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Southeast Asia Market Review 2020

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It is a tumultuous period for the Southeast Asian economy, as it is for many regions around the world, and challenging times undoubtedly lie ahead.

4.2%

GDP contraction expected in 2020

4.5%

Economic growth in 2019

Southeast Asia Market Review

As we near the final quarter of 2020 and begin to realise the 'new normal’ of COVID-19, Michael Murphy, Director at Linesight, reviews the Southeast Asian economic performance to date, and what we can expect in the coming months.

While the diversity in Southeast Asia usually makes it difficult to draw broad conclusions and forecasts, there is one particular factor impacting all economies in the region, and globally – COVID-19.

With the US-China trade war having taken its toll on Southeast Asia, growth in the region had slowed between 2018 and 2019, recorded at 4.5% for the year. The latest Global Economic Outlook from Oxford Economics projects the region’s GDP to contract by 4.2% in 2020. Furthermore, the road to recovery is uncertain at present, with global activity sluggish, a resurgence of the virus in some countries and tensions between the US and China rising once again, following the Phase 1 Agreement in early 2020.

Given the abovementioned diversity in-region and the varying mechanisms adopted to control the virus, the economic recovery periods will vary. Countries that have found a balance between kickstarting the economy while suppressing the virus, such as Thailand and Vietnam, are expected to recover in a more timely fashion, while others who were hastier in their easing of restrictions and were hit with a resurgence of COVID-19, such as Indonesia and the Philippines, will endure a more prolonged recovery.

Governments within the region have introduced a range of fiscal stimuli in an effort to keep their economies afloat, from pandemic support payments for citizens to central bank rate cuts. Some countries, such as Vietnam and Malaysia were focused on fiscal consolidation pre-COVID, and yet, faced with this crisis, Vietnam has had to roll out a package equating to 3.6% of GDP. Meanwhile, Singapore’s measures are projected to stand at almost 20% of GDP. However, as the crisis continues to drag on, some of the weaker economies within Southeast Asia will almost certainly struggle to fund another round of stimulus packages.

 

Summary

It is a tumultuous period for the Southeast Asian economy, as it is for many regions around the world, and challenging times undoubtedly lie ahead. While some countries look to have struck a balance between suppressing the virus while still keeping their economies afloat, and so are well-placed on the recovery trajectory, others appear to have lifted restrictions too early and are now suffering with additional waves of the virus with already weak healthcare systems, inferring a prolonged recovery period. All in all, it looks like the medium to longer-term impacts of COVID will vary significantly in-region.

This section includes:

Singapore market review 

Singapore value of construction output 

Singapore GDP growth rate 

Singapore currency exchange rates 

Linesight average Singapore construction costs 2020 

 
Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items. 

 

Singapore Market Review

As the final quarter of a remarkable year approaches, and the true impact of the COVID-19 pandemic begins to reveal itself, Steve Raye, Senior Cost Manager at Linesight, reviews the Singapore economic and construction industry performances to date, and what we can expect in the coming months. 

Economic overview

While the medium to long-term effects of COVID-19 and the extent to which they take hold remain to be seen, Singapore, like many other countries at this point, entered a recession in Q2, with GDP for the quarter contracting by 13.2%.

Looking forward, the Government is expecting GDP to shrink by 4-7% this year, noting that the pace of Singapore's recovery will inevitably depend on how well the public health situation is managed and whether community infections can be kept at a relatively low level. The construction industry accounts for approximately 4% of Singapore’s GDP per annum.

To date, the government has announced four support packages worth close to S$100 billion (nearly 20% of GDP), and has not ruled out announcing another package.

 

Construction

Following a strong performance in 2019, whereby the Building and Construction Authority’s (BCA) previous forecast to hit a five-year high of S$33.4 billion was surpassed with 9.3% growth in demand, 2020 was expected to be another good year for construction. The BCA projected that total construction demand would range between S$28 billion and S$33 billion, of which 62% (between S$17.5 billion and S$20.5 billion) was projected to be public sector. Demand was projected to then reach between S$27 billion and S$34 billion per year for 2021 and 2022, and between S$28 billion and S$35 billion per year for 2023 and 2024.

