South Korea Infrastructure Report Q1 2010

This quarter BMI has introduced new data series for infrastructure and its subsectors (Transport and Energy & Utilities). This is an effort to address a significant deficiency in the availability of globally comparable, infrastructure-specific indicators and forecasts across a wide range of countries. The new infrastructure data series enables users to quantify trends and growth patterns in the infrastructure sectors of the 35 main emerging and developed markets out of the 62 countries in BMI's Infrastructure service.

South Korea’s construction industry has been hit by the global economic downturn, with the impact already highly visible on the sector. However, government measures to funnel money into the country’s construction industry have cushioned the blow. In the Q110 South Korea Infrastructure Report we estimate that the value of the construction industry will contract by 4.55% year-on-year (y-o-y) in 2009, reaching a value of KRW63,711trn (US$49.97bn).

Using our new data we are estimating that the portion of the construction industry value that is made of infrastructure is 36.7%, a marginal decrease from the actual data from the Bank of Korea for 2008, when infrastructure accounted for 37.2% of the construction industry.

We are forecasting the infrastructure industry to contract by 5.6% y-o-y in 2009 to reach a value of KRW23.39trn (US$18.35bn). This contraction is evidenced in the small number of new projects recorded this quarter in the transport and energy and utilities sectors.

In the first half of 2009 we saw sustained activity in the country, and the real growth figures for Q1 and Q2 reflect this with the construction industry as a whole actually having grown y-o-y, by 0.4% in Q109 compared with Q108 and by 2.2% in Q209 compared with Q208. The government’s efforts to sustain activity in the construction industry, or at least make up for some of the diminished private sector investment, appear to be bearing fruit, and indeed have prompted a substantial revision in our construction industry real growth forecast for 2009, from -16.73% to -4.55%. Despite this, in the second half of the year we have seen little activity and therefore we are maintaining our forecast of a contraction in the industry. However, the data for the first half of 2009 undoubtedly represents upside potential for our forecast.

The biggest project announced this quarter has been the plans to create an underground road network stretching 149km in Seoul. The project is ambitious and provisional estimates put the price tag at KRW11.2trn (US$9.1bn). Although the project will provide a boost to the infrastructure industry, it is not scheduled to begin until 2010, and therefore will not affect our 2009 forecasts for construction industry and infrastructure breakdown. This joins another major new project in the transport sector that was announced last quarter in June, a US$3.1bn expansion project at Incheon International Airport.

Combined, these two projects present an upside risk for the percentage of infrastructure industry formed of transport infrastructure. Already, it accounts for a larger portion than energy and utilities, estimated at 56.6% in 2009. This is set to decline over the mid term, but if these projects get off the ground it will present an upside risk to this.

In the utilities sector, there has been little new activity, however, there are projects under way, including construction of new nuclear power plants. The country is at the centre of the growing focus on renewable energy, developing both the technology and increasing the portion of electricity generated by renewables.

The country is developing the world’s largest tidal power plant, which is due to be completed by the end of 2009 and in September, Korea Electric Power Corporation (KEPCO) announced a US$2.3bn plan to develop green technology for power generation. The investments are due to begin in 2010.