Fitch adjusts estimate, says Nigeria’s construction growth to disappoint
Fitch Solutions Macro Research has revised down long-term construction growth outlook for Nigeria and now expects growth to average 4.8% annually to 2028, down from 7.7% previously.
In its Africa Monitor report, the firm noted that this reflects its increasingly bearish view on Nigeria’s construction sector, driven by ongoing government fiscal constraints, elevated market risks, and weak prospects for reform following the re-election of President Muhammadu Buhari.
The macro research firm is of the view that in the short term, growth will mainly be driven by transport developments in the rail, port and road sectors, while residential and non-residential building will take over as the main growth driver towards the end of its long-term forecast period.
“We expect Nigeria’s construction growth trajectory to remain firmly below potential over our long-term forecast period.
“Our forecast has been adjusted to account for our more bearish outlook on the sector, with growth averaging 4.8% year on year in real terms to 2028, down from 7.7% previously”, the report reads.
Fitch said while this outlook represents an improvement on the growth posted in recent years, it remains well below Nigeria’s potential and the double-digit growth seen prior to 2015, and also fails to meet the level required to support the country’s economic and population growth.
“Nigeria’s infrastructure is not currently sufficient to facilitate growing business activity, with logistics bottlenecks and power shortages particularly pressing issues, while housing stock remains far short of demand for the rapidly expanding population.
“Weak growth in the construction sector means that these issues will continue to hold back the country’s development over the coming years. A range of factors, including limited government spending and high operating risks, will weigh on growth in the construction sector going forward.
“A major concern is the fiscal constraints on the government, which will restrict spending on infrastructure that is crucial for driving growth”, the firm stated.
It also observed that while government revenues will be boosted by increasing oil exports and rising oil prices, other efforts to improve revenues such as expanding the tax base will prove difficult, rising current expenditure will widen the fiscal deficit.
It said in particular, government spending will be focused on personnel costs, with the minimum wage rising, and additional funding diverted to tackle ongoing security threats.
“Our Country Risk team expects some cuts to capital expenditure as a result, and while borrowing remains an option for government financing of infrastructure projects, this restricted funding capacity will drag on growth in the construction industry.
“At the same time, attracting private sector investment in infrastructure remains a challenge due to fundamental risks in the Nigerian market”, it stated.
Construction firms are subject to a range of obstacles when operating in Nigeria, which will continue to deter investors lacking a high risk appetite.
Fitch said that the regulatory environment remains opaque and confusing, particularly in the rail sector, while competition with state-owned enterprises often puts construction firms at a disadvantage.
It noted multiple layers of bureaucracy, overlapping jurisdictions and a lack of oversight also mean that firms are at risk of being solicited for bribes by officials, with corruption perceptions high in the country.
Security issues also remain a key concern for the construction sector, with Boko Haram active in the north and militants continuing to operate in the Niger Delta.
Among the risk factor listed is the concern that a number of construction workers have been kidnapped in the country in recent months, with construction sites posing a key target for armed groups due to their often remote locations and lack of security protection.
“Lack of major reform will make it difficult to attract more private sector investment to infrastructure. The victory of incumbent President Muhammadu Buhari in the February elections means that even the limited prospects for reform which would have been possible under his challenger, Atiku Abubakar, will not be realised”, Fitch Solution stated.
“We expected Abubakar to have some success with reforming the management and oversight of the rail and oil and gas sectors, which would have attracted more private sector investment.
“However, Buhari’s poor track record on carrying out reforms means that we see little upside potential for infrastructure growth over the course of his second term, which is due to last until 2023”, the report reads.
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Initial signs suggest that the construction outlook for Buhari’s second term may be worse than we expected, with a new housing law passed in March including provisions that are likely to weigh on residential construction.
This has further informed our new, more pessimistic long-term outlook for Nigeria’s construction sector.
The firm stated that it expects to see some improvement in growth over the coming years, initially driven by transport developments.
“Our forecast is for average construction industry growth of 4.3% year on year over the medium term, representing acceleration on the average of 2.9% annually since 2014.
“This improved outlook will largely stem from transport developments in the road, rail and port sectors, all of which are seeing some substantial activity.
The government is prioritising road upgrades and construction, notably the second Niger Bridge project, in order to alleviate logistics bottlenecks, and there have been signs of growing private sector interest in the sector.
Rail projects are also progressing, including the remaining sections of the Lagos-Kano standard gauge railway, which is under construction by China Civil Engineering Construction Corporation. Extensive port plans are in the pipeline, including the Lekki port development in Lagos and deep sea ports at Olokola and Bakassi.
Fitch reckoned that these projects will keep transport infrastructures sub-sector growth outperforming other sub-sectors in the short term.
“Over the longer term, we are less optimistic on some of the more ambitious planned transport infrastructure developments. President Buhari has pledged to complete the construction of the USD11 billion Coastal Railway project from Lagos to Calabar.
“However, the high costs involved have left the project struggling to attract financing and we do not expect it to be completed within our long-term forecast period.
“As we have previously highlighted, the government’s ambitious rail and port plans are unlikely to be realised in full, due to a combination factors including uncertain viability, high costs and pressing operational risks.
“We are more optimistic on the prospects for residential and non-residential building and energy and utilities over the long term. This is mainly based on strong demand dynamics including rapid population growth, urbanisation and increasing economic activity, which will necessitate investment in housing and power infrastructure”, Fitch stated.
Fitch adjusts estimate, says Nigeria’s construction growth to disappoint