The public sector was expected to continue leading demand, contributing S$16 billion to S$20 billion per year from 2021 to 2024, with building projects and civil engineering works each accounting for half of this figure. BCA also expected private sector construction demand to stay at a moderate level pre-COVID, in view of the likely continued global economic uncertainties and the current overhang in the supply of private residential housing units.

However, construction in Singapore has been severely impacted by the global pandemic, unsurprisingly, with an extended circuit breaker period in place for eight weeks. This meant that all building works, as defined by the Building Control Act, were required to cease with effect from 7th April 2020. All stakeholders of the construction industry, including developers, builders, qualified persons, site supervisors and construction material suppliers had to comply with this suspension. ‘Phase 2’ followed this, with restrictions marginally lifted. For the most part, projects (particularly private) are now achieving significantly lower productivity levels than pre-COVID.

Recognising the negative impact that the circuit breaker would have on businesses, the Singaporean Parliament passed the COVID (Temporary Measures) Act on 7th April 2020. The Bill seeks to offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of the impact of COVID.

Construction in Singapore now faces a protracted slowdown in growth in the medium-term. Output growth, in real terms, is expected to decrease to 2.7% in 2020 and 0.5% in 2021, with the residential and commercial sectors particularly affected. There is a slowdown in private projects, while businesses face fierce competition, tighter margins and slow payments.

Construction insolvencies increased by about 5% in 2019 year-on-year, and another 5% increase was expected in 2020 prior to the pandemic. Construction businesses can now choose adjudication under the recently updated Building and Construction Industry Security Payment Act (with an emphasis on debtor protection and corporate rescue), rather than resorting to litigation or arbitration. While this offers valuable breathing space and a chance of survival for struggling SMEs, slow payments continue to trouble businesses.

 

The impact of COVID on existing projects

The Singaporean Government recognises that putting in place tighter measures to prevent the spread of COVID means extra costs for the construction industry and is bearing some of this cost using the Fortitude Budget. To assist with the balance of additional costs, the BCA have introduced the following support measures:

Sharing of prolongation costs (Government agencies share 50% of the prolongation costs for project delays due to the circuit breaker, capped at 1.8% of the awarded sum). There is no requirement for private projects.

Wage subsidies – for example, in April 2020, the Government was paying 75% on the first $4,600 of monthly salary for every local employee

Foreign worker levy waiver/rebate (S$90 monthly rebate for each work permit holder up to S$920 million until the end of 2022). Additional costs come in the form of safe accommodation, a higher volume of lorries to transport workers and PPE.

In the longer term, companies are encouraged to push for automation in order to reduce reliance on migrant workers. The public sector, for example HDB, will continue to take the lead in adopting DfMA (Design for Manufacture and Assembly) in their building projects, where 75% of all its units launched in 2020 will adopt DfMA methods, such as Prefabricated Prefinished Volumetric Construction (PPVC) or Advanced Precast Concrete System (APCS). The transformation efforts have also led to the redesign or creation of new and better jobs, such as digital lead and DfMA production manager within the sector. There are four significant challenges ahead in the construction industry in Singapore:

Insufficient manpower on-site

New workers are not permitted to enter Singapore and some of the existing workforce has left. Of those that remain, a small portion will be assigned to work on the construction of the new quick-build dorms as opposed to the projects already started.

Project delays

With the number of workers available to work restricted and strict working conditions imposed, both the production and productivity rate is expected to reduce by circa 25%.

Cashflow

There will be a substantial decline in revenue coming in as a result of no work being undertaken during the circuit breaker. This is compounded by the fact that COVID may trigger the force majeure clause within a standard building contract, which typically results in time but not cost. This already has and will continue to result in company closures and contract terminations.

Restarting work on-site

Whilst BCA states that more than 2,500 construction projects have been given the go-ahead to restart work (900 of which are residential), main contractors have not had the required time to implement the necessary COVID restrictions, meaning that there have been delays in getting some starts back up and running. Thanks to extensive testing and dorm quarantining, the spread of COVID within worker dorms has significantly reduced.

