Govt-led projects driving lending activities for construction sector

According to the central bank, loans approved for the construction sector rose 182% to RM2.5b in July


Loans approved to the construction sector reached an 18-month high in July this year as government-led infrastructure projects are driving lending activities for the sector.

According to the central bank’s July banking statistics, loans approved for the construction sector rose 182% to RM2.51 billion in July compared to RM889.5 million worth in June. The last time loans approved for the sector broke the RM2.5 billion level was in December 2016 at RM2.62 billion, according to Bank Negara Malaysia’s figures.

Loans applied for the sector also rose 44.9% to RM5.17 billion in July compared to RM3.57 billion in the
previous month.

The rise in financing for the construction sector is in line with increased momentum throughout the industry, which expanded 8.3% in the second-quarter of 2017 (2Q17) driven by civil engineering, transportation, power plant and other infrastructure activity.

The construction sector is expected to grow 8% this year and forecast to post robust growth for the next five years, as more government-implemented infrastructure projects are implemented across the country.

Among key infrastructure projects are the East Coast Rail Line, the Kuala Lumpur-Singapore high-speed rail, Mass Rapid Transit Line 2 and 3, Light Rail Transit Line 2 and 3, the Pan Borneo Highway, the Merdeka PNB 118 skyscraper, and the Refinery and Petrochemicals Integrated Development project in Johor.

Malaysia is also witnessing greater investments from China into construction-related projects, largely related to the “One Belt, One Road” initiative.

The China-led initiative aims to boost land and maritime connectivity from China to Europe. It includes investment in infrastructure across South-East Asia, South Asia, North Africa and the Middle East.

Both Malaysia and China are already cooperating on mega projects such as the Malaysia-China Kuantan Industrial Park and the China-Malaysia Qinzhou Industrial Park in China, as well as Xiamen University in Malaysia and several port and railway projects.

Despite fear of China’s dominance in the local construction sector, the government has given the assurance at least 30% of these foreign-led projects will have local contractors.

Rising demand for housing, particularly in the affordable segment, has added to the construction segment.

Excitement over more projects had pushed the KLSE Construction Index to a 52-week high of 344.91. For the year, the index which tracked the performance for the construction sector had increased 16.1% compared to 7.96% rise for the broader FTSE Bursa Malaysia KLCI.

Official figures showed that the construction sector’s contribution to the country’s gross domestic product (GDP) rose to an all-time high of RM13.39 billion in the first three months of 2017, but the figure dropped slightly to RM12.8 billion in the April-June period.

The sector’s contribution to the GDP averaged about RM9.91 billion from 2010 until 2017.

However, some analysts are sceptical whether the high growth numbers can be maintained in the long term.

Dun & Bradstreet Malaysia’s Business Optimism Index study named construction as the least optimistic
sector for 3Q17, with net profits expected to remain unchanged.

Standard Chartered Research in a recent report said it was cautious on sustaining the momentum of private investment driven by ongoing infrastructure projects, and increased external demand and foreign direct investment.

It said loans disbursed eased in the 2Q compared to the 1Q, while construction projects have fallen steadily over the last few quarters.

Malaysia’s economy grew 5.8% year-on-year for 2Q17, the fastest pace in over two years, spurred by strong private sector spending and robust export growth after a 5.6% expansion in 1Q17.

Strong lending for construction will provide a greater clarity on where the sector will be moving for the rest of this year.