Construction boom goes bust

  • 2009-02-25
  • By Kate McIntosh

REBUILDING THE ECONOMY: Though the construction industry has been hard hit by the economic crisis, many think that those who survive the tough times will be in a strong market position.

RIGA - After years of whopping growth, Latvia's credit-starved construction industry is fighting for survival, with financing drying up and major projects stalling.
Industry leaders told The Baltic Times they feared for the future of the sector, which is teetering on the brink of collapse.

They say the entire construction sector 's from builders to window and door manufacturers and tree trimming companies 's are now struggling to stay afloat, raising fears of mass job cuts.
The private sector has been the hardest hit by the credit crunch, with an estimated 5,000 newly developed apartments in Riga alone now lying empty.

"The construction industry has basically stopped. New projects are extremely few and I see that all companies related to construction are teetering on closing," said J.C. Cole, who was forced to shut down his Latvian-based construction business, Scandinavian Buildings and Homes, in January after demand fell sharply.
Cole, a long-time Latvian resident and former president of the American Chamber of Commerce, said financing problems were a major factor in insolvency cases.

"They [construction companies] don't have the cash flow coming in to meet their obligations going out. And of course you can't borrow at the moment. We're in a situation where the whole industry is imploding," he said.
In recent years the construction industry recorded an annual growth rate of 10 percent.
That trend reversed last year, with figures from the third quarter of 2008 showing a 7.3 percent drop.
The figure does not take into account fourth-quarter results, which are not yet released.

These include large scale construction projects such as the Dienvidu Tilts (The South Bridge) in Riga completed at year's end, and are expected to add growth to current figures.
Nevertheless, Leonids Jakobsons, head of the State Construction Inspection, told the Baltic News Service the decline would likely fall to 10 percent in 2009, adding that an analysis of construction sites and demand for building materials could reveal an even sharper downturn in the industry.

"The negative trend will continue this year, and I do not rule out that the drop could reach double figures. This is judging by what we see while inspecting construction sites," he said.
The latest macroeconomic outlook prepared by SEB Banka's analysts predicts insolvency cases among real estate developers will also grow amid fierce industry competition and the subsequent downward pressure on prices.

Job loss fears

In November, Lode, one the largest producers of ceramic building materials in the Baltics, was forced to suspend production and shut down its four subsidiaries.
The company said the closures were due to the rapidly decreasing demand for construction materials, as well as to the overall economic situation in Latvia.

Lode, which has no rivals in Latvia, sells mainly to the domestic market, but also exports several products to Poland, Russia, Lithuania, Estonia and the Ukraine.
Seventy-six employees were laid off after the company closed its plant in Livani.
Lode's remaining two subsidiaries, including the oldest plant in Liepa and the recently launched Ane plant, in which Lode invested more than 8 million lats (11.4 million euro), were also wound up.
Job losses have shot up in almost every sector of the construction industry in the six month period ending Dec. 31, 2008.

According to figures from the State Employment Agency (NVA), 6,086 unemployed were registered in the field of construction by year's end 's up from 2,718 in the previous six month period, which ended June 30, 2008.
An NVA press spokeswoman said the most common reasons cited by employers for staff cuts was decreasing work and turnover liquidation, or closure of enterprise and structural changes.

By the end of 2008, construction job vacancies had declined by 45 percent.
About 234 workplaces in the construction industry were also slashed in January, according to estimates from employers received by the NVA.
The NVA plans to roll out a series of vocational training, retraining and qualification improvement measures to help job seekers in the construction industry.
Twenty fields within the construction sector have been identified as targets for training programs, including building, carpentry, paving, machine operations and gas welding.

The spokeswoman told TBT that training measures are aimed at enhancing the competitiveness of the workforce and the quality of the labor market demand by providing adequate training and retraining.

Outlook bleak

With further bankruptcies and job losses predicted, the future of the construction industry looks increasingly bleak.
Cole said recovery in the industry was unlikely to occur for years.
"I'm always optimistic, but I can't see it [recovery] happening, at least in the short term. Latvia's focus has to be on exports," said Cole.

"I think that the Latvian government has very few tools at its disposal. The private sector has to be able to do this for themselves," he said.
According to Cole, improvement would only come once the export market in Western Europe and bank lending for housing development resumes.
"When Western European governments start stimulating industry growth, this will in turn stimulate export opportunities for Latvia," he said.

Despite the dramatic downturn in the market, Latvia and Estonia maintain a good competitive advantage over Western European competitors due to a low salary range, low overheads and a good corporate tax structure.
Meanwhile, Jakobsons said the development of government-funded projects and road construction would be necessary to weather the current crisis.

He said channeling government funds into public infrastructure projects would serve as a foundation for future development in the industry. SEB banking analysts have backed these measures, stating in their recent report that "implementation of those projects could be one of the best ways for warming up the economy."