Analysis: South Korea's construction sector feels chill from Moon policies

Samsung E&A Co

27/11/2018 23:00

* Investment in construction at its lowest since Asia crisis
    * South Korea economy set for slower growth, further job
losses
    * Data shows significant infrastructure over-capacity
outside
Seoul
    * Housing regulations cool appetite for new projects
    * Large companies taking more work overseas; smaller firms
suffer

    By Hayoung Choi
    SEOUL, Nov 28 (Reuters) - Jeong Myeong-in drives his dump
truck up to 800 km (500 miles) a day across South Korea to find
work and sleeps only three hours a night to keep up payments on
his truck. He still counts himself luckier than other drivers
with no cash to pay for fuel.
    Winter is South Korea's off-season in construction, which
provides almost a fifth of economic output in Asia's fourth
largest economy, but Jeong and others fear the seasonal slowdown
will linger longer this year.
    Investment in the industry fell a seasonally-adjusted 8.6
percent in the third quarter of the year, putting it on track
for the deepest fall since the Asian financial crisis in the
1990s.  urn:newsml:reuters.com:*:nL3N1X101Y
    Economists say investment is set to shrink further as
President Moon Jae-in's government slashes infrastructure
spending and shifts resources towards building stronger social
safety nets.  urn:newsml:reuters.com:*:nL3N1VF2VK
    But some critics argue that shift is pushing Jeong and
thousands like him into needing those safety nets. 
    Since taking office more than a year ago, Moon has
introduced a series of controversial measures to re-shape the
economy and deliver what he says is "quality" growth that is
shared more broadly and not based on speculation.
    Some key reforms, however, are backfiring. A record hike in
minimum wage has hurt small businesses and is being blamed for
the weakest job market in nine years.  urn:newsml:reuters.com:*:nL4N1U5272 
    Tougher housing regulations are slowing transactions and
keeping low-income earners off the property ladder.  urn:newsml:reuters.com:*:nL3N1W53DH
 
    Economists say a 14 percent cut to this year's state
investment budget could also begin to hurt low income workers in
the construction sector.
    Job growth in construction is down to 2.3 percent in Jan-Oct
from 6.4 percent for all of last year. Most economists expect it
to turn negative next year, when the pipeline of projects dries
out and state investments are set for another 2.3 percent fall. 
 
    WAGES DOWN, JOB LOSSES LOOM
    Jeong, 56, earns about 2.3 million won ($2,039.69) a month,
after paying for the truck, its maintenance, insurance and fuel.
It's about half what he was making a year ago, when the industry
was still hot. 
    Since January, there has been no new infrastructure projects
in Icheon, his home town, and the smaller house building
projects there are about to be completed soon. 
    "If I fail to pay 1 million won in interest, my truck will
be auctioned off," he said before leaving for a night shift at a
construction site in Gimpo, about a two-hour drive from home.
    Lee Hong-il, a researcher at Construction & Economy Research
Institute of Korea, estimates the industry's slowdown will cause
92,000 job losses and chop 0.4 percentage points off overall
economic growth in 2019.
    Many economists say South Korea's construction boom was
unsustainable, with much of the spending by previous governments
 on projects which over-estimated demand.
    According to Korea Expressway Corporation data, the average
utilisation rate of 13 highways opened from 2008 to 2017 was
58.1 percent.
    The finance ministry said its 2019 infrastructure budget
will focus on completion of existing projects while curbing new
ones, saying the country has longest highways and sixth-longest
railroads per square kilometre among G20 countries. 
    Home builders are seeing a slowdown outside of Seoul given
South Korea's record low birth rates and ageing population.
Moon's plan to build 300,000 homes in metropolitan areas remains
on paper for now and developers are reluctant to build outside
the capital.
    Analysts say most of the ongoing suburban housing projects
are almost completed. Renovation work, which usually accounts
for a fifth of construction contracts, is also slowing along
with the economy and with tougher safety regulations.
    "The long-term outlook for construction companies is murky,"
said Chae Sang-wook, an analyst at Hana Financial Investment. 
            
    GOING ABROAD
    Against that backdrop, heavyweights in the sector have
become more aggressive overseas, winning infrastructure and
urban development projects in Southeast Asia in particular.
    Samsung Engineering  028050.KS  signed $6.9 billion in
overseas contracts in January-November, up 431 percent
year-on-year, while Samsung C&T  028260.KS  booked $3.5 billion,
a 282 percent gain, data from International Construction
Information Service showed.  
    Daewoo Engineering & Construction  047040.KS  won $1.5
billion in contracts, up 31 percent.
     For smaller companies, however, that shift abroad is not an
option, and at home, business is drying out.
    "We are in wait-and-see mode," said an official at mid-sized
Jungheung Construction in the southern city of Gwangju, who
asked not to be named. 
    "Previously, almost all apartments we built were sold out,
but these days about half remain unsold.
($1 = 1,127.6200 won)

 (Reporting by Hayoung Choi and Choonsik Yoo; Editing by Marius
Zaharia and Lincoln Feast.)
 ((Hayoung.Choi@thomsonreuters.com; +82 2 3704 5643; Reuters
Messaging: hayoung.choi@thomsonreuters.com))