A Strong Market
Published by Lucy Stewardson,
Asia’s manufacturing landscape is undergoing important changes, with both regional and global implications. As China aims to move its value-added chain away from heavy industry (partly by necessity because rising incomes and labour costs have eroded its competitiveness in low-cost industries) the country will compete more directly with current trading partners within the region for investment and market share. While this presents a risk for countries such as Korea, Japan, Malaysia, and Singapore, given the increasing competition, new opportunities are arising for lower-cost countries, such as the smaller South and Southeast Asian economies of Vietnam and Cambodia, as well as the populous economies of Indonesia and India. These countries have the potential to benefit not only from improved market share as China exits some low-end industries, but also from increased investment and outsourcing from the very countries now more directly threatened by Chinese competition. There is compelling evidence that this phenomenon is already taking place, with countries such as Korea and Japan sharply boosting investments into ASEAN in recent years and repeated strong performances by Vietnam’s manufacturing sector since 2015.
Southeast Asia started 2018 on solid footing, but headwinds have been rising. The greatest area of concern for the regional economy is the impact of trade tensions between the US and China, because the situation remains fluid and most of the region has significant trade ties with China. In turn, the trade tensions are exacerbating the impact of the US Federal Reserve Bank’s expected implementation of extraordinary stimulus measures on capital flows. This is causing the region’s central banks to commence their own tightening cycles. The US-China trade tensions will extend to the rest of Asia (particularly Southeast and East Asia), affecting supply chain relationships for manufactured goods and constraining commodities prices and export volumes. A healthy outlook for advanced economies may partially mitigate the negative impact of the tariffs on broader Asia, although it will take some time to accomplish the necessary shifting of supply chains.
Construction data is not available from government agencies for some countries in the region. Accordingly, a first pass at relative opportunity needs to occur at a higher level of activity: gross domestic product (GDP). Figure 1 indicates the differing rates of growth across the region. For each country, historical and forecast estimates of real (inflation adjusted) GDP growth are stacked by year from 2015 through to 2021. Apart from Singapore, every country in the region will outpace global GDP growth of 2.9% to 3% over the forecast period. The rapidly developing economies of Cambodia, Laos, and Myanmar lead the region.
Expansion of the productive capacity of its mining and energy sectors will drive growth in the Laotian economy for the medium to long term, with GDP growth close to 7%. Chinese investment in Laos has driven the construction sector in recent years, particularly for power, water, and real estate. China’s Belt and Road initiative has been central to the country positioning itself as a vital hub for neighbouring countries. Crucial to these hopes is a 260 mile, US$5 billion rail line that Beijing is seeking to extend through Laos to Thailand. The completion of the rail line will connect landlocked Laos to China’s extensive rail network, which will bring tourism and property investment. The Nam Theun II power plant, the largest hydropower plant in operation to date, will see revenues expand to US$150 million, as much of its output is exported to energy-constrained neighbours – primarily Thailand and Vietnam.
Myanmar’s real GDP growth is projected to average 7.2% in the medium term. Foreign investment will be key, owing to strong demand for Myanmar’s oil and gas resources, although there is likely to be growing interest in non-commodity sectors, such as manufacturing and communications. With only around 20 000 housing units coming to the market annually, demand vastly exceeds capacity. Approved foreign direct investment (FDI) in real-estate activities reached US$1.1 billion in 2017/18, an increase of 21% over the 10% growth of the previous year, according to World Bank data. Demand for existing office and retail space in modern shopping centres in major cities is rising, but new projects face slower growth in demand for pre-sales, and there are concerns about potential excess capacity, particularly for apartments. There is anecdotal evidence that private investors are holding back investment in high-rise building projects, shifting instead towards small and affordable housing projects.
While Cambodia remains one of the poorest countries in Asia (with per capita income just over US$1000), a favourable geographical location, the development of domestic power and energy resources, tourism potential, and a favourable wage and demographic profile suggest that Cambodia will attract considerable FDI inflows in the coming decade. This will facilitate rapid economic expansion of close to 7% per year until 2020. The discovery of offshore oil reserves also represents a significant upside potential for medium- and longer-term growth. The potential for light manufacturing to relocate out of China into lower-cost economies in the region should offer Cambodia scope to attract FDI beyond garments and footwear. The cost of doing business remains high, owing to inadequate transportation links, elevated energy costs, and non-transparent and onerous government procedures. Deepening financial intermediation is a very important priority for Cambodia’s policymakers. At the moment, most large-scale investment projects are financed externally, since the domestic financial sector lacks the resources to support such activities. As the economy continues to grow, meeting rising financing demand domestically will become increasingly important.
