Growing risks of reduced infrastructure spending this year

(Borneo Post)
Prospects for the construction companies to replenish their order books will likely remain challenging in 2020 due to rising risks of an economic slowdown and a tighter federal government budget, analysts observed.

In a sector update, the research team at Affin Hwang Investment Bank Bhd (Affin Hwang) highlighted that there are rising risks of an economic slowdown due to global restrictions brought on by the Coronavirus Disease 2019 (Covid-19) outbreak while the new federal government could impose a tighter budget which could lead to a cut in development expenditure.

It also pointed out that the World Health Organisation’s declaration of the Covid-19 virus outbreak as a pandemic highlights the risk of a global economic slowdown due to supply-chain disruptions and weak demand for goods and services.

“As an open economy, Malaysia will be adversely impacted and could see a real GDP growth slowdown to the low end of the official government forecast range of 3.2 to 4.2 per cent in 2020.

“The sharp fall in the Brent oil price will reduce the federal government’s revenue from oil-related sources, which contribute about 30.8 per cent of total revenue.

“The government may reduce development expenditure to mitigate the impact on the federal government deficit, which could lead to lower infrastructure spending,” it opined.

It added, “We expect lower infrastructure spending in 2020 as implementation of new large-scale projects could be deferred.”

It also cut its earnings forecasts for construction companies under its coverage to reflect lower assumptions of new contract wins and weaker property sales.

On the other hand, the research team viewed the reinstatement of Datuk Seri Fadillah Yusof as Minister of Works as positive indications of policy consistency.

“But it is uncertain if he will review policies on the award of new public-sector contracts adopted by the previous government and re-prioritise projects to be implemented, which could cause delays in contract awards,” it warned.

Nevertheless, it said: “Fadillah said that the Pan Borneo Highway will continue through the use of a conventional project approach following the termination of the Project Delivery Partner by the previous government.

“We view this positively as changing the implementation approach again would cause further delays in completing the project.”

It also noted that the appointment of a technocrat, former CIMB CEO Tengku Datuk Seri Zafrul Aziz, as Minister of Finance is a welcome change if he is able to improve transparency and efficiency in the disbursement of the government’s development expenditure.

Overall, it maintained an ‘underweight’ rating on the sector.