Tigers roar again?
20 March 2008
It is just less than 10 years since the tiger economies of on Asia's Pacific crashed following a series of sharp currency depreciations. Indonesia, Malaysia, South Korea and Thailand were the worst affected, but the impact was felt throughout the region, and the crisis heralded the end of a 10-year period of remarkable economic growth.
The following few years were tough, and nowhere was this felt more acutely in the construction sector. Data from the Asian Development Bank (ADB) shows that the construction markets in the nine or so countries that were regarded as the ‘tigers’ of the 1990s – Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Th ailandd and Vietnam – were growing by a staggering +15% to +30% per year in the decade running up to the 1997 crisis.
Even at the time, it was realised that such growth was unsustainable, but that did not make the crash any easier to deal with when it came. Total construction output in these countries had grown from less than US$ 20 billion per year in the mid-1980s to more than US$ 110 billion in 1997, but three punishing years from 1998 to 2000 saw the market contract by almost -20% to US$ 90 billion.
The recovery in the early part of this decade was slow initially, but by 2004 the construction market was back to around its 1997 levels, and iC estimates construction output in the nine former tiger economies will be about US$ 135 billion this year. This figure of course excludes the two other major construction markets in the region, Japan and China, which are worth about US$ 550 billion and US$ 450 billion respectively, and which are largely outside the scope of this report.
But although the south-east Asian construction markets have recovered over the last few years, they are not as big in terms of the whole regional economy as they were back in the 1990s.
In 1997 construction in the Asia-Pacific region accounted for almost 8% of GDP. This is an average across the nine countries, and the one market that particularly stood out in 1997 was South Korea, where construction accounted for 11% of economic activity. In contrast Hong Kong's construction market was just 5.2% of GDP, and in other, much poorer countries in the region such as Laos and Cambodia, the industry was tiny at just 3.5% to 4.5% of GDP.
Following the 1997 crisis the wider regional economy picked up much faster than the construction market, and as a result construction's share of GDP is much smaller today than it was 10 years ago. iC estimates, based on ADB figures, that this year it is worth about US$ 20 billion per year – it is small given the size of the country.
The other major markets in the region are to be found in the smaller, but generally better developed countries such as Malaysia, Taiwan and Th ailandd.
The region also includes the city-state of Singapore, and China's semi-autonomous Hong Kong. In comparison to other countries in the region these are tiny, with populations of roughly 4 million and 7 million respectively.
However, they are by far and a way the most developed countries in the region, with GDP per capita of US$ 25000 and US$ 30000. To put it another way, the average person in Singapore is about 20 times richer than someone just across the water in Indonesia.
This high concentration of wealth means Hong Kong and Singapore have the two most focused construction markets in the region. Although they are relatively small – about US$ 5 billion per year each – they are well developed and will therefore tend to be less risky than other countries in the region.
But although Hong Kong and Singapore may offer a certain amount of stability, they offer relatively poor growth prospects for construction. According to ADB data, construction output in Singapore grew just +3% in 2005 (the last year for which full data was available) and the market in Hong Kong fell by -9%, very much against the growth trend in the rest of the region.
The most rapidly expanding construction markets in south-east Asia are to be found in the region's poorest countries. Most notable among these is Laos, where construction output grew a massive +37% in 2005, thanks largely to the various large hydro electric projects such as Nam Ngum and Nam Theun 2, which have begun construction over the last two years.
At +20% in 2005, construction growth has also been strong in neighbouring Cambodia and Vietnam. However, these three markets still remain very small and under developed – even taken together they add up to only about US$ 4 billion per year, the vast majority of which is Vietnam.
But if these growth rates can be maintained, the construction markets will develop and become more enticing. Already there are some interesting schemes being planned in Vietnam, most notably the proposed 1650 km high speed rail link between Hanoi and Ho Chi Minh, which is expected to cost US$ 33 billion at today's prices.
Another factor in Vietnam's favour is the efforts it is making to move from a communist state to a market economy, and as long as these stay on track, the country's construction market should become more appealing. The flip side of this is that political stagnation and events such as last September's coup in Th ailandd are very damaging to confidence.
Now that prosperity has returned to the region, Governments need to keep taking the steps necessary to make their economies robust and attractive. As long as that continues, the construction should keep benefiting. IC