Past Regional Reports
Following a 5.9% decline in real GDP in 2020, following a challenging year, the country’s economy continued to improve in the first quarter, driven by improvement in the non-oil sector, according to the Central Bank of UAE. The hosting of Expo 2020, which is now underway until the end of March 2022, is expected to provide an economic boost across both this year and next. The Targeted Economic Support Scheme (TESS) was extended by the Central Bank in an announcement in April 2021, and will now run until the end of June 2022, and is expected to provide a further boost, in addition to the economic stimulus packages at play. The country’s net borrowing as a percentage of GDP stood at 7.4% in 2020, but is expected to improve markedly in the years ahead. Negative inflation of -2.1% was recorded in 2020.
The UAE has embarked on a number of economic policy innovations, including full foreign ownership of companies in the base economy, Dubai’s remote worker visa, and an expansion of the ten-year term visa program to include doctorate and medical degree holders, engineers and technologists. It announced in August 2020 that it will deliver a three-stage 'flexible package', aiming at strengthening the economy by supporting the labour market and encouraging investment.
The UAE’s construction market performance was worse than expected, with a 10.4% contraction in 2020, as COVID restrictions took hold. Just AED69 billion projects were awarded in 2020 although 2021 looks set to have a significant increase on that figure for the year, albeit still low compared to pre-pandemic levels.
The market is already showing signs of a marked recovery, with real estate prices growing healthily in Q1 on both a quarterly and yearly basis for the most part.
Commercial construction dropped by 12.3% in 2020, amid the uncertainty in-market. Following a 4.9% contraction in 2020, infrastructure development is expected to rebound, as the government focuses on key projects in this sector to support the industry and economic growth at large. While Expo 2020 accounted for a number of transport projects, there are also longer-term projects underway as part of the Traffic and Transportation Plan 2030, from road and rail to airports. With a total investment of AED40 billion (US$11 billion), Etihad Rail, the national railway network developer and operator, is developing the Etihad Rail Network project to connect the seven emirates of the UAE by 2024. Lastly, retail and hospitality were particularly hard hit as the pandemic disrupted international travel.
Following a challenging 2020, economic growth is forecast at 3.1% for 2021 and an annual average of 2.6% from 2022 to 2025, according to the IMF, while the CBUAE pegs growth at 2.4% for this year and 3.8% in 2022. The fiscal position of the UAE is also set to begin its recovery, with a substantial improvement in net borrowing as a percentage of GDP from the abovementioned figure of 7.4% to 1.3% this year and 1.1% in 2022.
The construction industry is forecast to record growth in 2021 of 4.4%. There are a number of initiatives and plans at play to stimulate industry growth, including the Energy Strategy 2050, the Sheikh Zayed Housing Programme and the Dubai Tourism Strategy. Israel and the UAE have also reached a historic deal to open up investment opportunities, agreeing to develop a joint strategy to boost co-operation in the energy sector, across renewables, energy efficiency, oil, natural gas and water, as well as related technology.
Looking at specific sectoral performances, commercial looks set to record modest growth of 1.9% in 2021, as the country opens back up off the back of the success of its vaccination programme. Meanwhile infrastructure will rebound in light of the abovementioned focus and strong pipeline, with 5.8% growth anticipated. Etihad Rail, the national railway network developer and operator, is developing the Etihad Rail Network project with a total investment of AED40 billion (US$11 billion), which will connect the seven emirates by 2024.
Contributor: John Chavez
The Kingdom of Saudi Arabia has shown resilience, despite the effects of the COVID-19 pandemic that have resulted in slowdowns and disruption around the world. The GDP of the Kingdom, which ranks 19th globally according to the International Monetary Fund (IMF), recorded a positive rate in Q2 2021 for the first time since the pandemic began, with a 1.5% year-on-year expansion. Oil and gas production is a significant contributor to the Kingdom’s GDP growth, with roughly 87% of Saudi Arabia’s budget revenue coming from this sector. As the global economy recovers, oil prices have continued to improve, which has benefitted the Kingdom. As of earlier this year, oil production has increased, driven by new agreements made by OPEC members with Saudi Arabia, which are expected to increase their production from 11 million to 11.5 million barrels per day.
On the other hand, Saudi Arabis’s diversification plans and reforms, particularly ‘Saudi Arabia’s Vision for 2030’, are fundamental for the future of the country and its long-term ambition. The Kingdom has also been announcing major developments, primarily driven by the country’s vision of transforming Saudi Arabia into a global hub, aiming to connect three continents – Asia, Europe and Africa. The Kingdom’s non-oil economy output has expanded despite the pandemic, with a growth rate of 10.1% in Q2 2021. This is mainly driven by social and economic reforms, resulting in increased business confidence. The Purchasing Manager’s Index (PMI) in the Kingdom has steadily been increasing as a result of improved market conditions in the wake of the roll-out of the vaccine programme, as well as increased exports and online sales. However, economic contribution by non-oil sectors is still not back at pre-pandemic levels, despite the continued local efforts to boost productivity.
