BMI View: BMI has revised down its 2014 forecast for Slovakia's construction industry to -3.8% on the back of weak indicators across the industry. In the nine months to September 2014 construction output fell 3.2% year-on-year to EUR3.1bn, according to the Statistical Office of the Slovak Republic. 2015 should, however, see a return to positive growth ( BMI forecasts 1.1%) driven by EU energy and transport integration projects and an improving economic picture. The infrastructure sector will remain the key driver for construction industry growth to the end of our forecast period in 2024, despite accounting for only 25% of the total construction picture, and while we forecast construction industry growth remaining positive throughout this period, it will be weak and will begin to slow after a high of 1.7% in 2017.
Key developments informing our forecast include:
? Highways projects back on course: In April 2014, Italian firm Salini Impregilo won the EUR410mn contract to construct the 13.4km Lietavská Lú?ka to Viš?ové and Dubná Skala section of the D1 motorway in northern Slovakia, including five overpasses with an overall length of 2.5km, as well as a 7.5km twin-tube tunnel, according to Construction Europe. The section - linking Bratislava with Uzhorod in Ukraine and due for completion in 2020 - comes under the EU's Trans-European Network (TEN-T) plans and is therefore eligible for funding from the EIB and Slovakian government. BMI has the view that the EU's raft of transport network project funding announced in 2013, which will benefit Slovak road and rail development/upgrading to better integrate with a European network, should act as a driver for improved project handling, supported by a stable political outlook.
? EU g as security in the balance: The EU's desire to limit Russian gas reliance gained a boost in December 2014 when Russian President Vladimir Putin announced the cancellation of the EUR40bn South Stream gas pipeline. The project had suffered several setbacks in its construction, not least by Bulgaria in Varna where the pipe came ashore. BMI believes that apart from upsetting strong supporters Hungary and Serbia, and interested companies OMV, ENI and Gazprom, at least in the short term, this will only add strength to the UE's resolve to drive its TEN-E programme. For countries looking to secure affordable supplies from diversified sources, there will be other options - an Azeri gas pipeline, bypassing Russia, is in the planning; and LNG terminals are coming online in the Baltic granting access to Scandinavian supplies. Also an improved, integrated European network will allow for greater access to regional storage facilities, allowing EU countries to create localised economies of scale and control energy prices year round.
? Housing boost: Growth in construction volumes remained in contraction in 9M14, but leading indicators point towards a potential recovery in 2015. On a 12-month rolling basis, annual growth in building permits in Q114 rose to its highest level since 2008. Accelerating mortgage lending and rising home prices should support activity in the residential construction sector.
Slovakia is ranked 11th out of the 16 countries in our Central and Eastern Europe infrastructure Risk/Reward Index, with a below-average score of 52.0. The weak macroeconomic performance over recent years, which has led to overall pessimism in the domestic construction sector and continued delays in existing projects have resulted in Slovakia falling significantly behind its regional peers.