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Asian economic development and construction sector outlook: Soumitra Sharma, IHS (Singapore)

Filmed at Cemtech Asia 2015, 21-24 June, Grand Hyatt, Bangkok, Thailand

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Good morning everyone, so I'll be looking things from a more macro perspective and looking at economic development and construction sector from a macro perspective how various countries across the world are performing and what's from the ASEAN and Asian perspective what are changes which are changing the economic outlook and how does it affect the construction sector. This here sounds good, this introduction is already given. So
just talking of IHS first because they pay my salary, in terms of looking at their knowledge base.

This is a company which has expanded inorganically very rapidly over the last two decades and it has very strong databases across various commodities sectors including cement of course, so we have around 1000 experts globally working on various sub sectors. What we deal with, is we have information we use analytics and we provide expertise on each of the sub sectors in the construction segment, of course we have other sectors as well, one of major ones being energy.

And chemicals which we are very strong at and automotive as well. In terms of our core staff and construction sector we have around 100 and then we have other 1000 experts which are part of the economic and country risks team which works in construction outlooks. So I think we work with all types of players, we work with small business as well as the large companies across 165 countries.

We're fairly diverse in that sense and as I said our focus areas remain automotive, maritime, aerospace and defense, energy, chemicals. So, we are fairly a diverse company with both expertise in terms of economic outlook as well as sector expertise, so we're the only ones in this space which is quite has a right mix of deep tie into certain sectors as well as macroeconomic outlook. And then of course we help our clients in strategy planning, operations and engineering as well. So in terms of our construction sector we have a very strong tool which is called IHS Connect, has a lot of information on each of the countries as well as compile at ASEAN or you can just, it's kind of a database tool which we use to help provide strategy consulting as well in this space.

So, with that done I think I'll go to highlights of the global economic outlook which is the core of the topic. What we see is that global GDP will gradually move up back again from 2.7 this year to around 3.3 in 2016. This is primarily driven by United States, United Kingdom and India being the outliers in terms of growth as compared to the last year.

While one of the other aspects of Euro-zone and Japan which we're seeing a negative growth have now started to grow modestly, and then some of the earlier growth players like Brazil and Russia are contracting. So what we're seeing is in the last two decades there was a kind of a convergence and recent times and in the forecast what we see is that there'll be a divergence in this sense because for example, if you look at the bricks economy itself, Brazil and Russia are performing differently.

China is seeing growth, not a high growth. Seeing a decline in the growth aspects and India against outliers as well. And same is the trend with many emerging markets. If you look at Russia, Venezuela, Argentina and Brazil they're all in the falling in terms of growth. So looking at of course one of the major factors which is driving this is the oil prices which are helping the oil consumers versus the oil producers. There are estimates roughly around 1.5 trillion worth of GDP is being transferred just because of the price changes from the oil producers to the oil consumers. So this is good news for some of the oil consumer countries and of course there is a consumer spending and home building lead in US which is also driving a bit of growth in the construction sectors. And of course the good part from Asia perspective is Japan is again gaining a little bit of momentum from a negative growth to now it's on a positive side which is driven by of course the monetary policy and currency depreciation as well. In terms of growth parts of emerging markets it's more of the structural reforms which are driving the growth, so some countries have witnessed a lot positives in terms of investiments specially in infrastructure sectors for some of the emerging economies and that's driving the growth for some of them. So I think what we're calling this phase is a great divergence phase, what is happening is, it's more of earlier we used to talk about the breaks, the next eleven and the emerging economies and those concepts came up, but now these economies have started to part ways in a way, some economies are seeing a growth trajectory very high growth trajectory while others have, because of the oil prices other commodities falling as well there is shrinking in their economies.

So the feeling the four things which are driving this is of course debt and deleveraging, some of the countries had high debt and that's causing the growth to plunge initially and then recover again in a sense then of course, the oil prices is one of the major drivers which is affecting some of the economies, and then if you look at it some of the central banks have been very smartly playing their, currency fluctuations and keeping enough reserves and as well as reducing the interest rates at the right time, which is driving growth a lot. And of course the rise of the Us Dollar, what it's doing is in certain countries it's increasing the export potential, so their export competitiveness has gone up, which is some of the economies which are dependent on US economy are now back in growth phase.

And of course in terms of the construction sector we see that it will have a slight shrinking initially because from 4.1% to around 3% at a global level, but there is a different trend for each country and in fact Asia Pacific is one of the fastest growing segments within them. Now and what we focus for oil prices, is that it will be still firm and it will gradually move upward, it will not be a fast growth as it used to be but it will be a small growth primarily because the OPEC has also decided not to change the production significantly and then of course US oversupply is there in the market, which is affecting and then the demand has also declined in certain markets.