To mitigate the impact of the pandemic, the Saudi government has introduced over 150 support measures and packages, with benefitting sectors including construction, tourism and hospitality, and banking. Some of these initiatives include the allocation of over US$1 billion to provide employment support and training programmes that will allow more than 300,000 beneficiaries to work in the private sector, a US$714 million Project Support Fund aiming to finance major initiatives in health, tourism, real estate and education, and an allocation of US$13.3 billion to expedite payment of the private sector dues. Relaxed tax measures were also implemented, such as extending deadlines for filing tax returns and paying those taxes.
The labour market has undoubtedly felt the impact of COVID-19m and as of Q1 2021, the unemployment rate stood at 6.5% (11.7% for unemployed locals for the same period, despite the government's Saudization programme), which has improved significantly in comparison with the unemployment rate during the first few months of the pandemic. Inflation in 2020 came in at 3.4%.
The Kingdom’s construction output is showing promising signs of recovery so far this year, following the 0.4% contraction last year. Out of the US$1.7 trillion planned construction value in the GCC, Saudi Arabia remains the biggest market with US$1.2 trillion worth of projects in the pipeline. The forecasted construction contract award value for 2021 was estimated at US$35 billion. Despite a 26% decline in the amount earmarked by the government for capital expenditure between 2020 and 2021, the government is maintaining its commitment towards Vision 2030 goals, particularly in areas such as residential, quality of life, and megaprojects.
The construction industry’s recovery will be supported by the huge pipeline of significant projects, and Vision 2030 has brought about several key developments and ‘giga-projects’, including NEOM – a US$500 billion development, aimed to be fully automated and entirely powered by renewable energy. This development will include hotels, residential areas and a causeway, linking Saudi Arabia with Egypt. Saudi Arabia has also announced its plan of building a 170km linear city named ‘The Line’, that will link NEOM with the Red Sea Coast. Other notable developments include: the Al Ula, which is a new tourism master plan in the country's north-west; the US$8 billion Qiddiya City (dubbed the Entertainment Capital of Saudi); US$3.73 billion Red Sea Touristic Development; US$2.7 billion Amaala Luxury and Tourism Project; US$17 billion Ad Diriyah ‘Pearl of Saudi’ Project; US$2.7 billion Al Widyan located in Riyadh; and the King Salman Park, which is four times the size of New York City's Central Park. The construction of the country’s US$22.5 billion Riyadh Metro is also progressing, which is the largest mass transportation system, with the first phase planned to be operational later this year. The Public Investment Fund (PIF), which is the country’s sovereign wealth fund, has committed to spending billions of dollars annually in the domestic economy to fund these giga-projects. PIF has also announced their new plan called ‘VRP2’ or the Second Vision Realization Plan, which includes the creation of new investments equivalent to US$40 billion every year until the end of 2025, an amount equivalent to 5% of the country’s GDP. During the same period, PIF will continue its progress towards their goal of investing US$1.07 trillion worth of assets.
In addition, other private developers have also announced key projects, such as Jabal Omar’s Makkah Development worth US$4.4 billion and Majid Al Futtaim’s US$4.3 billion Riyadh North mixed-use development, which includes the US$2.2 billion Mall of Saudi Project. All of these developments will job opportunities for overseas professionals and locals alike, despite the Saudization or the Saudi Nationalization Scheme implemented in the country, which will certainly benefit not only the Kingdom, but also the wider Middle East region.
Looking at specific sectoral performances, commercial was one of the hardest hit in 2020, contracting by 4.2% in real terms, while construction in energy and utilities contracted by 8.6%, having been dealt a blow by a combination of the pandemic, low oil prices and the disruption of energy and utilities projects.
GDP is estimated to reach US$ 804.9 billion by the end of 2021 at a growth rate of 2.4%, according to the IMF. In spite of the impact of the pandemic and the reduced oil production as a result of the OPEC+ agreement, the Kingdom of Saudi Arabia is expected to achieve significant progress in the foreseeable future, particularly with achieving their plans associated with Vision 2030. Growth is expected to gather pace for 2020, increasing by 4.8% in 2022. These projections will be supported by new investments in line with the Kingdom’s diversification and Vision Realization Plan (VRP), which is built on three pillars – a vibrant society, a thriving economy, and an ambitious nation.
