After recording a strong growth of 10.2% in 2021, growth momentum for infrastructure construction in Brazil is expected to slow into 2022 and 2023, recording 3.8% and 1.4% growth respectively. Rising prices of materials and elevated interest rates are squeezing revenues and project growth which is causing significant delays and cost hikes, consequently adding downward pressure on output growth in 2022 and 2023, says GlobalData, a leading data and analytics company.

Notably, as a result of the stressed economic environment, major infrastructure project auctions have been postponed. For instance, Artesp – São Paulo state’s transportation agency – has delayed the auction of the $584.3 million North Rodoanel Road network, and now expects the project to be complete two years after its initial forecast.

Jack Riddleston, Economist at GlobalData, comments: “Brazil’s construction industry has struggled with cost hikes and increased lead times over the past year, with record low levels of capacity and heavily depleted inventories leading to a substantial demand-supply gap which has driven prices upwards.”

According to the Brazilian Economic Institute of the Getúlio Vargas Foundation (FGV/Ibre), The National Construction Cost Index – M (INCC-M) rose 0.87% Month-on-Month in April 2022 and rose 11.54% Year on Year (YoY). The index also shows that Materials, Equipment and Services rose 14.97% YoY, whereas labor costs rose 7.99%.

In addition, tightening in monetary policy will further drive up the cost of business. In an attempt to grapple with spiraling inflation, the Central Bank of Brazil has raised benchmark interest rates (Selic) to a five-year high of 12.75%, in real terms which equates to 6.69% which is the highest globally.

Although the economic environment is highly volatile, investor appetite for infrastructure projects remains strong; the Secretariat of Economic Policy (SPE) forecasts private infrastructure investment to increase 95% to $14.6 billion over the next year. The federal government initiated a plan in 2019 to use public-private partnerships to upgrade the country’s lagging infrastructure. The government has granted 79 concessions in total so far and over 2022 a further 61 auctions are to be held for infrastructure projects including highways, railways, shipping terminals and airports.

Riddleston adds: “Strong investor appetite will continue to drive infrastructure development, however, continued cost pressure will restrict infrastructure growth momentum over the rest of the year and into 2023. Furthermore, additional uncertainty may be ahead, with the presidential election to be held in October 2022. The left-wing candidate, Lula, who is leading in the polls, may scrap many of the auctions in an effort to scale back the involvement of the private sector in public infrastructure works, consequently halting future infrastructure investment plans.”