Wednesday, July 8

Construction sector activity to remain sluggish, limited room for fiscal manoeuvre

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Given the still elevated national debt and reduced petroleum revenues, we believe the government has very limited room for fiscal manoeuvre, which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, analysts say. – Bernama photo

KUCHING: Malaysia’s construction sector will likely remain sluggish as the government has very limited room for fiscal manoeuvre, analysts observed.

“Given the still elevated national debt and reduced petroleum revenues, we believe the government has very limited room for fiscal manoeuvre, which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term,” said the research team at AmInvestment Bank Bhd (AmInvestment) in its sector report for the construction sector.

“Our view is validated by S&P Global Ratings’ downgrade of Malaysia’s outlook to negative from stable on June 26, 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus,” it added.

Nonetheless, it pointed out that the international rating agency affirmed its “A-” long-term and “A-2” short-term foreign currency sovereign credit rating, as well as its “A” long-term and “A-1” short-term local currency ratings on Malaysia.

Similarly, it said it does not expect any pick-up in private sector jobs (predominantly property projects) given the acute oversupply situation in the high-rise residential, retail mall and office segments.

Meanwhile, it noted that there has yet to be any indication from the new government that it would honour the RM2.36 billion toll concession disposal deal signed between the previous administration and Gamuda.

“The proceeds from this deal, if it materializes, could come in handy for Gamuda, if the Penang state government decides to fund the Penang South Reclamation (PSR) component (the reclamation of three man-made islands with a total area of 4,200 acres at the southern tip of Penang Island) under the Penang Transport Master Plan (PTMP) project via a contractor financing/deferred payment scheme.

“To recap, under the scheme, the appointed contractor for the PSR project is required to come out with RM2.5 billion to RM3 billion to fund the reclamation of the 790-acre Smart Industrial Park on the 2,300-acre Island A. Once completed, the state government will sell the industrial park.

“The cash flow and profit raised from the sale of the industrial park will be used to pay the contractor and also ploughed back to complete the reclamation of Island A, Island B (1,100 acres) and Island C (800 acres), as well as the LRT and Pan Island Link highway under the PTMP project,” it explained.

As for Sarawak, the research team pointed out that the state government has decided that it wants to take control of its own destiny by resorting to state reserves to fund RM11 billion of public infrastructure projects, including the Coastal Road, Second Trunk Road and 11 mega bridges.

“However, the rollout of work packages from these highly publicised projects seems to have hit a snag after the initial hype,” it said.

All in, AmInvestment said it might upgrade its rating on the sector to ‘neutral/overweight’ if the government decides to revive key public infrastructure projects, particularly, the KL-Singapore HSR and MRT3, despite the fiscal constraints.

However, for now, it maintained its ‘underweight’ rating.