IN SPITE OF fluid economic conditions, dependence on the United States economy, and other challenges of the volatile Latin American marketplace, Mexico and Brazil offer construction equipment manufacturers export opportunities.
Construction industry growth in these nations will be driven by increased public spending on infrastructure projects in the short-term, according to Jose Luis Garcia Cantu, general director of the Mexican Construction Industry Chamber of Commerce, and John Price, president of the market research and strategy consulting firm Info Americas.
Price and Cantu pointed out the trend toward increased government spending on construction in Brazil and Mexico during presentations on the nations' economic conditions at a recent international council seminar sponsored by the Association of Equipment Manufacturers (AEM).
Although Mexico's economic performance in 2001 paled by comparison to the nation's 7% increase in GDP in 2000, it still had one of the strongest emerging economies in the world with historically low inflation and a relatively stable GDP, according to Cantu. He said a rebound is predicted this year with growth supported by investment instead of consumer spending in spite of challenges such as layoffs, a low growth rate (economists expect Mexico's GDP to expand by approximately 1.8% if the U.S economy continues to recover), lagging public spending, and a lack of infrastructure.
In spite of challenges, he says room for optimism exists.
“The overall economy is improving and also, for the near-term future, we think construction will be better as well with all of the policies and reforms that Mexico is going to have,” Cantu said.
The Mexican construction sector has contracted 30% over the past 20 years versus an 8% increase in overall GDP in that time. This resulted in undercapitalization of construction companies, decreased and stalled capacity, and a reduction in the number of construction companies, according to Cantu.
However, the construction sector still employs 20% of Mexico's workforce, and the economy's demand for infrastructure improvements could offer a better construction outlook.
Government spending spurred growth
Cantu said more government spending on public works aimed at boosting the efficiency of production and distribution of goods and services to help Mexico compete in the global economy drove two straight months of year-to-year growth in the nation's construction sector in spring 2002.
Mexico was ranked 54th on infrastructure spending out of 75 nations ranked in a World Economic Forum report on infrastructure development, Cantu said.
Therefore, he said, the Mexican government acknowledges that the nation needs infrastructure investments of $33.5 billion annually over the next six years on basic infrastructure such as oil ($7.9 billion), electricity ($7.1 billion), natural gas ($6.6 billion), water and sewage ($4.6 billion), telecommunications ($2.4 billion), roads ($2.1 billion), environmental protection ($1.4 billion), and another $1.4 billion for other infrastructure projects. In addition, social infrastructure needs are projected at $19.1 billion, including the construction of 750,000 homes a year through 2006 to avoid an increase in the nation's current housing deficit.
Positive outlook for Brazil's economy
As in Mexico, limited growth is predicted for the Brazilian economy in 2002 and 2003, according to Price. He said the nation's economy is expected to grow between 1.5% and 2% in 2002 and should present opportunities for construction equipment manufacturers. This is despite capital flight, a weakening currency, political uncertainties, and slowing civil construction since 1999 as Brazil struggled to meet conditions of its International Monetary Fund (IMF) loans.
Factors behind Price's positive outlook include:
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Both leading candidates in Brazil's October 2002 elections were expected to revive government spending on construction programs in the years after the election.
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Increased industrial construction.
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Reforms in residential construction finance.
Price believes concerns about major changes in Brazil's political landscape and the rollover of its IMF loans are unfounded due to checks and balances in its strong democratic structure. However, he said efforts to stabilize Brazil's currency could slow foreign investment, which does not bode well for equipment manufacturers that rely on projects to fuel demand for capital purchases.
In recent years, most of Brazil's construction projects were funded through private sector investments, according to Price, who warned that the nation's October 2002 elections were likely to be followed by a period of reduced private investment in construction. As a result, most upcoming projects will rely on public funds.
Public infrastructure investment is already creating opportunities for construction equipment manufacturers through Brazil's rush to build power plants to prevent a repeat of the brownouts the nation experienced in 2001, Price said. Another area experiencing increased activity is the industrial construction sector, which he said is recovering from the slowdown caused by brownout-related production decreases.
He said because the nation imports only about 15% of its equipment and the government protects domestically produced low- to midrange machinery, the market's best opportunities lie in big-ticket items and high-tech equipment, especially if they can be combined with financing tools.