Regional Analysis 2020

Middle East Market Review 2020

In spite of lackluster growth in the region over the past few years, economic expansion within the GCC states is expected in 2020.

2.5%
Economic growth 2020
US$102.3bn
Projects awarded in GCC in 2019

Middle East market summary 2020

Middle East market summary 2020

Middle East Market Review

Economic overview

Despite the diversity in the Middle East making it difficult to draw broad conclusions and forecasts, there are a number of common factors influencing all economies in the region to various extents. Once again, oil prices continue to have a significant impact on growth, along with geopolitical tensions, global trade wars and macroeconomic performance. These factors coalesce in the region to make the GCC less predictable than most major global markets.

In spite of lacklustre growth in the region over the past few years, economic expansion within the GCC states is expected to reach a modest 2.5% in 2020 according to the IMF, having been revised downwards from 2.8%, owing to the increased downside risks in global trade tensions, geopolitics and financial disruptions. Nonetheless, as oil prices stabilise, fiscal austerity is slowing and investment in diversification measures are gradually gaining momentum, which will support moderate growth next year. In particular, significant investment in infrastructure and major capital projects across key sectors, such as hospitality, entertainment, education and healthcare, should support growth in the construction industry.

Since hitting a ten-year low in January 2016, oil prices have improved considerably, rising from below US$30 per barrel to US$64 per barrel on average in 2019. This positive growth has been supported by extended production cuts by both OPEC and non-OPEC oil producers and geopolitical flare-ups, particularly in the Middle East. These higher oil prices, coupled with stability in the oil market will provide regional governments with an opportunity to carefully consider key strategic projects, which will then support growth, albeit at a slower pace than previous years.

However, the growth outlook for oil-exporting regions, such as the Middle East, continues to be uncertain, as the question mark over the future of oil prices remains.

Subdued economic performance has led to a number of measures being implemented by regional governments in an effort to achieve impactful fiscal consolidation, such as capital expenditure cutbacks, benefits to public sector employees, reform of energy and water subsidies, the introduction of land taxes and the well-publicised introduction of a 5% VAT rate. The pace of aggressive consolidation slowed in 2019, as most governments approved expansionary budgets, with continued focus on developing the non-oil economy and public infrastructure, along with pursuing various national development plans, such as ‘Saudi Vison 2030’ and ‘Qatar National Vison 2030’.

The outlook for 2020 shows signs of positivity, and will see the UAE approve the largest budget since the establishment of the country, whilst Saudi Arabia intend to reinvest the proceeds of the part-sale of state-owned assets, such as Saudi Aramco, to offset a marginal decline in government expenditure. Additionally, wide-ranging efforts have been made across the GCC countries to modernise legislation and enhance the business environment, in order to stimulate growth. The shift towards various forms of PPP models to develop projects in the region is well underway and has gathered pace in the past few years. Moreover, continued investment in becoming a more ‘business-friendly’ environment is proving effective, with Saudi Arabia rising through the world rankings to achieve most improved in 2019.

Despite the efforts of local governments to raise funding and stimulate growth, the GCC will remain a challenging market in 2020. GDP growth in 2019, which was forecasted in April last year at 2.1%, has been revised downwards to a forecast of 0.7% by the IMF. Whilst growth is expected to pick up in 2020, with the IMF predicting growth of 2.5%, this is lower than the previous forecast of 2.8% in 2019. Key factors which are hampering growth forecasts include an increase in geopolitical tensions, which weighs heavily on foreign direct investment, a lower oil price forecast, along with external factors, such as a worsening global economic outlook and trade wars.

Construction

Construction activity plays a significant role in regional economic development in the Middle East. In 2018, US$101.8b worth of projects were awarded across the GCC region compared to US$102.3b in 2019, and this muted growth is reflective of the more challenging environment mentioned above. As macroeconomic headwinds show no sign of abating in the short term, a large-scale, regionwide pickup in project awards in 2020 is unlikely. Despite this, there is an estimated US$1.45t projects planned across the GCC states, many of which are supported by solid fundamentals, including increased population growth, young demographics and a growing requirement for infrastructure across multiple sectors. The challenge in delivering these projects lies in sourcing finance whilst containing government debt.

Value of GCC contract awards by country, 2016 - 2019 ($m)

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Where growth is forecast, this is generally supported by government commitments to increase spending in sectors such as infrastructure, healthcare and education. GCC governments are also making remarkable investments in the tourism and hospitality sectors, as well as leisure attractions. Saudi Arabia in particular, which has been active in pursuing both social and economic reform, has launched a variety of megaprojects, including the Red Sea Project, Quiddiya Entertainment City, Project NEOM and Diriyah Gate, which have a combined value of US$532B. Much of the funding for these projects was to be supported by the part sale of Saudi Aramco, which was initially estimated to raise US$500bn. However, recent reports suggest that only US$25bn was raised, casting doubt over the viability of some of these schemes.

Whilst the UAE has historically been the market leader in the GCC construction market, Saudi Arabia has closed the gap, with the value of unplanned projects, estimated to be US$1.2t, compared to US$780bn in the UAE. It is worth noting that if the Saudi forecast is adjusted for Project NEOM, estimated to cost US$500bn alone, the pipeline in both countries is relatively similar in value terms. Meanwhile, Kuwait, Qatar, and Oman, whilst being the next largest markets in terms of pipeline value, are significantly smaller than both Saudi Arabia and the UAE.

Value of planned and unawarded GCC projects ($m)

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Despite a somewhat challenging outlook for the region in the short to medium term, long-term trends are expected to provide opportunities, as governments aim to add value through diversification away from the dependence on oil. Add to this a demand for infrastructure supported by demographics, a drive to privatise by local governments and a new generation of 5G investment to support technological advancement, and it’s clear that long-term fundamentals remain intact. The core challenge will be in attracting sufficient finance amid a worsening global outlook and rising geopolitical tensions.

Exchange rates

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Contributors: Ciaran McCormack, John Chavez, Kevin Gardiner

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