Overall, the impact of COVID on the Singaporean construction industry is expected to be six to nine months (three months circuit breaker; three to six months loss of production).

 

Sector outlook

Data centres 

Pre-COVID, the data centre construction market in Singapore was already expanding, with heavy investment in the region, and this has been further accelerated with the onset of the global pandemic. This demand has been reinforced by increased internet traffic, thought to stand between a 30-60% increase figure in Singapore, as restrictions meant people have been at home and spending more time online. Video conferencing and online entertainment e.g. streaming, downloads etc. represent the majority increase in online traffic.

However, given the strength of Singapore’s existing infrastructure, with a 30% buffer in design, this surge in demand has not proven to be problematic, and the Government is working with telecom providers to further increase their buffers in anticipation of future requirements. Ultimately, APAC is set to be the fastest-growing region for data centres. It is anticipated that the region will house 47% of global data servers by the end of 2020.

 

Residential

Given the current climate, the Government has reduced the supply of private residential units on the confirmed list by 23% (equivalent to 1,370 units). This means that the housing supply proposed for the confirmed list is the lowest since the first half of 2016. This follows already subdued demand pre-COVID, given the dampening of developers’ interests in en-bloc transactions following the cooling measures that were introduced in July 2018. The sites on the confirmed list will be launched in the final quarter of this year and have a longer tender period of six months to allow developers more time to make their assessment in view of the ongoing COVID-19 situation.

The reduction in housing supply will result in developers focusing on selling properties from existing projects and ensuring that they overcome construction issues and meet completion deadlines.

 

Infrastructure and transport

Government investment in infrastructure and civil engineering was expected to remain high, with projections of between S$27 billion and S$34 billion in 2020 and 2021, which are now being revised. Given the uncertainties about the future of the aviation and travel industries as a result of COVID, the decision has been made to pause the construction of Changi Airport Terminal 5 (S$10 billion) for at least two years. Tendering for the major civil engineering was due to commence in Q3 2020, and it is worth noting that whilst Changi Airport's passenger load has significantly reduced, cargo traffic has remained static. Other significant megaprojects in this sector that have been scaled back include the Thomson-East Coast MRT Line and the new Tuas Mega Port.

 

Commercial

As is the case globally, the corporate landscape has changed dramatically, with working from home the norm, with a significant number of large organisations stating that they do not expect their employees to return to the office until 2021. This has resulted in a seismic shift in the requirements for workspaces, meaning that even offices only recently completed will require some form of design changes to meet the current guidelines and restrictions. These could range from layout considerations with regards to social distancing, to going handsfree with automatic doors and switches, to the introduction of temperature monitoring as standard and smart controls for AC systems.

The impacts are being felt in the market already, with research from real estate consultancy, Edmund Tie, indicating a 0.8 percentage point decline in Singapore office occupancy rates to 92.8% in Q2, which is largely attributed to reduced demand in the CBD and CBD Fringe zones.

 

Summary

Lower global trade, ongoing trade policy uncertainty, less demand from China and the ICT downcycle have an immediate impact on Singapore’s export-driven economy. While the economic impacts of the pandemic are undoubtedly significant, construction has been particularly impacted by the eight-week circuit breaker putting a stop to all building works, followed by the ‘Phase 2’ restrictions, and now reduced productivity on return to site.

The Government is bearing some of the burden brought about by the protracted slowdown in industry growth via its Fortitude Budget, but it must be noted that construction in Singapore has been particularly hard-hit. Ultimately, as the COVID-19 situation continues to unfold, the long-term effects of the pandemic are still emerging and will continue to change over the next number of years.

