Transport concessions and an established international footprint will help insulate the construction sector in Europe, the Middle East and Africa (EMEA) 2012, but the overall outlook remains weak, according to Fitch Ratings.
In its 2012 Outlook: EMEA Construction report, the rating agency said diversification was central to the construction market's stability in the region over the next year as it battles headwinds including the Eurozone sovereign debt crisis and constrained infrastructure budgets.
"A decline in project tenders across EMEA will increase competitive pressures. Balancing this risk/reward conundrum in an increasingly thin margin business will be a key challenge for management in 2012," the report stated.
But the sector's diversification into transport concessions will provide resilience next year, according to Fitch, as such contracts provide increased cash flow and ultimately a more stable business model.
The report also forecast increased international diversification for 2012, driven by depressed domestic European markets.
"Penetrating emerging markets by EMEA contractors is likely to be accessed on a joint venture basis rather than through cross boarder acquisitions," Fitch added.
Long term austerity
However, the long term austerity outlook for EMEA leaves supply and demand dynamics "looking increasing weak", according to the report, which said a robust recovery was not on the cards.
Countries with an extreme negative outlook are Spain, Portugal and Ireland, while the UK market is forecast to contract over 2012 and 2013, although not as much as other fiscally restrained countries.
The Nordic countries, Poland and, to a lesser extent, Germany and France, should hold up with flat to low single digit growth at best into 2012 and 2013, according to Fitch. It said it expected the private sector construction segment to recover more robustly in these countries.
Meanwhile, Fitch said the construction sector in the Middle East and North Africa (MENA) would continue to be supported by infrastructure spending plans in Saudi Arabia, Qatar and Abu Dhabi. But the Dubai construction market will "remain fragile" in the medium term, and contractors with exposure to Libyan operations are also less well positioned.
Like those in Europe, contractors operating in MENA are also forecast to experience increasing pressure from lower margins in 2012 and beyond.