Regional Analysis 2019 Middle East

Middle East Market Review 2019

Despite sluggish growth in the region over the last few years, economic expansion within the GCC states is expected to reach 2.4% in 2018 and 3% in 2019.

2.4%
Economic growth 2018
3%
Economic growth 2019
11%
Increase in contract awards
US$69b
Building works contracts awards

Middle East Market Review* 

Unsurprisingly, oil prices continue to have a significant impact on growth, along with geopolitical tensions, global trade tensions, and global macroeconomic performance as a whole. Despite sluggish growth in the region over the last few years, GDP in GCC countries is expected to improve slightly, reaching 2.1% in 2019, up from 2% in 2018, supported by higher oil prices, a slower pace of fiscal consolidation and the implementation of public investment projects. These recently revised figures from the International Monetary Fund (IMF) are below the previous forecasts of 2.4% for 2018 and 3% for 2019.

Since hitting a ten-year low in January 2016, oil prices have improved considerably, rising from below US$30 per barrel to around US$85 in October 2018, before falling back to US$50 per barrel in January 2019. This growth has been supported by extended production cuts by both OPEC and non-OPEC oil producers, along with global oil supply disruptions, particularly in Venezuela and Iran. Most government budgets have now been adjusted to consider between US$50 to US$60 per barrel the average. Needless to say, higher oil prices will provide regional governments with an opportunity to peruse strategic projects and appraise some of the previously proposed austerity measures, which in turn will support growth. With that said, as the future of oil prices faces significant uncertainty, so too does the growth outlook for oil exporters.

Brent crude oil prices 

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Subdued economic performance in the region in previous years has resulted in ambitious fiscal consolidation measures being implemented, including cutbacks on capital expenditure and benefits to public sector employees, reform of energy and water subsidies, the introduction of land taxes, and the introduction of VAT at 5%. It now appears, however, that governments are softening their stance on cutbacks, having ap expansionary budgets for 2018 and 2019, with a particular focus on developing the non-oil economy and public infrastructure. These strategic goals are key components of regional National Development Plans, such as “ ‘Saudi Vison 2030’ and ‘Qatar National Vison 2030’, and are further supported by major regional events, such as Expo 2020 in Dubai and the FIFA World Cup 2022 in Qatar. Additionally, to help stimulate growth, further emphasis has been placed on improving the business environment, with a range of measures being implemented across the GCC states. Measures implemented include new insolvency laws, visa reforms, reduced time and cost for building permits, the streamlining of electricity connections for new plots, and moves towards making it easier to start a new business.

Bolstered by strengthening oil prices, increased government spending and a slower pace of fiscal consolidation, economic growth in the GCC states is expected to have rebounded to 2.4% in 2018, and to reach 3% in 2019 after hitting an eight-year low of 0.4% in 2017, according to the IMF. As part of its Regional Economic Outlook, the IMF has revised the UAE’s expected economic growth downwards from the October 2018 forecasts, projecting 2.8% real GDP growth for 2019 compared to the earlier forecast of 3.6%, compared to 2.9% in 2018 and 0.8% in 2017. According to the latest IMF projections, the UAE economy grew by a lower-than-expected 1.7% in 2018, against the October forecast of 2.9%. In 2020, the UAE is projected to grow by 3.3% in 2020, supported by a strong non-oil growth for the year at 4%. Similarly, Saudi Arabia is following a positive trend, with a forecast of 2.4% in 2019, compared to 2.2% and 0.9% in the previous two years.

Construction activity plays a significant role in regional economic development. A whitepaper published by Ventures Onsite estimates that in 2019, construction contract awards for building works will reach $69 billion followed by energy projects at $38bn and infrastructure at $17bn.This represents an 11% increase across the board when compared to 2018, largely due to growth in the energy and infrastructure sectors. Similar to previous years, the UAE, Saudi Arabia and Qatar will remain the top three markets in the GCC construction industry.

GCC construction contract award by industry

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This growth is partially attributable to increased GCC government budgets in 2018, for sectors such as infrastructure, healthcare and education. In addition, GCC governments are also making remarkable investments in the tourism and hospitality sectors, as well as leisure attractions. Projects include airport developments, such as the further development of Al Maktoum Airport in Dubai, seaport developments, including the Dubai Harbor Project, and metro developments, such as the Bahrain Rapid Transport Network, which is estimated at a cost US$8 billion across all phases.

Whilst the UAE remains the leader in the GCC construction industry, Saudi Arabia is beginning to close the gap. Project awards in Saudi Arabia are expected to increase from US$31 million in 2018 to US$40 million in 2019, compared to a forecasted reduction of US$2.6 million in the UAE to US$48 million. Meanwhile, contract awards in Bahrain are expected to contract from US$4.6 million to US$3.9 million in 2019, while Qatar, Oman and Kuwait, although much smaller markets, are forecasted to expand also. 

GCC construction contractor award by country

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With growth forecasts beginning to move upwards once more, there is a risk that previously subdued markets such as Saudi Arabia could face capacity issues, particularly for prestigious projects necessitating international tier one contractors. The exodus of an estimated 800,000 expats from Saudi Arabia in the past 12 to 18 months could compound capacity issues, if demand rises considerably. On the other hand, a capacity gap would present an opportunity for UAE-focused companies to weather a potential slowdown by becoming more active in the Saudi market. In some respects, this is already taking place. Despite a somewhat positive outlook for the region as a whole, it remains to be seen if the dynamic influences of oil prices, trade wars, geopolitical tensions and macroeconomics will convene to spur on industry growth.

Contributors:

Damien Gallogly, John Chavez, Oliver Keegan, Rasanga Wickramage, Kevin Gardiner, Ameer Hamdan, Garvan Barry, Michael McLoughlin

Exchange rates

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