2021 World Economic Outlook For Construction Part 4

By John Kenney, COO of Cotney, Attorneys & Consultants; CEO of Cotney Consulting; CIO Cotney Capital Corporation

Experts expect Latin America's economy to recover in 2021 after enduring its worst recession in recent history due to the COVID-19 pandemic.

Still, there are risks ahead for the construction industry due to muted incomes, fiscal gaps, social upheaval and the unknowns on how long it will be before the virus is under control.

Latin America - or Central and South America - has been called "the world's worst-performing region" for construction output due to severe economic damage brought on by the pandemic and its subsequent lockdown. And the situation is not improving just yet.

South Africa is not faring much better, having already been in a construction slump since 2017 and hit hard by the virus. Its situation continued to get worse as the pandemic raged across the globe. A depressed economy, rising cost of living and less foreign investment have all added to South Africa's poor showing going into 2021.

In Latin America, the poor forecast is connected to a slow second-half rebound in 2020, which had two main factors – the continued threat of the COVID-19 virus and construction companies continuing to struggle to revive pre-pandemic operations.

Depending on which forecast you check, expect output in Peru, one of the largest countries in the region, to contract by -24%, with Argentina not far behind at -23.5%, Mexico at 15.2%, Colombia at -13.2% and Chile at -8.2%. Do not expect Latin America to restore output levels from the pandemic era for several years.

For Brazil, continuity of building projects has kept its numbers from being worse. Expect output to fall by 4.8%. That has not been the case across Latin America. Construction in many countries remains sluggish due to the pandemic's uncertainty and the increasing number of infections. GlobalData expects the region to grow just 0.2% in 2021, eking out recovery to 3.1% in 2022-24.

Social tensions, low productivity, rising inequality, uncertain policies and fiscal restraints all add to the problems. Still, expect construction to expand through 2025.

A select group of countries, including Mexico, have adequate public and private capital from which to pull, while riskier markets with constrained opportunities are not so attractive to investors. A critical development in Colombia and Brazil will help expand the industry. Expect Chile and Peru to participate in that expansion as well.

Expect Mexico to take the forefront in the construction industry this year with a $121 billion value, followed by Brazil with $73.9 billion. The industry in Latin America includes energy and utility construction, infrastructure, commercial and residential construction and industrial construction.

Brazil's government is working to become a hub for medical and health tourism. Just one year ago the country had nearly 9,000 hotel rooms under construction, transforming it into the leading country for lodging construction in Latin America.

Look at some ongoing projects

In Peru:

Peru could experience some robust construction investment over the coming months, with the Chancay Multipurpose Terminal Project front and center. The $1.1 billion first stage of the project is now underway.

Expansion work is also underway at two port terminals, in Callao and at Salaverry.

Most planned investment is along Peru's Pacific Coast and represents an important South American effort to strengthen port infrastructure and links to and from the country. This robust port construction should continue for the next five years. There are 14 projects already in pre-construction and construction stages, representing $7.7 billion in investment. This includes public projects and private projects across the region, including along the Amazon River in Peru's interior.

In Colombia:

Construction should experience a strong rebound in 2021 with 15.4% growth year over year in industry value. This, after the industry, experienced a 17.8% contraction in 2020.

Continued advancement of road projects should be the key driver for construction here. The national public-private partnership known as Fourth Generation road concessions includes 29 projects with a $25 billion investment.

New concessions in Colombia should benefit from a more robust development of public-private partnerships, along with the expansion and diversification of equity investment and debt for infrastructure projects.

As in the U.S., home construction and non-residential construction should play critical roles in construction industry recovery. Government policies here are stimulating housing demand.

The Bogota Metro Line 1 project, another PPP, and the launch of other new transportation infrastructure concessions through the Fifth Generation program could allow for expansion. The Fifth Generation includes eight road corridors, four airport projects, one rail project and two waterway projects worth $63 billion.

In Argentina:

Following two years of weak investment, the Argentine and Chinese governments will boost infrastructure and the construction industry. The funding focuses on freight rail development.

The country's infrastructure will see a bump in investment due to increased Chinese funding. President Alberto Fernandez announced four agreements with China worth $4.7 billion for rail investments over the next several years.

The projects include:

• $817 million for investment in the Belgrano Cargas freight rail line
• $784 million to modernize the North Patagonian freight rail linking Bahia Blanca and the Vaca Muerta shale region
• $2.6 billion for the San Martin freight rail linking the provinces of Mendoza and Buenos Aires
• $490 million to purchase rolling stock for various rail projects

Freight rail in 2021 will continue to be a key focus of infrastructure investment in Argentina.

South Africa continues to struggle

The South Africa construction industry has struggled for a while due to a depressed economy, a lack of government infrastructure investment, the rising costs of materials and rating downgrades that hurt foreign investment.

Then came the pandemic, leading to job losses and fewer construction projects moving ahead due to the hard lockdown. That lockdown led to a construction reduction of -30.7% and for the entire year, a contraction of 14.3%.

Construction work in 2020 declined 76%, with non-residential dropping 80.8% and residential down 76.6%.

South Africa's struggles are likely to continue through 2021, with the current downturn affecting both private and public sector investments. Labor shortages, limited government spend and material cost increases all will persist.

This year through 2024, construction output should average 1% growth, with electricity projects and transportation infrastructure driving growth.

Positive trends in the industry

With all the negatives brought on by the pandemic, a few positive trends result from shifts in how crews work.

The construction industry is more widely adopting automation and even accelerating its use. And safety – always important on construction sites – has improved in some ways due to the measures implemented during the COVID-19 pandemic.

More construction project managers are turning to innovative materials such as plastic roads and self-healing concrete.

Building with prefabricated and modular components is on the rise in South Africa, as in the U.S.

Continuing disruptions

The challenges and disruptions will continue for South Africa due to investment rating downgrades, a sluggish economy, labor shortages and civil unrest, among other issues. Construction sectors will be impacted in various ways.

Fierce bidding will continue to be an issue, as is always the case in a challenging economic climate. With fewer projects to bid on, construction companies are battling it out for the wins.

Like in other countries, South Africa has experienced supply chain disruptions, forcing many companies to seek alternate local distributors.

Reasons for optimism

While recovery will take time, the primary industry drivers are strong. There remains a need for infrastructure despite the country's sagging economy.

There is a demand for housing, infrastructure, power and other utilities and the government has committed to driving the post-pandemic economy with infrastructure projects.

Although several large construction firms have either left or gone bankrupt, smaller companies have found ways to survive. Smart budget decisions, diversification, and the willingness to work hard to find projects will keep the industry afloat.

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