Burma’s building industry will grow only modestly before the end of 2015 because of hesitant foreign investment in the sector due to concerns about political stability leading up to the national elections, a business study said.
The country potentially offers “significant project opportunities due to its severe shortage in buildings and infrastructure,” the assessment of Burma’s redevelopment by Business Monitor International (BMI) said.
However, in the near-term, building construction will “remain close to the modest levels seen in 2012” because many investors remained skeptical of stability, it predicted.
“We believe that the majority of investors could wait for greater political clarity before carrying out capital-intensive works in the construction sector,” the construction sector assessment said.
Burma is scheduled to hold elections for a new Parliament and president in November 2015. President Thein Sein is reportedly not planning to seek re-election, and the Constitution currently bars opposition leader Aung San Suu Kyi from standing, although the rules might be amended.
Foreign investment is seen as essential for the major infrastructure development necessary to modernize the country’s economy, from roads to ports, housing to industry.
“We are forecasting real growth for the [construction] sector to reach 9.4% in 2013 and 9.7% in 2014. These relatively robust growth rates are primarily because the country continues to possess strong fundamentals for construction activity,” said BMI’s study, titled “Construction Boom Not a Guarantee.”
“However, we believe that the [Burma] construction sector is unlikely to maximize its growth potential and achieve double-digit growth rates. In fact, it is our opinion that the sector could see a dip in growth in 2015, falling to 8.5%.”
This prediction is due to two factors, it says: Limited foreign investment and “sizeable” potential for domestic political instability.
Investors from the European Union, China and the United States will be hesitant because of the fragile economic recovery in their own countries.
“Given this uncertain business climate, companies are likely to maintain a cautious outlook and could scale back on fixed investment in markets with high levels of business risks such as [Burma],” said BMI which is based in London with offices in New York and Singapore.
It said these uncertainties present a “major threat” to the revival of Burmese construction “as the sector is heavily reliant on FDI [foreign direct investment] inflows to spur activity.”
Burma lacks the funds and technical expertise to finance its construction needs itself, said BMI, estimating that the country’s foreign reserves in 2013 stood at about 8 percent of GDP for the year.
But despite the report’s cautious forecast for near-term construction growth, it thinks post-2013 prospects are bright if political stability remains.
“We are forecasting real growth for the sector to average 10.8% per annum between 2016 and 2023, making it one of the fastest growing construction markets in Asia.”
This bullish outlook for the medium term is primarily because Burma is starting out from a low economic base, it says. A combination of low wages and high resource wealth will continue to attract investment.
Workers’ pay in Burma is “significantly lower” than in China—until now the workshop of the world—and other countries of Southeast Asia.
The rising growth of tourism will be a major driver of infrastructure construction in transport facilities such as roads, airports and more hotels.
But bigger than tourism for the construction sector will be urban growth, said BMI.
“With rising economic development and better paying jobs in major cities, we expect [Burma’s] urban population to increase from 34% of total population in 2013 to 39% by 2022,” it said. “This will further boost the demand for residential and non-residential buildings. As it is, the country is already suffering an acute shortage. This has led to a sharp increase in property and land prices.”
Another important infrastructure deficit that urgently needs improvement is Burma’s strategic position on the Asia-Europe trade routes, said BMI.
The country’s international surface transport links, primarily roads and ports, are among the worst in Asia, the World Bank Logistics Performance Index said recently.
Again, an improvement in these links seems likely to depend on foreign investment, primarily from neighbors Thailand, China and India.
“Despite these downside risks, our base-line scenario is for political stability to persist in [Burma] and reforms in the country’s business environment to continue. Should this view play out, we believe that the growth prospects for [Burma’s] construction sector beyond 2015 are bright,” BMI concluded.