Value of construction output *

SEA September update Illustrator files SEA - 1.1. Singapore Value of construction output

Singapore GDP growth rate

SEA September update Illustrator files SEA - 1.2. Singapore GDP growth rate

Currency exchange rates

SEA September update Illustrator files SEA - 1.3. Singapore Currency exchange rates

Linesight average Singaporean construction costs 2020 

SEA September update Illustrator files Linesight average Singapore construction

This section includes:

Malaysia market review 

Malaysia GDP growth rate 

Malaysia currency exchange rate 

Linesight average Malaysian construction costs  

 

Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items. 

 

Malaysia Market Review

As the final quarter of a remarkable year approaches, and the true impact of the COVID-19 pandemic begins to reveal itself, Ciaran McNally, Senior Cost Manager at Linesight, reviews the Malaysian economic and construction industry performances to date, and what we can expect in the coming months.

Economic overview

Following 0.7% growth in Q1 2020, the Malaysian economy posted a 17.1% contraction in Q2, as COVID took its toll – the worst performance since the Asian Financial Crisis in 1998. This contraction reflects the significant impact of the economic disruptions resulting from the Movement Control Order (MCO) imposed during the quarter, which had a knock-on effect on key sectors, with all declining bar agriculture, which recorded a 1% increase in output. 

The global economic shock has led to weakened external demand conditions, which is resulting in production constraints, and both private sector consumption and investment, as well as public investment have plummeted, by 18.5%, 20.5% and 38% respectively. 

In terms of support measures, the Government has announced tax deductions on contributions to the COVID-19 Funds set up by the Ministry of Health and the National Disaster Management, as well to any approved organisation or institution. Furthermore, an import duty and sales tax exemption has been granted on a range of items until further notice. Pre-COVID, as mentioned in our March edition of this publication and our Southeast Asia review earlier in this document, Malaysia had been focused on fiscal consolidation. 

In addition to the current economic and public health challenges being faced at present, Malaysia has faced political issues, with former Prime Minister, Najib Razak, found guilty of all seven charges in his first trial linked to the multibillion-dollar 1MDB scandal. Current Prime Minister, Muhyiddin Yassin, is now discussing a potential election in March 2021, to “straighten the messy political scene by seeking a fresh five-year mandate from the people”.

 

Labour force

While the Malaysian labour force grew 1.7% year-on-year to 15.8 million persons, the unemployment rate hit 4.9%, down from May’s record-high of 5.3%, after holding steady between 3.2-3.4% in 2018 and 2019. 

 

Construction 

The Malaysian construction industry has not gone unscathed in the current crisis, with works shut down on a large number of projects during the circuit breaker period, unless the works fell into pre-defined criteria regarding contractor classification, essential works and almost-complete projects, amongst other factors. The value of work done contracted by 6.3% in Q1 2020 year-on-year, and the Department of Statistics reported declines across a number of sectors in the first quarter, at 11% in non-residential, 8.6% in special trades activities 7.6% in residential and 2.3% in civil engineering. 

 

Summary

Similar to many of its neighbours and other countries around the world, Malaysia faces a challenging road ahead, with the economic shock causing a sharp contraction. It also has political challenges compounding the issues posed by the global pandemic. With a high proportion of construction shut down during the circuit breaker, the industry is feeling the impact across multiple sectors. However, it is hoped that the recovery will not be prolonged and will see Malaysia record positive growth again in the not-too-distant future. 

Malaysia GDP growth rate

SEA September update Illustrator files SEA - 2.1. Malaysia GDP growth rate

Malaysia currency exchange rates

SEA September update Illustrator files SEA - 2.2. Malaysia Currency exchange rates

Linesight average Malaysian construction costs 2020

SEA September update Illustrator files Linesight average Malaysian construction

This section includes:

Vietnam market review 

Vietnam GDP growth rate 

Vietnam currency exchange rates 

Linesight average Vietnam construction costs 2020 

 

Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items. 

 

Vietnam Market Review

As the final quarter of a remarkable year approaches, and the true impact of the COVID-19 pandemic begins to reveal itself, Ira Vilaga, Cost Manager at Linesight, reviews the Vietnamese economic and construction industry performances to date, and what we can expect in the coming months.