The Philippines and Vietnam
The remaining Southeast Asian countries have strong construction forecasts, with the exception of Singapore. Figure 2 displays the construction outlook for the coming year (line), as well as the medium term (bar, five year compound annual growth) by country and major structure type.
The strongest real construction growth for 2019 will come from the Philippines and Vietnam, both at 6.5%. Over the medium term, those remain the leaders, with Vietnam accelerating to 6.7% and the Philippines falling back slightly to 6.2%. Singapore trails with 1.3% real growth for 2019 and 1.2% growth over the medium term.
Residential construction and infrastructure
Residential construction growth is the most diverse across the region. Singapore struggles with a high cost of housing, a slowing economy, and weak population growth; and residential construction is likely to contract modestly. At the other end of the spectrum, Vietnam not only enjoys strong population growth and a growing economy, but also rising real incomes that suggest increasing quality of housing, as well as volume. Notably, Vietnam is also seeing demand from foreign buyers in China, Hong Kong, and South Korea, which provides the additional impetus to push real growth to about 7.5%.
Infrastructure is the leading segment for most economies, particularly for transportation and power. In Singapore, this represents airport and seaport expansion, as well as improved road links. For most countries, infrastructure funding relies on FDI, with China being a leading financier in the region. There has been increasing resistance in several countries, notably Indonesia and Malaysia, to the increased influence China exerts, demanding preferential treatment in return for its financing, as well as the strains that it puts on national debt. At a minimum, the new government in Malaysia will seek to renegotiate projects such as the US$15 billion East Coast Rail Link, and some future projects across the region may be scaled back or cancelled.
Thailand offers the strongest infrastructure outlook for the region, although it is not without risk. Thailand set up the Thailand Future Fund in September and plans to set up a second in early 2019, with combined assets of nearly US$3 billion. These are intended to be domestic funds that do not add to foreign debt. The government has announced an infrastructure plan worth $25.2 billion, largely focused on road and rail, but also including air and sea ports. Key components will be a US$7.2 billion high speed rail link between national airports and another cross-border line to connect to China. Infrastructure has the potential to create a booming construction economy, but the history of political turmoil in Thailand needs to be kept in mind.
Non-residential construction also has a strong outlook; indeed, it offers the best opportunities in Malaysia and the Philippines. The relatively low cost of labour in several countries has created export markets for manufactured goods that demand the construction of new industrial facilities. Indeed, Thailand has a stronger outlook for industrial facilities than its traditional demand for commercial structures, such as hotels. The Philippines has become an outsourcing and support centre for financial and high technology companies, and office construction is the leading component. Increasing real disposable income is creating stronger retail construction opportunities in Malaysia and Indonesia. Indeed, the region as a whole is working to reduce its reliance on cyclical export markets in Europe and North America by improving domestic demand conditions.
Taken together, Southeast Asian construction spending offers one of the strongest construction markets in the world. The region’s rapid economic development suggests especially strong opportunities for non-residential structures and infrastructure. The risk to the forecast is any expansion of the US-China trade impasse and the increasing public debt positions of some countries, particularly with potential interest rate increases in the offing.
About the authors
Scott Hazelton is the Managing Director of the IHS Construction and Manufacturing Industries practice. He developed and is responsible for the quarterly Global Construction Outlook, as well as the US Construction Quarterly Briefing and the US Construction: State and Metropolitan Focus forecasts and commentary. He has also developed specific forecasting models for US renovation and infrastructure markets. He frequently provides outlooks to the executive leadership of construction and manufacturing oriented clients and has presented to the Engineering and Construction Industry Global Leadership of the World Economic Forum.
Hossam Abougabal is a Senior Research Analyst for IHS Markit’s Global Construction Outlook service. He was previously a construction reporter and analyst at the Middle East Economic Digest, with a particular focus on emerging markets. Fluent in English and Arabic, Abougabal holds both an undergraduate degree in politics and international relations, and a masters in international law from the University of Surrey.
Read the article online at: https://www.worldcement.com/asia-pacific-rim/31012019/a-strong-market/
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