Market Monitor - Construction industry - Brazil

Market Monitor

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After a modest growth of 0.5 % in 2014, the construction output in Brazil is expected to grow at more or less the same level in 2015.

Market performance snapshots

Brazil

  • Subdues prospects in 2015
  • Payment delays and insolvencies expected to increase sharply
  • A major corruption scandal shakes the industry

The Brazilian construction sector has been negatively affected by a slowdown in economic growth (GDP contracted 0.1% in 2014 and is expected to grow only between 0.5% and 1% in 2015). Another stumbling block is higher interest rates, as the Central Bank has repeatedly raised the Selic benchmark interest rate since December 2014, to the current 12.25%. This together with banks being less willing to provide credit, makes commercial loans more expensive, slows construction sales and reduces the number of new building projects launched. At the same time it is expected that government investment in infrastructure projects will decrease because the budget deficit needs to be reduced. We expect the government will be more restrictive in approving new expenses, which could result in longer delays in awarding contracts to general contractors. After modest growth of 0.5% in 2014, construction output is only expected to grow at more or less the same level in 2015.

Construction businesses´ profit margins are forecast to deteriorate further this year, and it is expected that both payment delays and insolvencies will increase sharply in 2015. Due to those developments our underwriting stance is currently restrictive.

Since the end of 2014 the Brazilian construction sector has been shaken by a massive corruption case: State prosecutors alleged that nine of the leading construction businesses (Odebrecht, Camorgo Correa, Queroz Galvao, Engevix, OAS, UTC, Mendes Junior, Galvao Engenharia, IESA) paid bribes to the state oil company Petrobras and certain politicians in return for contracts. Pending further inquiries into the scandal, Petrobras has barred those construction businesses and some other companies from bidding for project work with it and suspended payments for on-going projects. Additionally banks have stopped providing loans to those leading construction businesses. As a consequence the large construction company IESA has filed for Chapter 11, while OAS has defaulted on two major payments to its bond holders.

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