Economic overview

Although Vietnam is feeling the effects of COVID-19, like many countries, the impact does not appear to be as severe as it is elsewhere. Following robust GDP growth of 6.8% in 2019, the country’s economic growth in 2020 was expected to be around 7% before the pandemic struck, and it is now expected to slow down to 3%. Although this is a significant reduction, it still marks a level of economic growth as opposed to the contraction being recorded elsewhere.  

Inflation was steady at 4% in 2019, and despite the consumer price index recording a six-year high for the first seven months of 2020, weakened demand, both domestically and in global markets, means that the inflation rate is expected to grow by 3.2% year-on-year, according to the International Monetary Fund (IMF).  

In terms of the labour force, the Ministry of Labor reported a 33% increase in urban unemployment in Q2, while the average income per worker decreased by 5%. 

 

Construction

The construction industry plays a key role in supporting Vietnam’s economic growth, having grown 8.5% per year on average over the last decade.  

In Q2 2020, GDP from construction in Vietnam increased to 89,659 VND billion, up from 35,837 VND billion in Q1, due to many projects being closed down in the first quarter as a result of COVID. All non-urgent construction projects were suspended from mid-February to mid-April, with social distancing measures being implemented on sites upon their re-opening. 

The negative impact of the pandemic on construction has been somewhat mitigated by two key factors, according to risk and research firm, Fitch. The US-China trade war had already spurred on the move from China to Vietnam for a number of low-end electronics and textile manufacturers, signaling an influx of foreign investment, which has been coupled with rapid urbanization due to shifting demographics. This in turn has led to a forecast of 7.2% growth in the demand for new buildings in Vietnam between 2021 and 2029. 

As of April 22, 2020, the World Bank has provided Vietnam with US$24.44 billion in grants, credits, and concessional loans. Most of these investments will go towards developing the country’s sustainable, urban and rural developments, thus supporting the construction industry.  

Tender prices will see an inevitable increase as a result of COVID-19 social distancing measures, along with material imports remaining a challenge, as borders in Vietnam remain closed as of July 2020.  

 

Summary

Vietnam continues to evolve rapidly, with its shift to a centrally-planned economy leading to it now being one of the most dynamic emerging countries in East Asia region, according to a 2019 World Bank report. For a number of reasons, COVID is having a much lesser impact on Vietnam than what we are seeing elsewhere, and with its strong fundamentals and seemingly firm control of the crisis, the Vietnamese economy and construction industry are both expected to rebound in 2021. 

Vietnam GDP growth rate *

SEA September update Illustrator files SEA -3.1. Vietnam GDP growth rate

Currency exchange rates *

SEA September update Illustrator files SEA - 3.2. Vietnam Currency exchange rates

Linesight average Vietnamese construction costs 2020 *

SEA September update Illustrator files Linesight average Vietnam construction costs 2020

This section includes:

Indonesia market review 

Indonesia GDP growth rate 

Indonesia currency exchange rate 

Linesight average Indonesian construction costs 2020 

 

Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items. 

 

Indonesia Market Review

As the final quarter of a remarkable year approaches, and the true impact of the COVID-19 pandemic begins to reveal itself, David Levis, Senior Commercial Manager, and April Sampiton, Cost Manager at Linesight, review the Indonesian economic and construction industry performances to date, and what we can expect in the coming months.

Economic overview

Following the outbreak of COVID-19, Indonesia, Southeast Asia’s largest economy, which is home to more than 260 million people, is expected to contract by 1% in 2020 according to the Asian Development Bank (ADB). This follows a four-year-low growth rate of 5% in 2019, with the ADB expecting 2021 to rebound to 2019 levels. It had revised the 2.5% annual growth forecast that it had made for the Indonesian economy at the end of Q1, illustrating the speed at which the impact of the virus was being felt. The reduced growth forecast is in line with the International Monetary Fund’s forecast for a 0.3% annual contraction and a 0.8% annual contraction forecast by Moody’s. The Indonesian Finance Minister has projected a 3.1% year-on-year contraction of the economy in Q2, following growth of 2.97% year-on-year in Q1. ADB expects annual inflation to decline to 2%, having been 2.8% in 2019 and 3.2% in 2018.

