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BMI View: We expect growth to decline sharply in 2013 and to continue to deteriorate over our forecast
period. Our 5% construction industry real growth forecast for 2013 is partly due to base effects from
exceptionally strong growth in 2012 (estimated at 15.8%), but is also due to the continuation of economic
and policy mismanagement represented by the re-election of Hugo Chavez. Consequently, we believe the
government will struggle to finance high value projects such as the social housing programme, new
railways and revitalising the ports and electricity sectors. Consequently, we expect growth to average just
1.3% between 2014 and 2021.
Despite strong growth in 2012, and a number of infrastructure projects promised by the government, as
well as a continuation of the housing construction programme, which drove activity in 2012, we do not
expect strong growth to be repeated in 2013. Indeed, factoring in base effects, high inflation, slowdown in
production growth in oil, and waning momentum to pursue a social agenda following the election, we
believe 2013 will be the start of a steep deceleration in growth. While there are a number of projects
which, if progressed, would present upside potential, we believe the fundamental weakness will be
Fundamental Weaknesses Underlining Pessimism:
?? The re-election of Huge Chavez for his third six-year term implies a continuation of economic
mismanagement policies, which have been detrimental to the economy and business
environment. Arbitrary decision making, anti-market policies and under investment in favour of
populist spending has preventing investment in infrastructure over the past decade, and we
expect continuation of the same over Chavez's next term.
?? Rising oil production will do little to help the government fund investment programmes as much
of its future oil production has been sold to China, with fund diverted to the social spending
agenda enacted over 2012. Consequently, even though oil prices will remain elevated over the
near term, and production is expected to increase, the government's fiscal position will not
improve by the same level.
?? High inflation is eroding real growth and we expect this to be exacerbated over the short term.
Our country risk team is anticipating currency devaluation in Q113, which will place greater
upside pressure on the cost of imported building materials. We are factoring in inflation above
20% until 2016, which is driving our low real growth outlook over the period.
Projects moving forward present upside potential:
?? Estimated 15.8% real growth in 2012 was predominantly driven by government construction of
housing under the Great Housing Mission (GMVV). The programme, launched in May 2011,
hoped to build 350,000 houses in its first 18 months and eventually three million houses by
2019, and was implemented vigorously ahead of elections. As of September 2012, a total of
243,990 houses had been built since the launch of the mission, reaching 70% of the 18 month
target. However, we do not expect this pace of homebuilding to continue into the next 18
months. Despite Chavez approving a further US$5bn for the programme for the 2013-14 period,
the momentum prior to the election is likely to have dissipated and consequently we expect its
contribution to headline growth to decline rapidly in 2013 and 2014.
?? The government's Railway Development Plan is seeing billions of dollars invested into new
railway projects. The largest is the US$7.5bn project being built by China Railway
Engineering. The 468km rail line linking Anaco, in Anzoategui and Tinaco in Cojedes was 20
%complete as of September 2012. Also under construction is the EUR3.3bn Puerto Cabello - La
Encrucijada railway line, which was 67% complete as of September 2012. The railway is being
built by Impregilo and Ghella, and is due to be completed in 2014. The consortium is also
building two new lines between the cities of San Juan de Los Morros and San Fernando de
Apure, and the cities of Chaguaramas and Cabruta.
?? The government is reportedly investing US$6bn to addressing Venezuela's practically defunct
electricity sector. The largest project under construction is the US$6.6bn Tocoma hydropower
project (also known as Manuel Piar), which will have a capacity of 2,160MW.