Energetic growth

27 February 2008

Growth by country

Growth by country

Construction markets in South America, as a whole, have decelerated in 2007 and are likely to slow further in 2008 and 2009. However, real average construction growth rates on the continent will be well above average over the next five years. Of the other markets in the world, only Asia will see better growth.

In fact, the slowing of the historic highs in 2006 reflects the secondary effects of a weaker US economy, rather than any fundamental economic problems in South America itself. A key consideration with this continent is commodity prices. Some moderation is likely here, but be it in oil or metals, prices are expected to remain high for the foreseeable future.

Infrastructure

Good infrastructure is a key element for any successful country. Efficient movement of goods and people is critical to economic success, while ineffective transportation, communications and other networks increase the cost of doing business and bring down competitiveness.

For South American construction as a whole to prosper in coming years, new infrastructure development is vital. But while South America will offer above average growth in infrastructure development over the forecast, stronger investment will be necessary for the region to truly prosper.

Global Insight expects that other developing regions – Asia, Eastern Europe and the Middle East – will all see better growth over the next five years. This is partly a function of financing as the Middle East's oil wealth, Western European subsidies to Eastern Europe and positive trade balances in Asia give these areas an investment advantage.

Global Insight segments infrastructure spending into energy related (pipelines, electricity etc.), transportation (roads, airports, ports, rail) and water and sewer work. As with most developing countries, water and sewer is a lower priority in the near term. In South America, the winner is energy for two reasons.

Energy infrastructure

First, the region is a major producer of petroleum products. Venezuela is the leader in this segment, and this is the driving force making it the overall infrastructure growth leader. Indeed, Venezuela is one of the global leaders in infrastructure spending measured as the share of GDP reinvested in such activity. However, Peru is also making major investments in pipelines and other energy facilities, making it the unlikely second best opportunity in the region.

Besides petroleum, the other driver of energy investment is electrical power. This is in short supply in most South American countries, including the largest economy, Brazil. In fact, scarcity of electric power has become a brake on economic development in Argentina and Chile.

In the near term, about 85% of energy investment is going into petroleum related activities, but in the longer run, this will shift toward electric power. Whether the region harnesses its hydroelectric capabilities or turns some of its gas or oil into electricity, power construction is absolutely critical to the region's continued development.

Transportation closely follows energy in growth, with most of the emphasis on road and rail. A prolonged period of strong demand for commodities has created the demand for bulk transport, with Peru's mining industry in particular apparently reaching its capacity constraint.

At the same time South America's manufacturing base has expanded and become more competitive, emphasising the need for better transportation. While the region is still susceptible to a downturn in the US, individual countries have also developed trading relationships with China, Russia and other nations such as Israel to help insulate them. As a result shipping logistics are more complicated and timeliness more important, adding impetus for both public and private investment.

Another positive impact from this is that the increased trading presence of the region has improved the climate for foreign direct investment (FDI), particularly from China, which has invested some of its trade surplus in the area.

Brazil

Brazil is a surprising laggard in infrastructure investment. The World Bank has found that Brazil's infrastructure compares well with other Latin American countries, but lags those of Asia. Brazil's transport sector is particularly bad, lagging even Latin American standards, although its telecom sector is much better than the regional standard.

As with other countries in the region, public spending on infrastructure has declined due to fiscal limitations. In the wake of the regional currency crisis several years ago, all governments have felt the need for fiscal discipline and the obligations of social programs have crowded out investment.

In some countries, such as Colombia and Chile, private investment in infrastructure, partially from foreign direct investment, has been sufficient to offset public declines. Venezuela has cash from its oil revenues to invest, but until Brazil lowers it cost of capital and/or increases the long–term concessions on projects such as roads, it will lag in private investment.

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