Industry Trend Analysis - Corruption Allegations Pose Growing Risk To Forecasts - OCT 2017

BMI View: Mounting corruption allegations pose a downside risk to Guatemala ' s construction industry growth and the success of the country's nascent PPP programme in particular over the next several years as the exposure of alleged corruption leads to project delays and the deterioration of investor sentiment toward the country.

Downside risks to our forecasts for construction industry growth in 2017 and 2018 are rising as corruption allegations stemming from several ongoing investigations block a number of ongoing projects and weigh on investor sentiment toward Guatemala. Guatemala is facing a mounting political crisis as investigators look into alleged corruption by President Jimmy Morales as well as a number of public officials and private firms ( see " Political Crisis Will test Guatemala ' s Fragile Institutions", 28 August). This crisis will weaken investment into Guatemala's economy over 2017 and 2018 and risks jeopardising our positive outlook on the country's construction industry.

Corruption Poses Risk To Forecast
Guatemala - Construction Industry Value, USDbn and Real Growth
e/f = BMI estimate/forecast. Source: Banco de Guatemala, BMI

Driven by economic growth, rising government expenditure, and a strong project pipeline, we expect Guatemala's construction industry to grow by 3.0% and 3.4% in 2017 and 2018 respectively following growth of 1.8% in 2016 ( see chart above).

Investigations into corruption will substantially limit activity on a number of projects into 2018 as work is halted while officials investigate alleged corruption. As of July 2017, 23 out of 70 projects the government planned to develop in 2017 were stalled, including the USD384 CA-2 Occidente highway widening project awarded to Brazilian firm Odebrecht in 2012. While it is not clear how long stoppages will last, substantial delays on a majority of projects would pose a significant risk to our forecasts given the size and importance of the projects, in particular the CA-2 Occidente, one of the largest projects in the country's project pipeline.

Beyond the negative impact on already contracted projects, corruption investigations will also weigh on investor sentiment more broadly over the coming quarters, limiting the government's ability to move forward with new infrastructure projects. Already over the past several months, we have seen this begin to play out as measures of business confidence have turned negative and construction firms have become increasingly weary of participating in public tenders ( see " Corruption Allegations To Undermine Investment " , 15 August).

Elevated Risk Limits Guatemala Attractiveness
BMI Risk/Reward Index - Select Countries
Scores out of 100, higher score=lower risk. Source: BMI

PPP Programme Particularly At Risk

The impact of the corruption scandal on investor sentiment will worsen an already complicated outlook for Guatemala's nascent public-private partnership (PPP) programme. The programme, first launched in 2010 with the passage of Decree 16-2010 establishing the legal framework for PPPs in the country, has been plagued ever since by weak investor interest, substantial project delays, and high turnover of key personnel at ANADIE, the agency in charge of overseeing the PPP programme. As a result, of the seven projects currently in ANADIE's project pipeline, only three have moved into the prequalification phase and none have yet been awarded. With investor sentiment souring, it will be even harder now for the government to successfully tender these projects, meaning that delays in advancing the project pipeline are increasingly likely to persist.

Guatemala - Current Status Of PPP Projects
Project Description Estimated Investment (USDmn) Status
Barberena Roadway Roadway Maintenance and Operation 35 In Planning
Escuintla -Puerto Quetzal Highway Roadway Rehabilitation, Maintenance and Operation 65 Prequalification
State Administrative Centre (CAE) Building Design, Construction and Operation 240 In Tender
Dry Port Tecun Uman II Design, Build and Operate Terminal 40 Prequalification
La Aurora Airport Modernisation Airport Modernisation 200 In Planning
Metro Riel Urban Railway Construction 770 Feasibility Studies Completed
North-South Expressway Road Construction, Widening and Operation 180 Feasibility Studies Awarded