South Africa Infrastructure Report Q4 2009

In BMI's Q409 South Africa Infrastructure Report we have revised upwards our forecast for South Africa's construction industry value and real growth in 2009. We are now forecasting a real growth rate of 12.77% for the year to reach a value of ZAR76.23bn (US$9.02bn). The reason for the significant upward forecast is data released by Statistics South Africa for real construction industry growth comparing H109 with H108. In our Q309 report we noted that if we saw continued double-digit growth when the Q209 data were released, we would revise our forecasts up. In Q109 real growth was 12.4% yo- y and in Q209 it increased to 13.2% y-o-y.

This level of construction activity is almost unmatched globally, where the majority of industries are contracting or experiencing far reduced growth. Although South Africa's growth will be down on 2008 (13.9% y-o-y), it will still post very enviable double-digit growth in 2009. The driving force behind this activity is the country's preparations for the 2010 Football World Cup, which is seeing the construction of stadia, hotels and tourist facilities, and also vast investment into transport infrastructure, with new airports and railways under construction. Transport infrastructure is also getting a boost from Transnet's ZAR80bn (US$10bn) five-year investment plan, which is seeing upgrades to ports and freight rail lines.

Another driving force is the construction of large-scale power plants by Eksom, to make up for years of underinvestment, which culminated in a power crisis in 2008. Although Eskom has had to scale back its investment plans, with Business Day reporting that US$6.8bn worth of projects were on hold as of August 2009, priority projects are going ahead. This includes the Medupi and Kusile power plants, which will each have a 4,800MW capacity once completed. According to Eskom, the two projects will contribute 0.34% each to South Africa's GDP growth per year and combined will provide employment for 5,200 people, highlighting the scale of the projects.

Despite this, the country's economic situation is strained, with the country having entered into recession for the first time since 1992 due to declining mining and manufacturing activity as a result of diminished global demand. BMI is forecasting a 1.9% contraction in real GDP for 2009. At the same time the political situation in South Africa is still unsettled following the election of Jacob Zuma as president in April 2009. Strikes have peppered the summer months in the country, threatening work on construction projects for the world cup and the running of infrastructure such as electricity and railways. All of these elements present a downside risk to our forecasts.