Industry Trend Analysis - CEE Infrastructure: Region Set For Middling Growth - OCT 2017

BMI View: Construction sector growth in Central and Eastern European countries will outpace more developed Western European markets over the next five years on the back of EU funding inflows and the fact that many of the former are expanding from a lower base. Within CEE, higher growth rates will be concentrated in emerging, non-EU markets, as favourable demographics and economic outlook act to stimulate demand for further infrastructure investment.

In a global context, the Central and Eastern Europe (CEE) region is expected to register relatively middling growth in the years ahead, with our forecast project annualised average growth of 3.8% over the next five years. This places the region ahead of Western Europe - which is characterised by a more mature infrastructure base and a less robust demand profile - but behind emerging, high-growth regions like Sub-Saharan Africa, the Middle East and North Africa, and Asia ( see below chart).

CEE With Middling Growth Outlook
Construction Industry Value By Region, Real Growth %, y-o-y
f = BMI Forecast. Source: BMI, National Sources

Within CEE, we expect frontier markets in Central Asia and Israel to outperform, as more dynamic economic growth prospects and favourable demographics support higher growth rates within the construction sector. We have long highlighted the higher growth rates of Kazakhstan, Uzbekistan, and Turkmenistan relative to their Eastern European peers and expect this trend to continue as hydrocarbon prices edge higher in the coming years and China bolsters its economic engagement in strategic neighbours (see, ' CEE Infrastructure: Region To Grow Modestly, ' April 7, 2017).

Turkmenistan: We expect that construction sector growth in Turkmenistan will be the strongest in CEE over the next five years, and forecast that real growth rates will average 6.9% annually between 2017 and 2021 ( see ' Industrial Construction Cementing Regional Growth Outperformance, ' September 21, 2017). Our positive outlook rests upon an anticipated influx of bilateral and multilateral development funding - particularly from Asian countries and institutions - that will energise an infrastructure sector long characterised by underinvestment.

Industrial Projects Prominent In Fast Growing Central Asian Markets
Uzbekistan & Turkmenistan: Industrial & Total Project Value, USDmn
Source: BMI Key Project Database

Uzbekistan: Similar to Turkmenistan, the presence of Asian institutions and companies in key financing and construction roles will support strong average growth rates of 4.5% annually from 2018 to 2022. Uzbekistan's project pipeline is dominated by industrial construction and power projects and will remain so over the first half of our forecast period, reflecting the government's desire to leverage the country's hydrocarbon reserves. Our view is underpinned by an analysis of our Key Project Database, which indicates that industrial construction accounts for an outsized 67% of project value currently moving through the pipeline.

Kazakhstan: Rising oil prices and a positive economic outlook will buoy construction sector growth in Kazakhstan over the next few years (we are forecasting growth of 4.9% out to 2022) and allow the government to allocate additional funding to infrastructure projects, which form a key plank of its economic diversification strategy. Strong performance in the country's rail and residential segments will boost growth above the CEE average.

Israel: Israel's construction sector is slated to expand at a faster pace than any other CEE country except Turkmenistan on the back of the recently announced USD37.3bn plan to double the length of Israel's rail network (see, ' Rail Investment Package A Construction Game-Changer, ' June 17, 2017). We expect that the initiative will have a transformative impact on Israel's overall construction sector over our 10-year forecast period between 2017 and 2026, and have upgraded our headline construction sector growth outlook as a result - we now expect annual construction growth to average 6.3% in real terms over the next decade, up from 4.9% previously.

PPP Outlook Remains Bright In Eastern Europe

Although markets in Eastern Europe will grow at lower headline rates than those in Central Asia, we expect the former to continue their recent success in attracting private capital into infrastructure projects via Public Private Partnerships (see, ' Regional PPP Outlook Remains Bright, ' June 1, 2017).

Varying Performance Across CEE
CEE PPPs: Count & Project Value, USDmn By Market
Source: BMI Key Projects Database

Increased adoption of PPPs within the infrastructure sector will be driven by two key factors: the need to offset persistent budget deficits with private financing ( see chart below) and a wave of EU fund disbursement targeting planned infrastructure that will increase the number of attractive, lower-risk project opportunities for the private sector.

Fiscal Weakness To Prompt Funding Diversification
Fiscal Balance, % of GDP
f = BMI forecast. Source: National Sources, BMI

Illustrating the sustained private sector interest in gaining exposure to infrastructure assets throughout Eastern Europe, the Serbian government has qualified France-based Vinci and four consortia out of 27 first round bidders to proceed to the final round of bidding for the USD400mn concession to operate Belgrade's Nikola Tesla airport for a period of 25 years (see, ' Airport Interest Underscores Healthy CEE PPP Outlook, ' June 23, 2017).

Project Risk Easing Across CEE
CEE: Project Risk Index Scores By Country, 2012 & 2017
Note: PRI methodology revised in 2015, but overall scores remain comparable. Source: BMI Project Risk Index

We note that growing investor interest in PPPs in Eastern Europe is occurring against a backdrop of improving project risk dynamics throughout the region, which can be largely attributed to the organisational, technical, and financial expertise of EU institutions. We expect this positive trend to gain further momentum over the first half of our forecast period, as EU institutions and initiatives like the EFSI gain further traction in the planning, structuring, and delivery of infrastructure projects.