So there are various factors which is driving this kind of scenario, and then based on those demand estimates what we see is that oil prices will gradually go up, and there will not be a very erratic growth in that sense. And then of course if you look at the dollar perspective, if you look at the 2014 US dollar price the market is likely to grow on much lesser but then because the US dollar has appreciated we'll see a much higher growth in terms of oil prices. Looking at the overall market, one of the fastest growing markets is Asia-Pacific, we see a bit of a slump in 2015 from 2014 numbers, of course Thailand was a slightly different it had seen a lot of negative in the 2014 so that's been covered up in 2015. But what's happening in rest of Asia is they will see a bit of downfall in 2015 following again growth, driven by some of the economies which are more infrastructure driven countries. So coming to Asia-Pacific what we see is as a region China and Japan and India, South Korea are major consumers in terms of China while it benefits from this it has some other negative aspects which are curtailing the growth in terms of economy. So keeping these aspects in mind, China will even though it has some negative factors, it will continue to have a growth which is slightly positive in the sense, but the real growth will come from India, and India has been the outlier in this context.

And of course weakness in commodity prices has affected major countries like Indonesia, Australia and Malaysia, these are the countries that have been severely affected Indonesia has again if you look at the previous chart. Indonesia will be in a similar pattern wherein they'll see a bit of a downfall in 2015 but because of the infrastructure projects suggested by the government and then positive outlook, economic outlook we'll see a growth back again in 2016 and in a long term we see a much positive outlook.

So now I think in terms of growth patterns what we see is Indonesia's growth will re-stabilize at around 5% and of course the big market outlier is India right now in terms foreign investments coming back in, government proposing a lot of big infrastructure projects which might affect the future growth in the long term as well.

So looking at the growth patterns as I said, China will see a bit of a downfall, but it will stabilize somewhere around 6.8 % for a long term perspective which is quite a good growth even at the current scenario it's driven by lot of domestic demand as well which was cut down drastically over the last two to three three years but now that demand will go up again, and of course China suffers from over capacity in residential as well as some of the manufacturing infrastructure which it has. So keeping all that in mind I think it will see a bit of slump from 7.4% to around slightly lower and then going up again to 6.8% over the long term.

And of course India will be, as I said again and again this is the key market right now, it's going from 7.4% and going up to 8.2% growth in the long run. So, the other market which is interesting is the Indonesia market which will, we have said that over the long term it will see a lot of economic growth, and it has stabilized at around 5% going up to 5.4% Yes.

Thailand was an interesting market which has seen a slump in 2014 this was the only market which had suffered significantly in 2014 and we don't see a significant fall in 2015 and then what we've focused is that it will grow in a long at around 3.8% which will be a very positive outlook from a long term perspective. Why we say this is because we have already started to see the last quarter some recovery because of a bit of stabilized political environment and then we expect that policy measures will go ahead, and government will be able to finance most of the projects which they're suggesting.

Of course Malaysia is severely affected by commodity prices we see that even in the long run it will be around 5.3 % growth rate which it will see between 2017 to 2021, and it will not be able to achieve the 6% growth which it achieved in 2014. Singapore economy has a very different outlook, it will continue to grow at around 3.7% what we forecast.

Is dependent on some of
the policies and projects which they're announcing, and their success factors, so there's a slightly, this number is slightly subject to change over the next few quarters. And of course Philippines, while it has seen good growth, it's likely to see a bit of a downfall in the long term growth perspective.

Yes, so coming to construction sector and then looking at Asia's global scenario. So, if you look at the overall market now we see the North America growing at around .27% largely driven by US growth and Mexico growth but then the big markets is of course Asia which is looking at a 3.9 % and this is what is going to drive the market in future. So I think in terms of the asset class it's purely driven by infrastructure and off course in certain markets even the residential market is growing significantly but then the mean growth is in if you go in the order so residential is the lowest growth in that sense then other commercial buildings and then then highest growth is in the infrastructure, mostly of Asia. Yeah.

So in terms of looking at non-residential infrastructure so commercial and office buildings sorry the institutional infrastructure is the primary driver for Asia-Pacific this will be from all including ASEAN markets this kind of investment is rising and then of course in certain markets the office demand has increased quite significantly.

Looking at in terms of opportunities versus risk if you can clearly see that in terms of the five year construction risk we have increased, there's high risk in the high growth markets like India, china and Indonesia an then if you look at the more developed markets the lower risk, but the growth rates are also similar. So this is a very straightforward analysis, but if you go down to in terms construction spending some of the interesting markets is Sri lanka has seen a lot of growth as well and then Bangladesh again has seen a lot of growth, so these are the key markets which are the future for Asia and South Asia region as well. And then of course Vietnam even though it continues to have a high risk, is also one of the high growth markets. So looking at some of the countries which are small markets growing very rapidly, we see a lot of growth in Myanmar and Bhutan markets, and Cambodia as well.

