Hungary Infrastructure Report Q3 2012

BMI View: We maintain our core view that that the Hungarian construction industry value is on track to bottom out in 2012, with a year-on-year (y-o-y) contraction of 0.2% anticipated. However, we have downgraded our 2013 growth forecast from 0.6% y-o-y growth expected earlier to just 0.1%. This revision highlights the risks to the sector’s growth following EU finance ministers’ decision to withhold EUR495mn in cohesion funds from Hungary in 2013.

An uptick in order bookings for the construction sector during 2011, combined with the slight pickup in activity in late 2011, indicate that the industry is on track to bottom out in 2012. Much of this growth will be driven by growth in the infrastructure sector, where a couple of notable projects should be enough to create growth. The largest source of growth will be power plants and transmission grids, with a new EUR600mn power plant due to enter construction in 2012. However, our expectations of any significant growth in 2013 were dampened by the following factors:

• A 42.5% decline in the orders in the construction industry during 2011 suggests that a large number of investors continue to shy away from the market. The industry recorded a 46.9% y-o-y decline in contract volumes in the residential and non residential sector, in addition to almost a 40% decline in the infrastructure sector over 2011.

• March 2012 saw the EU suspend 30% of Hungary’s Cohesion Funding for 2013, owing to the government's failure to adequately address its fiscal problems. Given that the country has been incredibly reliant on this funding to support infrastructure investment, primarily in the transport sector, we expect the suspension to put dampen industry growth.

• There is greater uncertainty regarding progress in the planned Nabucco pipeline, after Hungarian oil & gas company MOL , in April 2012, revealed its plans to sell its share from the project. The project has already been delayed and there are further doubts about the viability of the project, due to spiralling costs.

On the back of these unfavourable developments, Hungary has seen its score in BMI’s infrastructure risk/reward ratings for Central and Eastern Europe slipping from 57.0 in Q212 to 55.7 points in Q312. With that score, Hungary has moved to 10th place behind Turkey, falling short of the regional average score of 56.3.

With domestic demand looking so depressed, it is not surprising that we expect a greater proportion of Hungarian cement production to be geared towards export markets. Industry estimates show that Hungarian cement producers rely on exports for close to 20% of their total production. However, an annual average y-o-y growth of 7.4% in export demand will see exports account for nearly 27% of total production by 2016.