Thailand: Building momentum

Thailand’s construction sector looks set for an increasingly busy time leading into next year, with the new government committed to ramping up infrastructure and housing projects, though the industry is still wary that rising materials costs and higher wages could weaken growth.

Thailand’s construction sector contracted by 5.3% in 2008 and expanded by less than half a percent the following year, before bouncing back in 2010 to post growth of 6.8%, according to data from the National Economic and Social Development Board. While many analysts do not expect this rate to be matched this year, solid growth of around 4% has been tipped for the industry.

In part, this growth will be driven by state-funded projects. The new Puea Thai-led government of Prime Minister Yingluck Shinawatra has vowed to increase spending on infrastructure projects, especially those aimed at improving the country’s transport and logistics network. On August 23, Yingluck said her government wanted to focus on developing a domestic high-speed rail grid, rather than on the planned international rail links favoured by the former Democrat Party-led coalition.

Three rapid transit lines would be constructed connecting Bangkok with urban centres in the north, north-east and upper south, she told parliament in a policy address, while another line would be built to the province of Chonburi, close to the major tourist hub of Pattaya.

It is not just the new government’s infrastructure programme that could boost the construction sector: campaign pledges to increase the availability of low-cost housing are also set to bring a rapid injection of capital into the building industry. On August 26, the head of the National Housing Authority (NHA) told local media that a plan to lift the target for the Baan Ua-Athorn housing scheme for low-income earners would be laid before the cabinet. The plan, according to the NHA’s governor, Vitoon Chaisakul, includes the construction of between 385,000 and 485,000 residential units, rather than the 285,000 planned for by the previous government.

“If the Cabinet approves the plan, we will start the project as soon as possible. The process will take three to four months to implement,” Vitoon said.

The NHA is also looking at opening tenders for private developers to conduct work on low-income and first-home-owner housing projects, with the maximum bid rate being set at below BT1m ($33,268) for each project, said Vitoon. This measure would mean that the individual developments would not be subject to the Public-Private Joint Venture Act, reducing NHA’s business risk but also speeding up the tender process.

Along with the prospect of more work, another potential positive for the construction industry could come in the form of lower oil prices, with a reduction in fuel costs flowing on to the sector, according to Uthai Uthaisangsuk, the senior executive vice-president of developer Sansiri. If petrol prices eased, “costs of construction materials will decline in tandem”, he said in an interview with the Bangkok Post in late August.

However, while lower fuel costs could help cool price pressures in the sector, many other factors could well increase the heat. Rising demand for materials could cause blockages in the supply pipelines, which could cancel out any benefits of a fall in petrol prices. Also of concern to many in the construction trade is the government’s promise to raise the minimum daily wage to BT300 ($10) from the current average of BT190 ($6.30).

One of the first to voice these concerns was Polpat Karnasuta, the president of the Thai Contractors Association, who said in mid-August that even a phased increase in the minimum wage for the sector’s 2.9m employees would hit the construction industry hard. If fully implemented, the increase would add 6% to the costs of building projects, he said.

“Even a gradual increase will have an impact on them. A sudden increase will cause a larger impact,” said Polpat.

At the beginning of August, Chaiyan Chakarakul, the CEO of developer Lalin Property, said that while increasing materials costs would likely force the company to raise the prices on its housing units by around 5-7% by the beginning of 2012, if the new minimum wage rate was introduced, the hike would have to come this year. However, Chaiyan said he hoped the impact of the wage increase on the construction industry could be mitigated.

“We believe the new government will not rise the wages at once. It will give the private sector and consumers some time to adjust,” he told the Bangkok Post on August 3.

In early August, Bank of Thailand’s governor, Prasarn Trairatvorakul, urged the incoming government to err on the side of caution when it came to pumping money into the economy, warning such measures could fuel inflation. In particular, he cited the construction industry, where he said raw materials accounted for 40% of costs, with prices expected to increase by 6% this year, well above the bank’s 4% forecast for annual inflation.

He advocated that the government not increase spending above the proposed deficit levels of BT350bn ($11.6bn) for next year, while saying construction firms should shift to cheaper technology such as prefabrication.

Though the government has said it is determined to boost spending on construction projects, it may find it takes time to roll out new developments and push through with schemes it has already committed to while also trying to balance the other demands on the budget.

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