So these are the high growth and high risk countries and then in terms of some of the other demand, Mongolia is also picking up a bit of demand and used to be a high risk country. Looking at the Asia's construction sector, in global context again in term of looking at no excluding middle east towards a growth rate, the overall growth rate in construction spending has continued to grow at a significant rate, and this will drive, but then in terms of the growth rate per say it's stabilized at around 4%, 3.9 to 4.1% range, and then this will represent largely the global growth rate as well so this is the area which will drive the global growth as well.

Of course China is the biggest consumer market as of now, Japan being the next one and then India and Indonesia following it up in terms of the total growth of the construction sector. This is interesting slide in terms of looking at the growth versus risk in a slightly broader perspective, so if you look at the growth, on the extreme the right top hand corner there's no country at that stage there, but some of the countries which are trying to move in there is I think India will be a hot market for 2017-2021 period, and then it will be the high growth sightly lesser risk. Why we're calling it the market opportunity because high rating means that the risk is lower, so that's why I've marked it this way. China it has a slightly lower risk compared to India market and then it's a much bigger market in size, but it will slightly move towards lower growth in construction and that's a diffrentiator but then again as I said Sri Lanka, Bangladesh these are the key markets which are moving very rapidly upwards and Thailand in a longer term will pick up not in the immediate future, but around 2017 on wards we'll see a bit of growth for Thailand as well. So looking at in terms of the cost breakdown the sales have seen a bit high and a fall in 2015and then it gradually moving back up again, but then there was a price problem in 2015 which will see kind of affecting the profits as well in the long run so this as seen in 2015 we see a price the output price index to go down a bit, and then of course CapEx investments we see a high growth in 2016 which is will drive the future and that's why we are saying that most of the growth will come through CapEx space investments.

And then of course looking at the asset class again infrastructure is the one which will be driving most of the growth in this region. Looking at the residential I think Australia is the only country where residential growth is highest as compared to other sub segment growth. The rest of them they are seeing growth but then this is the lowest of the three components' growth.

And then of course the overall Asia-Pacific is higher than the world average in residential as well that's direct proportional in terms of demand rising. In terms of non-residential structures what we see as the office space, that's what is driving the market significantly and the institutional growth, and the key markets which had lagged behind earlier and now picking up again is of course the India market which is growing at around 8.2% and driving the market here and then some of the smaller countries have seen lot of growth as well, this is of course includes some countries Sri-Lanka, which has seen a significant growth post the war, and then those kinds of growth there's a time lag and then there is a lot of growth in office spaces right here, and institutional investments as well.

In terms of looking at the construction site, this is the area which will drive and it continues to be high even for China where the rest of the roads have stabilized, China will see a huge growth even in the infrastructure side of things, of course this is primarily because it has an oversupply in the residential and commercial building space, while so it continues to spend on infrastructure.

In terms of the growth within the sub segment it's transportation infrastructure which will see the maximum growth and then certain countries including Indonesia which has spent very less on public health, they'll see a bit of investment coming in public health spaces. Well, I think the cement experts are here they can give a much more deep dive into this area of growth, but then we see that, there'll be of course growth driven by keys markets like India, Sri lanka, Bangladesh, Vietnam and smaller markets and then of course China will continue where it will be a slower growth compared to.

Some of the share China enjoys right now will shrink over the next 4-5 years. I think coming back to the country focus we see a good opportunity, in Indian market and then in terms of the key markets would be automotive construction and infrastructure, these will the ones which will be driving the market. Policy reforms will move forward what we anticipate, there is a bit of a challenge right now in the upper house and then that's likely to be reduced by 2017 where the government will be in majority in both Upper and Lower Houses and that's where the most of the policy reforms will take place and then of course the open market policies will keep coming in and that will drive the growth.

We also wanted to focus on China because China is continues to enjoy the infrastructure growth which will drive its market significantly and then of course in terms of the industrial capacity which is driving its growth down is likely to be affected but then in terms of the construction industry growth per say it's around 5.51 which we have focused for China between 2015 to 2023. And of course Thailand since we're here, we wanted to keep our eye on Thailand market and then of course construction industry will be on a slightly low growth rate compared to the rest of the markets. Why the what we focus is Thailand economy will recover a little bit of time but it's losing the international competitiveness because other markets are taking over which are growing at much faster rate compared to Thailand. So I think that's a brief outlook of the economic and construction outlook, I think that's from my side.

Asian economic development and construction sector outlook: Soumitra Sharma, IHS (Singapore)

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