Brazil Infrastructure Report Q3 2009

Despite the government's continued commitment to supporting the development of Brazil's infrastructure, the country will be hit hard by the impact of the credit crunch on private investors. As a result of this and other downside risks we have revised down our forecasts for Brazil's construction industry and in BMI's Q309 Brazil Infrastructure Report we are forecasting a 6.2% contraction in the construction industry value for 2009, to reach BRL130.9bn (US$52.75bn).

Despite fears over project financing, a number of projects have been announced and are progressing in the country. In the transport sector the biggest news was the increased cost of the high-speed rail line planned to connect Sao Paulo and Rio de Janeiro. Initial estimates had put the figure at US$11bn, but a feasibility study by UK-based Halcrow suggested that it would cost at least US$15bn and could reach US$20bn.

Despite cost fears, a number of international players are positioning themselves to take part in the bidding, which starts in June 2009. A number of road concessions have been awarded with Portuguese Mota-Engil's joint venture company Ascendi awarded a US$1bn concession for the Marechal Rondon Leste highway.

Ports have been a major focus of transport infrastructure development over the last quarter. China has reportedly stepped up as financier for a number of port projects, which it uses to export iron ore from Brazil. The Brazilian government is supporting a number of port projects and the private sector is also investing following the opening up of the sector.

In the utilities sector investments have been ongoing in both generating capacity and transmission lines.

Aneel has continued successfully auctioning off a number of transmission-line concessions and the large hydropower projects currently being developed, e.g. the 11.2GW Belo Monte and the Jirau Hydropower project have been progressing well, with bidding under way for the former and the environmental permit approved for the latter.

Despite the ongoing activity we have revised down our forecasts as the risks we had maintained to the downside for some time have shown no sign of easing. Falling private sector investment due to difficulties in financing projects and risk aversion in the markets in general has been a key factor. In addition, the declining macroeconomic climate (real GDP contraction of 0.6% forecast in 2009), due to falling demand for Brazil's key revenue source (exports), will impact demand for construction. The issue of accessing credit has been a key catalyst in our revision. BMI's country risk analysts are forecasting sharp decline for real capital investment growth in 2009 (-15.56% y-o-y) linked directly to this issue, which indicates reduced infrastructure investment and therefore has fed into our forecasts for the construction industry.