Construction sector seen to slump by 10%
The Philippine economy is unlikely to get the much-hoped for boost from infrastructure projects this year, as the construction sector is seen to shrink by up to 9.8% amid the pandemic, according to Fitch Solutions Country Risk & Industry Research.
In its Aug. 12 commentary, Fitch Solutions said it slashed its forecast for the Philippine construction sector to -9.8% year on year, from the previous projection of 2.9% growth, following the grim second-quarter economic data and rising number of coronavirus infections.
In the second quarter, gross domestic product (GDP) contracted by 16.5%, with the construction sector declining by 33.5% year on year. Luzon was placed under an enhanced community quarantine during most of the period, resulting in many construction projects being halted.
“We have turned bearish on the growth of the Philippines’ construction sector in 2020,” Fitch Solutions said.
For next year, Fitch Solutions raised its growth forecast for the industry to 9.5% on expectations that the country will contain the spread of the virus and normal construction activity will resume.
While the government is hoping infrastructure projects will drive economic growth, Fitch Solutions said the impact will only be felt in 2021 as it still needs to address “administrative hurdles” such as finishing feasibility studies, addressing right-of-way issues, and securing local permits.
This year, the pandemic’s impact will be seen in both the infrastructure and building construction sectors. Fitch Solutions slashed its 2020 forecasts for these sub-sectors to -7.8% and -10.6%, respectively.
“The infrastructure sector, often seen as an important engine of growth, is expected to take a backseat throughout the rest of 2020… Our forecasts are mainly underpinned by the belief the government will face increasingly tighter financial constraints as the pandemic drags on,” it said.
The think tank said reduced government infrastructure spending may delay some projects. Economic managers have cut anew this year’s infrastructure program to P785.5 billion, which accounts for 4.2% of gross domestic product (GDP).
“Although the financial contribution from the government towards ‘Build, Build, Build’ infrastructure projects do not account for a substantial portion of total project pipeline value, it nevertheless remains imperative to the development of projects given that strong government spending usually sends a positive signal to the rest of the sector, which could spur private investments,” Fitch Solutions said.
State spending on infrastructure declined 12.2% to P235 billion in five months to May.
Fitch Solutions said projects funded through the public-private partnerships (PPP) will also take a hit, noting arranging deals may be challenging this year.
“A potential upside risk, the progress of PPP transactions is the government’s proposal to lengthen the term of projects to increase financial viability, mentioned by Presidential Adviser for Flagship Programs Vivencio Dizon in late July 2020. The government is also exploring the possibility to defer the collection of its share of revenues until the normalization of project operations,” it said.
Fitch Solutions said the buildings construction faces a deeper slump as investments in housing, industrial and commercial sectors decline.
“In the residential sector, we expect the fall in income levels to reduce demand for housing and renovation, leading to a decline in housing construction activity. In the commercial and industrial sector, lower expected construction activity is expected to be caused by a reduction in capex in light of the economic uncertainty,” it said.
The think tank said downside risks to their 2020 and 2021 growth forecasts persist as it remains unknown on how long the pandemic will last.
“We have earlier alluded to the effects of a prolonged pandemic on the construction sector, and we continue to highlight the possibility of further cuts to the government’s infrastructure budget and reduced PPP activity in 2020 that would exacerbate the slowdown in the infrastructure construction sector,” Fitch Solutions added.
However, Charlie A. V. Gorayeb, the chairman of the Chamber of Real Estate and Builders’ Association (CREBA) in the Philippines, expects the construction sector to be resilient.
“We don’t see the construction section declining, especially in the real estate industry, considering the size of the market and need of the housing sector,” Mr. Gorayeb said, noting that there is currently a backlog of 6.7 million housing units.
“It may undergo a slight adjustment in the interim but not as huge decline as in the other sector of the economy,” he added.