EMEA Corporates to Cut Capex to Preserve Cash in 2012, Says Fitch

Fitch Ratings expects Europe, Middle East and Africa (EMEA) corporate capital expenditure (capex) to fall by 4% in 2012 as companies seek to insulate their businesses from Europe’s slowing economic growth. The drop in capex isn’t as severe as at first glance as total spending will still be higher than pre-crisis 2008 levels. The 2012 drop comes after the 17% rise forecast by Fitch for 2011, based on our aggregate projections for the Fitch-rated EMEA corporate portfolio.

While the modest fall reflects uncertainties about 2012’s outlook, the ratings agency believes that capex could be cut even further if needed – an ability companies demonstrated in 2009 after the last financial crisis.

Expected capex varies by sector. Industrials are forecast to boost spending by 27% this year with a further 2% expansion in 2012. Automakers, capital goods companies and miners have seen the strongest expansion in 2011, while the capital goods and building materials sectors are expected to increase spending by over 10% in 2012. However, for the recovering building materials sector, capex will still be almost a third below its 2008 peak.

Retail, leisure and consumer product spending is also likely to be 3% higher. Much of the growth will come from those companies with emerging market exposure, particularly in the packaged food and brewing sectors. The more capital-intensive utilities, oil and gas, and telecoms sectors are forecast to have declines of between 3% and 8%.

The expected falls in 2012 are split relatively evenly between developed and emerging markets, with developed markets falling 3% and emerging markets 5%. This follows 2011 growth of 16% and 23%, respectively, which underlines the higher investment needs of emerging market corporates. Emerging market utilities, in particular, will continue to invest heavily in 2012, with spending 70% above 2008.

The 16% capex growth of developed market companies in 2011 probably paints too rosy a picture of investment in western Europe. Many European companies see emerging markets as key and are focusing their investment in these markets. Some of this involves capacity increases in developed Europe for goods that will be exported – but much will be investment in premises and equipment in emerging countries themselves.


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