 square metre shopping mall.
Demand for this planned airport is questionable. Airlines face a series of downside risks to flying into Sudan including restrictions on the repatriation of profits, laws requiring air tickets to be sold in local currency (which has fallen more than 100% against the dollar in the last two years) and a number of international sanctions. Indeed, in March Dutch carrier KLM ceased operations in the country. With much international attention now focussed on the development of South Sudan, much of the traffic previously flying into Sudan is now arriving at the newly finished Juba International Airport (also recently expanded by China).
The deal for this substantial loan has been on hold until oil began to flow again between South Sudan and Sudan. The resumption of oil flow s underpins our outlook for a recovery in growth in Sudan's construction industry real value. However, it will take many months before oil revenues - both for South Sudan, in terms of export receipts, and Sudan, in terms of pipeline royalties - reach significant levels, and it will take even longer for those revenues to find their way into infrastructure projects. As such we expect a real growth contraction of 22.2% in 2013. This rate will moderate in the coming years as oil revenues return and the industry will manage an average 2.6% real growth per annum between 2014 and 2017 - of which the new airport provides upside to .
|Oil Providing Construction Upside|
|Sudan Construction Industry Value|
There has been a recent uptick in tensions between South Sudan and Sudan and as such we highlight the significant risk to this project's timetable posed by the uncertain future over the two country's oil arrangement. Whilst BMI's Country Risk team's core view is that oil exports from South Sudan will continue to flow, they attribute a 40% chance to the situation worsening in the coming months and oil once again being shut off ( see, 'Renewed North-South Tensions Emerge' 8 July). Considering the huge dip in the revenue generated for Sudan as a result of the 2012 halt in oil exports, the country may struggle to meet its financial obligations to China Exim should there be a repeat.
|Theoretically Enough Oil To Pay|
|Sudan and South Sudan Oil Production (US$bn) and % Change Year-on-Year|
That said, China has been operating in Sudan for many years now and has been heavily exposed to all the risks that come with that. As such, even if tensions were to flare and oil were to stop flowing between the two countries, the long-term risk to the project as a whole is likely minimal as China's commitment to the country will remain. The likely outcome of a halt to oil production is that the airport will be delayed until Sudan can once again afford the repayments of the loan.