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Investment in preparations for the UEFA 2012 Football tournament enabled Ukraines construction industry to emerge from deep recession in 2008-10 to strong growth in 2011. However, we question what will sustain the sector following the tournament, considering the presence of weak government finances, a poor domestic economy and regionally and weak private investment. Consequently, we are penciling in a sharp slowdown in growth in H212 and 2013.

Strong Rebound

Ukraines construction industry was one of the worst hit in the global financial crisis of 2008/09, with the industry losing almost a third of its nominal value between 2007 and 2009, and more than half of its real value. However, we had previously highlighted Ukraines potential to transform from a regional underperformer to outperformer from 2011 onwards and this appears to be playing out. Back in April 2011, we wrote: …owing to necessary infrastructure investments and a considerable base effect, the countrys construction industry looks to be experiencing a revival and could be a regional outperformer in 2011 and 2012 (see BMIs online service Underperformer To Outperformer: Ukraines Construction Industry Revival - April 6 2011).

The country had been slow off the mark in investing in infrastructure ahead of the UEFA 2012 Football tournament, having been plagued by financial and political difficulties. However, Ukraine has made impressive progress on its US$14bn investment plan for the tournament. Although a few projects were abandoned, most have been either completed or are drawing to a close. This has translated into an estimated 10.7% real growth rate for the construction industry in 2011, vastly outperforming regional peers who have struggled to post above 0% growth. In 2012, around UAH10bn is due to be invested and this, in tandem with last minute preparations for Euro 2012, should help sustain growth in the industry.

Weakness Going Forward

Beyond H212, we see very little to drive industry growth and therefore do not believe Ukraine will avoid the tournament curse which has seen other emerging market hosts of sporting tournaments experience a deep and sometimes prolonged dip in construction industry growth in the quarters following the tournament (South Africa being a case in point). Consequently, we have penciled in a sharp slowdown for 2012 (2.3%) and a dip into recession in 2013 (-0.2%). The government has over-extended itself to ensure projects are completed on time, and this has created a backlash domestically, given the lack of investment elsewhere. There are also growing concerns over the benefits of hosting the tournament, with some citing an expected $8bn loss in investment. In light of this, the government will have very little room to approve public works beyond H212. With private investment in the construction sector still weak, we expect the industry to stagnate.

There are a couple of sectors of the construction industry which could perform well; however, these only present risks to the upside:

- Ukraines gas network needs US$3.2bn in investment in order to modernise it, according to a study by Mott MacDonald in October 2011. The country has already started modernising the extensive but outdated gas pipeline network. At the same time, the possibility for Russia to purchase a stake in Ukrainian pipeline company Naftogaz (in return for lower gas prices) would see new investment into the sector - talks are ongoing, however, the sale would be politically unpalatable in Ukraine.

- The railway sector could be an outperformer. As well as Ukranian Railways approval of its US$20bn five-year rail electrification plan in October 2011, which will see 1,500km of railways electrified between 2011 and 2016, the EBRD announced in January 2012 that it was considering a EUR152mn loan for construction of the Dnipropetrovsk metro.

- The electricity sector is also benefitting from development bank funding, following loan approvals by both the EIB and the EBRD in late 2011 to support electricity projects. The EBRD approved a US$267mn loan for Ukrgidoenergo to upgrade six hydropower plants and the EIB a US$240mn loan upgrade for transmission projects.

- The electricity sector is also seeing an influx of renewable power investments, with solar and wind doing especially well. Very attractive FiTs, especially in comparison to the rest of Europe, saw strong solar installations over 2011. We expect this to continue and to be complemented by investment into wind farms and biomass to a lesser degree.

- Finally, the state privatisation programme, which is running to 2014, could generate revenues and precipitate investment. A privatisation law was signed in January 2012 and could see the government generate between UAH50bn (US$6.2bn) and UAH70bn (US$8.7bn) in revenues. This could be directed into much-needed infrastructure projects.

Click for Report details:Ukraine Infrastructure Report Q2 2012