Fitch pumps brakes on buildings sector

Fitch pumps brakes on buildings sector

Fitch Solutions has reduced its growth forecast for Thailand's construction sector in 2020 to a 3.6% contraction this year from 1.2% growth because of the Covid-19 pandemic and the curfew.

A Thai construction worker at a building site on Song Wat Road. Arnun Chonmahatrakool

A fall in private sector investment into Thailand's residential and non-residential buildings sector will lead to the decline.

In particular, investments into the Eastern Economic Corridor are expected to fall in 2020, leading to reduced construction activity in the industrial buildings sector.

However, Fitch expects public infrastructure projects to cushion the fall in construction activity.

This would be the first contraction in the construction sector since 2017.

While construction work was allowed to continue during the lockdown, the industry reported reduced work hours as a result of the curfew, affecting the pace of construction work.

The closure of certain provincial and international borders also affected the flow of migrant workers and created a labour crunch.

Social distancing measures have complicated worksite inspection and monitoring processes, with engineers and officials resorting to the less efficient method of teleconferencing rather than on-site visits.

A disrupted global construction supply chain has added further woes for contractors, with certain businesses experiencing delays in production and delivery of construction-related goods and raw materials.

The expected contraction of Thailand's construction sector will be led by an anticipated fall in construction activity in the buildings sector.

Thailand's residential and non-residential buildings sector growth is expected to shrink by 5.4% year-on-year, underperforming the broader construction sector.

Fitch forecasts the residential buildings sector to contract in real terms by 5.1% in 2020, underpinned by its view that a tougher macroeconomic environment will hurt demand for residential property in the short term.

The already slowing domestic economy has curtailed domestic demand for housing -- Thailand's real GDP growth has slowed from 4.15% in 2018 to 2.37% in 2019, and Fitch's country risk team currently holds a negative outlook for GDP in 2020, with growth expected to hit -4.05%.

The situation is exacerbated by the economic fallout following the Covid-19 outbreak, which has severely dampened consumer sentiment.

Thailand's consumer confidence index, as observed from data from the Bank of Thailand, fell to a fresh low of 33.3 in April 2020, pointing to a cutback in consumer spending, which could imply a reduction in domestic real estate purchases in the short term.

Fitch predicts prospective homebuyers are less likely to take on large amounts of debt needed to finance the purchase of residential real estate, and would likely delay purchase decisions until signs of economic recovery begin to emerge.

It observed that total personal housing credit growth has been steadily decreasing on a year-on-year basis since the fourth quarter of 2018, indicating the tapering off of housing demand over the past 12 months, which would have translated into lower housing construction activity in 2020.

Fitch also noted the bleak short-term economic outlook could force developers to hold on to their existing land banks or delay decisions to purchase new land for development, again leading to a slower pace of residential housing development in 2020.

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