Construction poses biggest credit risk worldwide

Worldwide, the construction sector is becoming like a canary in the mines, an indicator of each country’s economy, according to a report by global credit risk agency Coface.

“The construction sector was badly hit by the 2009 crisis, and a large number of payment incidents were still occurring in 2011,” according to Coface’s analysis. “The intensity of activity in the construction sector varies according to the impact of the crisis on the economy of the concerned country and according to sensitivity to economic conditions that varies from one subsector to another.”

Coface’s Global Construction: Substantial Geographic Differences, High Sensitivity to Economic conditions, Permanent Credit Risk report shows that activity is strong in emerging markets, particularly subsectors such as public works and private and institutional non-residential construction. Conversely, activity in developed markets is either moderate or stagnant, with particularly large disparities in the residential construction sector.

Unfortunately the uneven fortunes of the industry poses a credit risk, particularly in stagnant economies in parts of Europe, where activity will depend on forthcoming austerity plans. Defaults and payment incidents have risen in Ireland, Iceland, Spain, Denmark, the Netherlands, Greece and Central Europe and high prices have started to affect the more robust economies of the UK, France, Belgium and Italy. Other countries, such as Germany, Austria, Norway, Sweden, Finland and Poland, however, remain somewhat untouched.

Conversely, construction in the Asia-Pacific zone is “relatively buoyant”, particularly in Australia, Japan and New Zealand where reconstruction efforts, following respective natural disasters in 2011, are taking place.

The building boom continues in China, however, even after the government restricted bank loans for the property market to avoid inflation. “The drop in sales, price adjustments and increased stock levels are expected to slightly slow the activity in the private residential segment, but this will be partly offset by the launch of a new public social housing construction program,” according to Coface.

The effect of the China boom has seen a number of world-class players emerge from the construction industry, as well as related sectors such as producers of raw materials and machinery manufacturers. These players are reaching out to other emerging regions in Africa and the Middle East, which may spur growth in those areas.