Malaysia Infrastructure Report Q4 2009

Despite Malaysia faring particularly badly during the current global economic downturn, the recession has done little to dent the bottom lines of the country's key infrastructure companies, if results from the first quarter of the year are anything to go by. Indeed, Gamuda registered a profit of US$13mn in the three months to the end of April 2009, WCT Engineering posted a profit of US$19.5mn in the three months to the end of March 2009, and IJM Corp posted a profit of US$113.2mn in the 12 months to the end of March 2009. Geographic and sector diversification have helped to underpin these companies' performances. Going forward, the bounce in oil prices in the first half of 2009 should underpin workflow from the Middle East, a key arena of operations.

Much has been made by the local press - and financial markets, with construction firms surging in value in the first half of 2009 - of Malaysia's fiscal stimulus plans. However, we remain dubious about the impact of these spending plans, particularly for the current calendar year. Prime Minister Najib Razak announced on June 16 that in the six and a half months since the first fiscal stimulus package was first announced in November 2008, only MYR4.0bn (US$1.1bn) of the planned MYR7.0bn in additional spending has been offered to successful contractors, and as of June 5, only MYR1.4bn has actually been spent. Moreover, although the government announced a second fiscal stimulus package to the tune of MYR60bn - equivalent to approximately 9% of GDP - as of March, only MYR10bn of this is slated to be spent this year. While MYR4.2bn of this has already been allocated, only MYR1.2bn has been spent. The fiscal stimulus measures should have a more pronounced impact on the economy, particularly the construction sector, in 2010, but even then, fiscal constraints generate concern about the government's ability to carry forward its spending plans fully.

Meanwhile, the economy remains mired in recession, with GDP growth in the first quarter of 2009 registering a contraction of 6.2% y-o-y in real terms. For the full calendar year, we anticipate that the economy will contract by 3.4% in real terms. With all this in mind, we now predict that Malaysia's construction sector will contract by 4.29% in real terms in 2009, and 1.21% in 2010. Furthermore, 2011 is likely to witness near zero real growth in sector output. These forecasts represent a significant negative revision from the first quarter of the year, when we had been predicting that the construction sector would contract by a relatively modest 1.4% in 2009 before returning to real growth of 2.1% in 2010.