Prospects for the construction sector are expected to be impacted by the slowdown in Government-related projects and the potential tightening of the property sector.
According to Hong Leong Investment Bank (HLIB), the imminent delays in the government-related projects were to address the fiscal deficit, the shrinking current account surplus and the implementation of the International Public Sector Accounting Standards (IPSAS).
“Despite the notion that government projects are the key drivers for the construction sector, projects have been largely coming from the private sector – namely for building developments.
“Hence, despite the ‘sexy’ appeal of mega infrastructure projects, private sector jobs have been the bread and butter of the construction sector. Nonetheless, any deferment in rollout of key projects would still affect investor sentiment,” said HLIB in a report in response to a Fiscal Policy Committee (FPC) statement yesterday.
On the property sector, HLIB said most of the private sector construction activities were related to property development projects.
“Building-related activities make up a chunk of the value of construction works done. Most construction companies have moved up the value chain into property development and the division has been a key area for earnings growth.
“Hence, in our view, a slowdown in the property segment would have a more pronounced effect on the construction sector, as it would hamper both job opportunities and also property profits,” it said.
On current account surplus, HLIB said it was difficult to quantify the imported content for construction projects, as it varied from types to specification requirements.
“Most of the imported contents are perishable items, monitoring and evaluation-related materials and works for instrumentation, control systems, process equipment, and signalling and communication scope. Hence, we see two key projects that have higher import content that may be impacted, namely, the RM60bil Refinery and Petrochemical Integrated Development project as well as the RM10bil 2,000MW coal power plant known as project 3B,” it said.
On the IPSAS, HLIB said the Government would be moving towards it by 2015. “Hence, it may reflect higher debt levels on the Government’s books, while off-balance sheet items would also be scrutinised. This would affect projects that involve government support loans and government guarantees. Highway projects would mostly be affected due to the risks and higher financing costs involved.
“In the case of highway privatisation, it may also be reconsidered.” said HILB, downgrading the sector to “neutral” from “overweight”.