Contributor: John Chavez
Similar to other countries in the Middle East, Bahrain's economy is sensitive to oil price volatility, although to a much lesser extent than other GCC countries, due to the relative diversity of its economy. GDP contracted sharply by 5.4% in 2020, as the pandemic, low oil prices and regional geopolitical unrest took their toll on activity, following 1.9% growth in 2019. Given the wider economic context, it is unsurprising that negative inflation was seen in 2020 at -2.3%.
The unemployment rate among nationals was estimated to be 4.9% in 2020 and standing at approximately 3.9% in 2021, despite the negative economic impact of the pandemic, according to the latest World Economic Outlook from the IMF. The large expatriate labour force in Bahrain tends to be transient, moving on to other countries as opportunities diminish locally, which is not reflected in the unemployment rates.
Despite a US$10 billion bailout package pledged by its wealthier neighbours in 2018 and continuing fiscal reforms, Bahrain’s public finances have been under strain from the dual shock of the pandemic and lower oil prices. Preliminary estimates of the 2020 total fiscal deficit were around BHD1.624 billion (US$4.31 billion), an increase of BHD817 million (US$2.17 billion) from the 2020 approved budget (Finance Ministry, 2021). Although the abovementioned measures were set out to balance the budget by 2022, public debt grew to 103.4% of the GDP in 2019 and 133% in 2020.
The Kingdom has responded to the health emergency by rolling out a stimulus package estimated by S&P Global Ratings to amount to US$11.38 billion (approx. 32% of GDP). Other countries that long relied on oil receipts have started to look for other sources of revenue, but Bahrain has yet to take additional steps since implementing VAT in 2019. Saudi Arabia tripled VAT earlier this year, while Oman stated it was exploring the introduction of income tax, which would make it the first state in the region to do so. Nonetheless, a combination of recovering crude prices and optimism about the roll-out of vaccines has helped restore investor confidence, with the gap between government debt in Bahrain and Saudi Arabia narrowing.
Bahrain’s early response to the pandemic and extensive testing enabled the economy to reopen ahead of many others. As of August 2021, approximately 75% of the population had been vaccinated.
Construction output declined in 2020 by 0.2%. Despite the volatility in oil prices and ongoing fiscal consolidation, Bahrain has continued to develop infrastructure projects, with US$588 million (BHD221.7 million) in new tenders in H1 2020.
Residential was the second largest sector for Bahrain’s construction industry in 2020, accounting for 23.7% of the industry’s total value, and growing by 2.8% in real terms. Generally, oversupply continues to govern residential property prices and rents. Higher vacancy rates coupled with the completion of projects under construction are putting increasing pressure on landlords to attract tenants.
The trend of subdued market conditions in the commercial sector has extended into 2020, primarily due to an oversupply of office spaces amidst a protracted economic slowdown. However, certain pockets have displayed signs of recovery, with some signs of a tentative pick-up in occupancy rates, and rents either holding steady or declining at a slower pace.
Despite being oversupplied, a number of major retail projects have either been announced or delivered recently, and approximately 300,000sq.m. of combined gross leasable area has come onstream.
In 2021, the Bahraini economy is expected to return to growth on the back of stronger global demand and the resumption of international travel. However, uncertainty over the pandemic still lingers, posing a key risk to its recovery. Nonetheless, the Ministry of Finance and National Economy forecasted expansion of 3.1% in 2021, and the same rate in 2022, driven by growth in the non-hydrocarbons sector. These projections are similar to the latest estimates of the International Monetary Fund (IMF) compiled in April 2021, which expects Bahrain’s economy to expand by 3.3% in 2021, and 3.1% annually on average from 2022 to 2025
As the economy continues to recover in 2021, inflation is forecasted to rise to 1.5% by the IMF, although there are a number of downside risks, including recurring waves of COVID-19, oil price fluctuations and regional geopolitical unrest.
As noted above, the unemployment rate among nationals is estimated to be around 3.9% in 2021, while public debt is expected to reach 130.6% and 132.9% in 2021 and 2022 respectively, with sizable gross financing needs. On the other hand, Bahrain's pledge to monetize newly discovered hydrocarbon reserves of up to 80 billion barrels and around 20 trillion cubic feet of tight natural gas within the next five years will improve its outlook.
Looking ahead with regards to construction, output is expected to rebound, with growth of 2.1% this year, with investment in major infrastructure constituting a key driver, as well as the increasing proportion of FDI. The government’s latest budget at the end of March 2021 includes a project expenditure of BHD600 (US$1.6 billion) for 2021–2022. From 2022-2025, sector growth is expected to be in the 4.1%-4.3% range.
Furthermore, the construction industry could benefit from a much-needed impetus, as ties are normalised with Israel, potentially resulting in new sources of project funding. The country’s continued commitment to its extensive pipeline of infrastructure, energy and utility projects is expected to provide momentum for recovery in the industry towards the second half of 2021 and beyond.
Contributor: Kevin Gardiner