Reconstruction Underway In Worsening Conditions
BMI View: Optimism engendered by the announcement of numerous construction projects in the Karbala and Baghdad regions of Iraq is being tempered by the worsening outlook for the US$7bn Besmaya mega-project in the face of a decline in the political environment. As such, our outlook for Iraq's construction industry as a whole remains below consensus. We forecast a significant drop in construction industry real growth for 2012 - from 65% y-o-y growth in 2010 to 6.4% y-o-y for 2012.
In a development that bodes well for reconstruction efforts, Karbala Council recently announced that they had contracted over the first major residential project in al-Hindiya district, Eastern Karbala, tendering a 500 unit build to a local firm at a cost of US$53mn. Indeed, we are observing an incremental increase in the amount of construction activity occurring within Karbala, one of the most important Shi'te cities in Iraq which, as a result, has been a prime target of Sunni radical Islamists over the past years. Due to decades of underinvestment and recovering from the depredations of warfare, the province possesses significant scope for infrastructure investors.
As we have long highlighted, Iraq's construction sector is proving an attractive market for Turkish, Emirati and South Korean firms. Vehbi Orakç?, a former mayor of Istanbul's Beylikdüzü district who has launched a return to the construction industry since his five-year prison term for corruption, has been awarded a $150mn project which will include the construction of 1,260 villas, roads and cultural centres over 660,000m 2 section of Karbala. In August, Orakç?'s firm announced that they were to construct an even larger 6,500, US$6bn housing project in Baghdad.
Both an uptick in regional demand and an increase in the pace of reconstruction are highlighted by June's opening of a new US$14 million passenger terminal at Karbala airport. The build will cater to increasing numbers of pilgrims flying from Syria, Iran, Northern Iraq and Saudi Arabia - in January, over 16mn pilgrims flocked to the city to mark the festival of Arbain. Karbala will also benefit from the construction of the Mid-Euphrates Airport which The Karbala Investment Commission (KIC) has recently put to tender.
The construction industry will also gain from a slow improvement in domestic infrastructure and transport links. Since 2011, the regional government has pushed on with the construction of a modern road network. The Ya Houssein road, which cost the Iraqi Council of Representatives an estimated US$42.8mn, is part of a raft of measures that are lowering transaction costs within Southern Iraq by linking the roads that connect Karbala to the economic hubs of Baghdad, Babel and Najaf Provinces. Furthermore, in January a new railway line was inaugurated between Karbala and Musayyib, and the KIC invited bids for a US$450mn monorail project which, if successful, will also link the region to Baghdad and Babel.
|Below Consensus View|
|Iraq - BMI's Construction Industry Forecast|
Sectarianism To Dictate Project Implementation
However, despite the positive regional developments, a number of factors are leading us to assume a more bearish stance on Iraq's construction industry. Although we expect the Iraqi government's budget to remain firmly in the black - coming in at 9.4% and 7.6% of GDP in 2012 and 2013, respectively - we forecast that forthcoming budgetary provisions will take on a populist bent, with an increase in sectarianism within parliament likely to lead to significant project delays or cancellations ( see BMI 's online service. 15 August, Political Paralysis Slowing Investment Spending). Such developments lead us to believe that future investment in construction may be uneven, benefitting some provinces to the detriment of others, as sectarian cleavages widen.
As such, uncertainty and an inconsistent allocation of investment may dissuade investors in the medium term. Further degradation within the investment climate may hamper the National Investment Commission's goal of attracting $100bn in FDI for infrastructure projects. The energy sector has been a particular loser in this respect and investment flows remain lower than desired. Aside from impacting upon Iraq's overall development, the continuation of power shortages will add to the cost of construction across the board, weighing on Iraq's industry growth outlook.
Inefficiencies in the energy sector will also work to inflate the price of cement. As reconstruction has picked up a gear, building material prices have begun to climb. The cost of cement, a commodity reliant on a constant and secure supply of electricity, has recently increased dramatically as domestic output struggles to match demand.
Indeed, the risks outlined above continue to threaten works on the ground. Concerns are rising that US$7bn Besmaya housing mega-project - slated to be constructed by South Korean firm Hanwah Engineering & Construction Corp - will prove to be a white elephant. According to All Iraq News, an MP and member of Iraq's Economic Committee recently described the build as 'failed.' Further details are, as yet, unavailable, but we highlight that the risks associated with such mega builds have long been factored into our forecast.
The problems facing project completion in Iraq are reflected in BMI's Risk/Rewards Ratings. The country scores 32.5 out of 100 for industry risks, far below the regional average of 57, due to a lack of transparency in the tendering of projects. This was illustrated dramatically in August 2011, when power plant contracts signed in haste and without due diligence fell apart when it was revealed the companies did not exist. This led to the dismissal of the electricity minister and the filing of lawsuits. The news illustrates a deep-rooted weakness in tendering contracts and reflects Iraq's low score for this section.
As such, we reiterate that our long-held optimistic outlook for Iraq's construction sector is taking a hit from the country's political turmoil. We have revised down our 2012 growth outlook (to 6.4%) and maintain a below-trend forecast for 2013 (at 7.5%). Given the historic high double-digit growth rate, this is a notable slowdown and has been largely precipitated by concerns over the government's ability to generate oil revenues and procure infrastructure projects.