The Government has announced three budgets totalling IDR677 trillion to counteract the impact of the virus, which has impacted all sectors of the economy, including the important tourism sector, which the government estimated would suffer a US$10 billion revenue loss in 2020 at the end of Q1.

The impact of COVID-19 is expected to be relatively short-term, and Indonesia is expected to resume its positive economic trajectory once the virus has been contained. The World Bank published a report entitled ‘Aspiring Indonesia – Expanding the Middle Class’ just prior to the emergence of COVID-19, which noted that Indonesia had achieved an average growth rate of 5.6% over the previous 50 years, and that over the previous 20 years, the majority of the poor and vulnerable have escaped poverty.

 

Construction

The Indonesian construction industry experienced an annual growth rate of 5.8% in 2019, exceeding the growth rate of the economy, but the impact of COVID-19 has already slowed the year-on-year growth value for the first quarter of 2020 to 2.9%. This slowdown is expected to continue through Q2 and Q3, with President Joko Widodo expecting the virus to peak in August and September. Similar to the majority of other countries, we are likely to see contraction overall for 2020 in these challenging times, prior to an expected return to growth in 2021.

The resumption of growth will be spurred along by the Government announcement in 2019 of the intention to spend IDR571 trillion on the development of Jakarta’s transport infrastructure by 2029, IDR6 quadrillion to develop the country’s infrastructure between 2020 and 2024, and to add 430GW of power plant capacity by 2050. The Jakarta transport initiative includes 120km of light transit rail corridors, and the nationwide initiative includes 25 new airports. Following his re-election in 2019, President Widodo approved plans to relocate the national capital to East Kalimantan in Borneo. The decade-long project is estimated to cost IDR482 trillion and is included in a national backlog of projects estimated to stand at IDR9 quadrillion in 2019.

Throughout the pandemic, much construction work has continued, notwithstanding the issuance of Instruction No. 02/IN/M/2020 by the Minister of Public Works and Housing in relation to the ‘Protocol for Preventing the Spread of COVID-19 in Construction Works’ on 27th March. The instruction was addressed to officials at the Ministry of Public Works (MPW) and its supply chain and applies only to MPW projects. The instruction covered COVID-19 prevention protocols during construction, the impact of COVID-19 on construction contracts, and protocols for preventing COVID-19 in the procurement of goods for construction services.

The requirement to fund national efforts in relation to COVID-19 has compelled the reallocation of resources away from government budgets for activities considered to be non-urgent in relation to ministerial travel, workshops, meetings, seminars and state events. The Public Works and Public Housing Ministry has suspended some infrastructure projects following the Ministry’s decision to reallocate a significant proportion of its efforts to mitigate the impact of the COVID-19 pandemic. The postponed projects included overhauling an irrigation network in Aceh, revamping the waterfront in Pariaman, West Sumatra, and the Sp Tohpati - Tjokroaminoto bridge in Bali. Delays in other projects have also been announced, including the Jragung Dam in Central Java, the Way Sekampung Dam in Lampung, the Temef Dam in East Nusa Tenggara, and construction of ring roads at Kuningan East in West Java and Brebes in Central Java. IDR45 trillion of funding has been reallocated to finance COVID-19 related emergency measures, such as the construction of Galang Hospital in Riau Islands.

Work has resumed on Phase 2 of the Jakarta MRT project after a three-month delay due to COVID, commencing with a 2.8km tunnel, which will ultimately see the mobilisation of 2,000 workers to the site. Elsewhere, work is ongoing on the 142km long Jakarta-Bandung high speed railway. The project has proceeded using modified health and safety protocols.

Summary

In summary, while Indonesia is feeling the impacts of COVID, along with the vast majority of other nations, the outlook for recovery is relatively optimistic. This is particularly true of the construction industry, which was not as severely impacted as many other countries, given that a significant level of activity continued through the pandemic, and is somewhat buoyed by the considerable investment in infrastructure projects. However, as is the case globally, it remains to be seen what the long-term impacts of COVID will be, given that future waves of the virus cannot be ruled out.

