Mexico Infrastructure Report Q1 2009

Latest Developments In November 2008, the Communications and Transport Ministry said that three consortia had submitted qualified bids for a US$577mn suburban railway project in Mexico City. The railway is the first of three planned systems to be constructed for the Mexico City area. The winning bid will be awarded sometime in March and construction will begin in Q2 2009.

In December, the President of Mexico, Felipe Caldern, signed the 2007-2012 national water plan into action. The plan sets out clear targets and a strategy to improve access to water services in Mexico. The decree signed by Caldern implements the plan which will be separated into annual projects considered within the annual budget. Also that month, Conagua, the Mexican national water authority, approved a US$3.76bn project that would sanitize 100% of the wastewater produced in Mexico valley's urban areas.

Currently, only 60% of waste water in this region is being treated.

BMI is cautious about the prospects for Mexico's construction industry, on the back of the crisis in the US and the implications this has for real economic growth. Mexico's economy is closely tied to that of the US, despite recent protestations by the government that it is less vulnerable than it was during the US downturn of 2001. Moreover, in late September 2008, there were reports that planned spending on road infrastructure and power projects had been subject to delays year-to-date, owing to the government's reluctance to release funds. We estimate that real growth in the construction sector was close to zero in 2008 as a whole, at 0.7% y-o-y. We also expect a modest performance by the sector next year (with real growth of 1.4% y-o-y), as the escalation of the financial crisis in the US (and beyond) during September 2008 provoked a downward revision to our global economic growth forecasts. However, beyond 2009, we expect the global economic environment to improve, with stronger GDP growth in the US feeding through to the Mexican economy and government revenues. This should ensure a rebound in private construction and government investment in infrastructure spending. As such, we forecast that real growth in Mexico's construction sector will register an average of 3.7% y-o-y across our five-year 2008-2012 forecast period.

The risks to our infrastructure forecasts are to the downside, particularly for 2010 and 2011. Much depends upon how prolonged the global economic downturn is. A prolonged downturn may mean that the government has to reign in its spending on infrastructure projects, which would result in a double whammy to the industry and scupper our cautiously upbeat long-term overall outlook for construction.