Fitch unit: Review of mega projects poses risk to construction industry

As of May, the value of planned and ongoing projects in Malaysia exceeded US$100 billion. — Bernama pic
As of May, the value of planned and ongoing projects in Malaysia exceeded US$100 billion. — Bernama pic

KUALA LUMPUR, May 18 — The Pakatan Harapan government’s plan to review large-scale infrastructure projects could pose downside risk to growth for the construction industry, BMI Research said today.

But the Fitch unit group said the new federal government will likely continue to pump money into necessary public infrastructure projects.

“Foreign investment-backed projects, including ones that are part of China’s Belt and Road Initiative (BRI), will..likely face increased scrutiny and may be subject to delays as contracts are reviewed and renegotiated,” the group said in a statement.

“Nevertheless, we highlight that PH’s popular support means that the government will likely continue to invest in public infrastructure projects, particularly smaller-scale road, rail, power and utility initiatives aimed at serving local populations.”

Apart from a near-term slowdown in projects in 2018, the group expects the construction industry’s growth to average 5.3 per cent in real terms between 2018 to 2027.

Prime Minister Tun Dr Mahathir Mohamad had, during his campaign, pledged to “review” major infrastructure projects, particularly those that involved Chinese companies with the aim of scrapping those deemed dubious.

BMI Research said going through with the plan means there is a downside risk that Malaysia’s construction industry growth will be negatively impacted if projects are downsized or cancelled.

It noted that the former Barisan Nasional government has been highly supportive of infrastructure development and effective at attracting investment from both domestic and overseas sources.

As of May, the value of planned and ongoing projects in Malaysia exceeded US$100 billion (RM390 billion), nearly six times the nominal value of Malaysia’s construction sector and with the majority being in transport or real estate sectors.

“Projects that we believe are at greater risk of being revised or cancelled are those linked to the scandal-ridden 1MDB investment fund, those that are predominantly led by foreign investors (such as Chinese state-owned enterprises) and those that have weaker business cases,” the group predicted.

It noted that Dr Mahathir had called the China-backed MYR55 billion East Coast Rail Link a project that is too expensive and economically unproductive although BMI said the KL-Singapore High-Speed Rail project is likely to remain intact.

With cost-of-living concerns and housing costs being primary issues driving the May 9 elections, BMI said it is likely that the government would enact policies aimed at cooling property prices, which could weigh on construction and investment activity in the real estate sectors.

Rural development

Rural infrastructure will likely continue to be a priority under the new PH government, particularly given the coalition’s surprisingly strong performance in the underdeveloped states of Sabah and Sarawak in East Malaysia, the Fitch unit said.

Despite Malaysia’s status as a middle-income country, there remains a sizable developmental gap between the urban, industrialised regions of peninsular Malaysia and Sarawak and Sabah — many towns in the two states lack road access, reliable electricity and connections to telecom network.

The upgrade of rural roads and expansion of power and water utility networks was a growing component of former Prime Minister Datuk Seri Najib Razak’s 2018 Budget but BMI said it expects budgetary priorities to change under the new government.

“We believe these projects will likely be preserved in some form or another,” it said.

“Rural roasd, power and broadband projects may not be of the same value or prestige as high-speed railways, but they remain essential to bolstering economic growth and will be a source of project opportunities for companies that may have missed out on larger projects.”