2021 World Construction Economic Outlook Part 2 Asia

At least in parts of Asia, the construction industry was severely disrupted by the COVID-19 pandemic in 2020, with a contraction of 8.5%. However, if the pandemic levels off this year, expect a sharp rise in work due to a growing middle-class population and housing and infrastructure investments.

Despite taking a hit due to the pandemic, the Asia Pacific region has pockets for potential growth in 2021. That potential for the construction industry depends on the region's commitment to tourism, infrastructure, and economic health.

As it has in other regions, the pandemic and the lockdowns and unemployment that ensued have taken their toll. Weak oil prices and real estate markets have become issues after years of economic expansion throughout much of Asia.

The World Bank predicted that Asia's economic activity would see a drop of 0.5% in 2020, the lowest rate since 1967, but that China's growth, which slowed to 1% in 2020, would pick up to 6.9% in 2021 as lockdowns end.

China continues to dominate the region in construction growth.

Economic activity throughout the rest of Asia, while contracting by 1.2% in 2020 with Malaysia, Thailand, and the Philippines taking the biggest hits, should see a rebound of about 5.4% growth in 2021.

Expect modest construction growth in Thailand this year, driven by more investment in the country's transportation infrastructure sector. The Thai government is working toward becoming a regional transportation hub.

The short term for the Philippines does not look robust. The COVID-19 pandemic hit hard here, and the Philippines industry's value-add dropped 39.8% in 2020. Disruptions in construction will continue with limited investment in new construction projects.

Expect the Philippines construction industry to recover between now and 2024, with an annual growth of 11.8%. Healthcare, education, infrastructure, and renewable energy projects will support that growth.

The Philippines is also expecting investment support now that the Corporate Recovery and Tax incentives for Enterprises Act reduced corporate income tax from 30% to 25%. The country expects that legislation to attract foreign investment.

There does not appear to be a bright side for Japan's construction industry in 2021 due to its shrinking, aging population, its already well-developed infrastructure, and a continued gloomy economic outlook.

India, which has a Smart Cities initiative to create 100 "smart cities" with upgraded infrastructure, should see healthy construction growth. Government projects include railway station renovations, airports, new ports, and infrastructure. The country is also reforming policies to encourage more investment.

Numerous international players are relocating manufacturing to South East Asian countries from China. This could result in new infrastructure projects across India.

If COVID-19 numbers are brought under control, Asia could see a sharp rise in production due to the underlying potential for regional growth due to the rising middle class and investment in housing and infrastructure, GlobalData reports. So, industrial construction could actually benefit from the pandemic as companies move to India seeking lower labor costs.

A 10-country bloc known as ASEAN made up of Malaysia, Philippines, Thailand, Indonesia, Cambodia, Vietnam, Singapore, Myanmar and Laos, holds $250 billion in potential construction, or 7.5% growth by this year, according to New Building Materials and Construction World Magazine.

All is not equal, however. Malaysia's new government is working to reduce the country's debt by cutting investment in significant infrastructure projects.

However, much of Asia will benefit from greater public infrastructure spending as a result of its efforts to contain the COVID-19 pandemic.

China is at the forefront, encouraging more investment in electric vehicle charging stations, ultra-high voltage transmissions, and intercity rail, issuing Local Government Special Bonds as the primary funding source. The country is preparing to release its newest five-year plan, expected to feature infrastructure investment as a key policy driver. It will focus on "new infrastructure" such as the electric vehicle charging stations.

While even before the pandemic, the residential market was weak in several Asian countries, the lockdowns worsened the situation. The housing sector will continue to struggle amid weak economic activity, a rise in unemployment, and people and companies struggling to pay their bills. There will be pressure on developers with unsold inventory to cancel projects, at least for the short-term.

In the commercial sector, expect investments to be canceled or paused due to tourism and travel collapse.

The industrial sector, too, will continue to struggle in the short-term due to the shutdown of production for materials. As a result, companies could cut back on expansion plans. In the long-term, though, industrial construction could benefit from the U.S.-China trade war and with companies leaving China for other Asian countries.

Risks in Southeast Asia

In Southeast Asia, private infrastructure projects' main commercial risks are exchange rate risks and construction risks.

There are numerous construction risks that can be transferred onto the private side to achieve higher value for the money and to gain efficiency. These risks include time delays, cost overruns, engineering, and technical feasibility, and performance-related risks.

When domestic markets are not sufficiently developed, large infrastructure projects often are financed with Euro, yen, and U.S. dollars. There is a risk with exchange rates since there are end-user fees and public subsidies involved in financing in the international capital market.

Demand risks - the potential for a loss when there is a gap between forecast and actual demand – are typically determined by factors outside the control of private stakeholders reluctant to take on such risks. They are more willing to do so in countries with a good track record for PPP projects.

And with PPP projects, credit risks are significant since such projects are financed often with more than 70% debt. The only collateral for the lenders may be the project's assets, revenue, and contract rights. This increases credit risk for lenders while capping exposure to sponsored companies.

The bottom line is that as a vaccine for COVID-19 rolls out across the globe, the bleak picture for Asia might brighten in 2021 due to the demand for housing to accommodate the growing middle class and the investments that will spark. Greater public infrastructure could also play a significant role in a projected uptick, leading to growth in public-private partnerships.

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