Indonesia GDP growth rate

SEA September update Illustrator files SEA - 4.1. Indonesia GDP growth rate

Currency exchange rates

SEA September update Illustrator files SEA - 4.2. Indonesia Currency exchange rates 4.2. Indonesia currency exchange rates

Linesight average Indonesian construction costs 2020

SEA September update Illustrator files Linesight average Indonesian construction costs 2020-

This section includes:

Republic of South Korea market review 

Republic of South Korea GDP growth rate 

Republic of South Korea currency exchange rate 

Linesight average Republic of South Korea construction costs 2020 

 

Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items. 

 

Republic of Korea Market Review

As the final quarter of a remarkable year approaches, and the true impact of the COVID-19 pandemic begins to reveal itself, Jason Tse, Cost Manager at Linesight, reviews the Republic of South Korea's economic and construction industry performances to date, and what we can expect in the coming months.

Economic overview

Following decade-low GDP growth of 2% in 2019, South Korea’s GDP is expected to contract by 1.2% in 2020, which contrasts with the pre-COVID forecasts of 2.4% from the Finance Ministry, 2.3% from the OECD and 2.2% from the IMF. The global economic downturn caused by the US-China trade dispute played a major part in the decade-low GDP growth in 2019.

 

Construction

Whilst it is too early to predict the full impact that COVID-19 will have on construction costs, the new on-site regulations and measures have led to a drop in productivity and efficiency on sites across the South Korea region. The considerable reduction in the number of workers allowed on-site has had a profound impact on project progress within the industry.

GDP from construction has increased marginally to US$19 billion in Q2 2020 compared to US$18.7 billion in Q1, and this is largely attributed to the relaxation of the COVID restrictions.

Overall the projection is for a 2.8% decline in the construction industry in 2020. The South Korean Government, however, intends to mitigate this by investing US$27 billion in the infrastructure sector, in a bid to replace and upgrade aging infrastructure, including roads, bridges and tunnels over the next four years. The Government has also announced several stimulus packages and adopted accommodative fiscal and monetary policies, by reducing the benchmark interest rate from 1.25% to 0.75%. In addition, liquidity is being supported via an injection of funds into the banking system, coupled with emergency financing.

The residential sector in South Korea is expected to be the hardest hit, and with the number of residential building permits already down by 24.5% in 2019, figures are continuing to fall in 2020, exacerbated by the pandemic’s impact on household incomes and consumer confidence.

The Government is aiming to support domestic contractors with securing contracts overseas (in the Middle East, Southeast Asia, Eurasia and the Americas) by providing consulting and financial aid. Of the proposed 30 projects, 15 will be investment developments, where South Korea will have a Public Private Partnership, in which Koreans provide equity investment, procurement, construction, operation and maintenance over a contracted period of time. The other 15 proposed projects will be limited to the construction phase alone, with financing and overall management led by local partners. However, there are valid concerns about the logistics of these overseas plans, as travel and exports remain a challenge in these uncertain times.

Tender prices are anticipated to significantly increase across the market as a result of the pandemic, and the current severe shortage in building materials is expected to drive overall construction costs upwards. Labour costs are also expected to trend upwards, due to a limited number of skilled foreign workers in the country as a result of South Korea’s strict border control.

 

Summary

While South Korea is expecting contractions in both its economy and its construction industry, the Government is adopting a number of fiscal and monetary measures in an effort to combat the negative effects of the pandemic. However, as is the case for many other countries, the longer-term impact will depend on the trajectory of the recovery, and whether a resurgence of the virus takes hold.

Republic of Korea GDP growth rate

SEA September update Illustrator files SEA - 5.1. Republic of South Korea GDP growth rate

Currency exchange rates
 

SEA September update Illustrator files SEA - 5.2. Republic of South Korea Currency exchange rates

Linesight average Republic of Korea construction costs 2020 *

SEA September update Illustrator files Linesight average Republic of South Korea construction costs 2020 -

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