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Construction sector: performance evaluation amid challenges

Construction sector: performance evaluation amid challenges

Egypt’s construction sector is currently ranked second in the MENA region, coming slightly behind the UAE, the Cabinet said in a June statement.

According to an April article by GlobalData, a data and analytics company, the sector is beginning to witness a positive outturn despite project delays, suspensions, and employment cuts amid the virus breakout.

In fact, the July-March period of fiscal year 2019/2020 saw implemented investments in construction worth EGP 48.814 billion, compared to EGP 35.570 billion during the same period a year earlier, according to official figures released by the Central Bank of Egypt.

Although the coronavirus pandemic is seen to be crippling in various industries, Egypt’s construction sector has been one of the few that maneuvered the crisis well.

A roller coaster

Before the COVID-19 era, the Egyptian construction sector performed “strongly” during fiscal year 2018/2019, contributing to 6.2% of the country’s GDP, according to the “Egypt Construction” 2020 report by Mordor Intelligence.

The residential construction industry saw a compound annual growth rate of 2% from 2015 to 2019, according to the "Egypt Construction Industry Databook Series" report released by ResearchAndMarkets.com. In addition, infrastructure construction was estimated to be EGP 126 billion in 2019.

Fast forward to the pandemic period, the sector contracted by 9.1% in the first quarter (Q1) of 2020, accounting for EGP 91.35 billion of the country’s GDP income, adjusted for current prices, according to the Planning and Economic Development  Ministry’s figures.

However, the sector rebounded by 2.7% in Q2 2020, contributing by EGP 66.649 billion to the country’s GDP, the ministry’s figures showed.

Fitch Ratings, a US credit rating agency, highlighted in a September article that Egypt’s continued outperformance of the region is backed by the industry’s project pipeline and continued provision of government funding for infrastructure projects.

On the employment side, the government paused construction work only for two weeks, resuming work in April, local press reported. The decision helped the sector, which employs approximately 4 million people,  to be the least impacted in Q2 2020  as 288,000 jobs were cut, compared to the 624,000 jobs wiped out in the retail and wholesale sector, according to CAPMAS figures

“Thanks to the national megaprojects under construction, the unemployment rate did not increase [above] the 9.6% mark [in Q2 2020],” Abdel Mottaleb Abdel Hamid, professor of economics at the Cairo-based Sadat Academy for Management Sciences, told Al-Monitor news website in August.

He added that the numerous infrastructure projects nationwide have cushioned the negative impact of the COVID-19 pandemic on Egypt’s economy, especially growth and employment.

Although private-sector investment plummeted significantly between April and July, the government carried on its megaprojects — especially roads and bridges — as planned, Abdel Hamid explained. 


Other hurdles emerging?

The country moved in May to halt building activities in a bid to limit building violations and illegal construction across the country, affecting all its sub-industries.

In May, Local Development Minister Mahmoud Shaarawy announced a six-month ban on construction permits in urban centers including Greater Cairo and Alexandria.

This came after President Abdel Fattah El Sisi ordered the government to halt construction in response to continued building code violations.

As a result, the ministry ordered all ongoing construction of private housing to stop until owners or developers present building plans that meet legal requirements such as allowing for enough parking spots, Shaarwary said. The decision, however, was not applied to construction work at national projects commissioned by authorities.

The consequences were significant in most industries serving the construction sector. The ban caused demand for steel billets and building materials to plummet 40-50%, an industry figure told the local press in September.

Besides, steel demand declined 60% due to the halt, a different local press quoted Mohamed Hefny, executive director of the Chamber of Mineral Industries. Factories’ sales do not exceed 40% of its production capacity, he added.

Not only that, but demand for cement is on track to drop to 45 million tons in 2020, down from 49 million tons last year, Arabian Cement CEO Sergio Alcantarilla told a local press in September.

In response, El Sisi directed in later the same month to end the six-month ban and introduce new building regulations as soon as possible.

Accordingly, the government relaxed the construction restrictions, allowing contractors and real estate developers to resume construction on buildings that are no higher than four stories.

The exemption applies only to companies that have already obtained the required building permits, Prime Minister Moustafa Madbouly noted following a September meeting with local governors and the local development minister.

 

Forecast

Experts see that the industry is likely to reverse the contraction trend, but growth forecasts have been revised downward by global agencies.

GlobalData cut in April its growth rate estimate for Egypt’s construction sector to 7.9% in 2020, given the disruption caused by COVID-19.

For the 2020-2024 period, the company expected in a June report Egypt’s construction industry to grow at an average of 9.6% per year between 2020 and 2024, before bringing it down to 9.5% in July.

This is compared to 2019 figures when the firm expected the industry to expand at an annual average 11.3% clip between 2019 and 2023, spurred by Cairo’s urban development program.

Fitch was much of the same, lowering its construction growth forecast for 2020 from 9.7% to a “still strong 7.5%” in an April report.

The report’s release, however, came at a time of reports that work is being suspended on the vast majority of large-scale projects in the country.

The agency added, “Downside risk to this growth figure exists and will depend on the country’s ability to see a timely resumption of works later in the year.

In September, Fitch forecast the sector to exhibit robust real lower growth of 5.5% Year on Year (YoY) during 2020, before posting an average annual real growth rate of 8.3% YoY between 2021 and 2029.

However, the agency said, “The wider prospects for the Egyptian construction sector remain strong, despite the Covid-19 pandemic, with the market set for consistent outperformance above our forecasts for real growth in the MENA region.”

All in all, over the short term, investment in the construction industry will be driven by government spending in the infrastructure sector, according to the "Egypt Construction Industry Databook Series" report released by ResearchAndMarkets.com.

By 2029, Fitch expected the country’s sector to be the largest in the region in terms of value, Fitch Solutions’ BMI research said in a report released by the Cabinet in June.

The sector’s value will more than triple to $89 billion from a current $25 billion by 2029, and account for 30% of the entire region’s construction market, Fitch highlighted. 

 

 

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