Mexico Infrastructure Report Q3 2012

BMI View: We anticipate that Mexico''s construction industry will continue to make a steady recovery from the recession which took hold in 2008. While there remain weaknesses in the market, the outlook is more stable than many others in the region, with private investment expected to grow in light of the new PPP law. Over the medium term, the promise of a second National Infrastructure Plan, which will look to tap alternative sources of financing, is underlying our annual average construction industry value growth forecast of 4.3% between 2012 and 2016.
Mexico''s construction industry is on track to post robust growth in 2012. Q112 real growth came in at 4.9% y-o-y, continuing the above 4% trend seen since H211, however we expect growth to slow over the course of the year, and thus anticipate full year growth to come in around 4.1%. Given the strong rebound seen in 2011 (4.8%), following three years of no growth, the continuation of plus 4% expansion is a good sign for the industry''s more medium term recovery.
Despite this bullish outlook, the trend is for growth to gradually slow. The primary cause will be a reduction in government investment into infrastructure, following an accelerated level of investment in 2011. Planned investments for the year are down by around 10%, which will impact both 2012 and 2013 industry value added. However the slowdown is less marked due to an expected increase in private investment facilitated by the new PPP law. With a number of concessions, both transport and utilities, coming to market this year, we expect strong take up for the well designed ones. However, Mexico continues to struggle with poor planning for infrastructure investments, pushing projects which will struggle to attract investors (such as the Punta Colonet port which was put back on the table by CMIC earlier in 2012).
Key Factors Guiding Our Forecast: • The National Infrastructure Plan (2007-2012) is in its final year and the government will be keen to push through as many projects in the last year as possible to make some success of it, especially considering that the plan is significantly behind schedule and under budget. However, public sector spending in 2012 has already been reduced compared to 2011, and therefore it is not clear how much leeway the government will have to push through projects, especially in an election year.
• In place of decelerating public investment, we expect private investment to pick up with the passing of the new PPP law in January 2012. The law will help to protect investors, which is especially topical given the cancellation in May of a road concession awarded to OHL Mexico. However, while we think the law could attract more bidders to Mexico''s PPP sector, we also highlight that tenders need to be better organised and more attractive in order to entice investors. At the same time, we note some level of heightened policy uncertainty ahead of the July 1st election. Front runner Enrique Peña Nieto has shown support for the PPP model and if, as expected, he wins, policy continuity in this regard should be strong; however other candidates have questioned the model, leaving some room for uncertainty.
• Beyond 2012, plans for a new National Infrastructure Plan to follow on when the first one expires could see US$400bn invested into the sector over the 2013-2018 period. The plan outlines 1,138 projects covering energy, transport, water, tourism and urban development to receive investment. The programme will also have a strong green component to it, with energy efficient buildings and transport to be funded alongside renewable projects. From a regulatory point of view, it incorporates greater use of public-private partnerships (PPP) in light of the new PPP law, as well as plans to open up pension fund capital for infrastructure investment. Few practical details have been released. However, the plan has the potential to support and sustain significant investment into the sector over the medium term.
• We expect the top performing sector to be Energy & Utilities, specifically water infrastructure and power plants and T&D, with 10.1% and 13.2% forecast respectively on average per year between 2012 and 2016.
There are US$9.1bn worth of water infrastructure projects underway and US$8.8bn worth of electricity projects underway in the country, whilst many more have completed construction in H1 2012, according to BMI''s Infrastructure Key Projects Database.