01 Jul 2020
Posted in Construction
SSA construction sector sees cuts as COVID-19 impacts economic activity and investment growth, says GlobalData
The 2020 construction output growth forecast for the sub-saharan Africa (SSA) region has been revised down to 0.7% from the previous pre-COVID forecast of 3.6%, according to GlobalData. This revision reflects the impact of COVID-19 on the region’s economic activity and investment growth stemming from the wider global slowdown. Revenues from travel and air transport are projected to be hit hard, as well as foreign direct investment (FDI).
Yasmine Ghozzi, Economist at GlobalData, comments:“Construction growth is expected to remain slow in 2021 before regaining strength in 2022. This, in part, reflects the expectation that budget spending in 2020 and 2021 will be focused on stabilization, with some development projects being pushed back, and health sector spending being a priority as the novel coronavirus is exerting strong pressure on a national health that is not equipped to deal with major pandemics.
“In order to free up funds to support sectors heavily affected by the crisis, there will be a focus on negotiating debt relief and restructuring with external creditors. Governments’ plans in the region for fiscal consolidation will be pushed off track because of the negative effects on revenue collection and increased expenditure pressures. Governments may also resort to selling assets or privatize state-owned companies to help deal with funding shortfalls. The implementation of the African Continental Free Trade Area (ACFTA, originally scheduled for July 2020 but is now delayed by a year due to the pandemic) should boost recovery.”
COVID-19 is expected to hit the region’s largest two economies, South Africa and Nigeria, in a context of weak growth and investment. This will adversely impact their respective construction sectors. GlobalData expects South Africa’s construction industry to contract by 5.9% in 2020, and this negative impact will persist as the industry continues to be hit hard by the impact of high national debt, labor shortages and little infrastructure spending amid a depressed economy.
GlobalData has further cut its growth rate for Nigeria’s construction industry to -2.1% (from the previous update of 1.3%) in 2020, and foresees that weak public investment alongside limited foreign direct investment (FDI) amid the global economic downturn will push Nigeria into recession. Continued deficits in energy and transport infrastructure will also hinder the economy’s medium-term recovery.
Ghozzi comments: “The overall short-term outlook for Nigeria remains subdued as the intervention of OPEC+ and top oil-producing countries through output cuts has still not impacted significantly on oil prices or stabilized the market (the oil price recorded fluctuations in April and May), and if the pandemic lingers on, the Nigerian oil sector is predicted to contract further in the remaining quarters of the year, resulting in further revenue shrinkage for the government.”
GlobalData has cut its growth rate for Kenya’s construction sector to 3.1% for 2020, and has cut Ethiopia ’s construction growth to 7.8% in 2020 (down from Q1 2020 update of 10.9%) and 8.7% in 2021.
Ghozzi adds: “The weaker growth outlook for Ethiopia reflects the likelihood of a decline in project financing given concerns surrounding the completion of projects, exacerbated by a sharp rise in the country’s fiscal. Capital projects such as railway and road construction will gain momentum again from 2022 once the election is over (general elections as well as regional and council elections were supposed to be held in August but are now postponed due to the pandemic with no specific date) and global economic conditions normalize.”
GlobalData has revised down its forecast for Ghana’s construction sector to -4.3% in 2020 and -1.8% in 2021 in real terms. Given that Ghana is an import-driven economy, COVID-19 is expected to negatively impact the country’s international trade and reserves, and the economy will suffer from a slump in government’s revenues, which will affect its ability to spend on development projects. The unplanned increase in expenditure, specifically in the health sector, could result in a sharp rise in public expenditure, which will result in a fiscal deficit of 6.6% of revised GDP, higher than the de facto fiscal rule of 5% set by the Fiscal Responsibility Law.