BMI View: The Czech Republic's construction and infrastructure industry value has become a victim of limited cash flow, restraint on public spending and the overall caution among banks to finance projects, resulting in a nearly 5.5% year-on-year (y-o-y) contraction in infrastructure industry value in real terms during 2011. Although we expect the market to return to positive growth territory in 2012, hopes of a robust recovery remain a distant possibility. We are currently forecasting average real growth of 4.4% in industry value in real terms between 2013 and 2016.
The factors which underpin our cautious outlook for the sector over the forecast period are:
- The transport infrastructure sector is likely to post another year of contraction in 2012 and only marginal growth thereafter, owing a cut in budget allocation. Although a number of contracts (worth a combined US$1.7bn) have been awarded, the government has little in the way of funds with which to pay for work. The situation is made worse because the next batch of EU funding, equal to around US$1bn, could be cancelled, following an investigation into tendering processes.
- The energy and utilities infrastructure sector will experience delays or suspension of key projects. In January 2012, locally-based utility provider CEZ revealed that it is examining the possibility of withholding the construction of three optional new reactors in addition to two planned units at Temelin nuclear plant, owing to some legal restrictions. The move is likely to cut spending on the project by up to US$15bn. The Temelin expansion project has already been delayed by around two years, and there have been no assurances that the delays will not continue.
The two sub-sectors combined are estimated to have accounted for 58% of the country's total construction industry value in 2011 and the forecast average annual growth of 0.9% for the transport sector and 5.7% for the energy and utilities sector between 2012 and 2016 - according to BMI -will hardly support growth. On the brighter side, however, we expect recovery in the residential and nonresidential building to be significantly quicker, growing an average of 5.2% y-o-y between 2012 and 2016, making it an outperformer in the wider construction sector.
Despite the cautious outlook, the Czech Republic stands as a relatively strong market by regional standards. The country gets a score of 63.3 out of 100 and remains in fourth place in BMI's infrastructure business environment regional rankings for Central and Eastern Europe this quarter. However, the weak outlook for opportunities over the short-term and the transport ministry's renegotiating of contracts pose significant risks to its profile.