South Korea Infrastructure Report Q2 2009

South Korea's construction industry has been hit by the global economic downturn, with the impact already highly visible on the sector. In BMI's Q209 South Korea Infrastructure report we are forecasting a contraction of 24% year-on-year (y-o-y) for South Korea's construction industry in 2009.

In the Q209 report we have compiled a brand new data set, including new historical data and five-year forecasts from 2009 to 2013. In addition, we have new indicators for the electricity, gas and water industry value. For 2009, we expect this industry's value to contract by 3.5% y-o-y, down from growth of 4.9% recorded in 2008. The report also includes BMI's new Project Finance Ratings. The ratings provide a globally-comparative, numerically-based assessment of the risks facing major infrastructure projects, which will in turn affect the source, availability and cost of finance. South Korea ranks 8th out of 14 countries assessed in Asia, with a score of 60.47.

During the first quarter of 2009 South Korea released real data for the construction industry for 2008. The data shows a contraction of 2% in the industry, with the real value of the industry in Q408 falling to KRW15,297bn (US$11bn) compared to KRW16,054bn (US$11.5bn) for the same quarter in 2007.

According to the latest available breakdown data (Q308), all three sub-sectors - civil, residential and commercial - contracted in Q308 compared to Q307. The most pronounced decline was in South Korea's struggling residential sector; the smallest decline was in the civil engineering sector, which can likely be attributed to the government's infrastructure investments.

The fourth quarter of 2008 and the first of 2009 have seen the government announce a number of investment commitments across the sectors for infrastructure development. These commitments all form part of South Korea's stimulus package and will hopefully provide jobs. In the energy sector, the government announced an investment of US$28.5bn to 2022 to boost generating capacity. South Korea is potentially facing a shortfall in electricity supply from 2010 onwards; therefore the investments are much needed. The amount includes the construction of 12 nuclear power plants, eight of which are already underway. In addition, US$80bn has been allocated to renewable energy infrastructure. As a result of these two commitments, we are expecting to see sustained activity in the power sector.

In the transport sector, the government announced US$1.7bn for the rail sector in 2009 and US$1.2bn for the road sector to 2014. The biggest project in the transport sector however, is the Gyeongin (Seoul- Incheon) Canal, which is due to start construction in March 2009 In the construction industry, the residential sector has been hit hard. The property market is suffering from low demand due to a contraction in private consumption, which is resulting in a number of unsold houses and therefore a reduction in the construction of new ones. The contraction in the economy is also quelling demand for commercial construction projects.

BMI is forecasting a recession in South Korea during 2009, with a contraction in the economy of 3.3%.

This is feeding into our negative growth forecasts for the construction industry. The recession can be attributed to a sharp drop in exports, upon which South Korea's economy is largely reliant, and a decline in private consumption. The government stimulus package, which includes increased spending on infrastructure, is hoped to cushion this, and therefore represents an upside risk to our 2009 construction industry forecasts.