Regional Analysis 2018 Middle East

Knowledge Center

* Middle East Market Review - section updated Sept 2018

Despite the diversity in the construction sector in the Middle East making it difficult to draw broad conclusions, there are a number of common factors influencing economies in the region to various extents. It was evident that the Middle East has been attracting investors and project funding, particularly during the first half of 2018, with the introduction of a number of Government initiatives, which include Saudi Arabia’s foreign ownership structure and amended UAE visa regulations. Furthermore, the implementation of Value Added Tax (VAT) earlier this year provided significant sources of funding for local government projects, particularly for KSA and UAE.

Low oil prices, geopolitical tensions and global political events have continued to impact the region in 2017.

Overall, the economic outlook for the region remains positive, despite low oil prices, and GCC countries are constantly pursuing economic reforms to reduce oil dependency. Since hitting a ten-year low in January 2016, oil prices have improved considerably, rising from below $30 per barrel to around $69 per barrel in July this year. This positive growth has resulted from the announcement last November in which OPEC and Non-OPEC oil producers agreed to extend production cuts until the end of 2018. These production cuts are expected to bring further stability to the oil market, and increase confidence for both governments and investors alike. Increased stability and higher oil prices will provide governments in the region with an opportunity to peruse strategic projects, while appraising some of the previously proposed economic reforms. 

Despite rising oil prices and increased government revenues, the reality that the GCC region is still adjusting to a new economic model is evident. Ambitious fiscal consolidation measures are being implemented across the region, as the GCC governments seek to support growth amid a challenging economic climate. 
The efforts  to diversify the economy away from hydrocarbon dependency and increase private investment through government-devised plans such as ‘Saudi Vision 2020’ and ‘Qatar National Vision 2030’ are ongoing, and are likely to build upon the momentum gained in 2017. There have been a number of key fiscal measures 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. With the support of a strengthening global economy, real GDP growth in the GCC is expected to rebound to 2.2% in 2018, after hitting an eight-year low of 0.5% in 2017, according to the IMF. The aggregate budget deficit for the GCC region is forecasted to be about 6.3% of GDP in 2017 and 5% per cent in 2018, which is a significant improvement to the 11.9% deficit recorded in 2016.
Project funding remains fundamental to success and market expansion. Individual GCC member countries are adopting different tools and strategies to bridge the funding gap and support growth, with the majority of governments turning to the bond market to raise capital. Kuwait, the UAE, Qatar and Saudi Arabia drew down on their large foreign currency reserves built up over the past decade. These forms of funding are likely to continue for the foreseeable future. Apart from issuing debt, governments are actively working to enhance the role of the private sector and its participation in the overall economic development of the region; the establishment of Public Private Partnerships (PPP) frameworks is one such initiative. Middle East Economic Digest (MEED) estimates that about 156 PPP projects, requiring about $206 billion of investment, are planned across the region outside of the energy sector. Aside from bonds and project finance, other alternative sources of financing being explored include attracting funding from long-term institutional investors, such as pension funds and insurers, and the use of Export Credit Agencies (ECAs), as well as the privatization of government assets. The planned floatation of a 5% stake in Saudi Arabia’s national oil company, Saudi Aramco, is one such example, and is a good indicator of what is to come. The strategy has received widespread publicity for being the largest IPO in history and will be a significant windfall for the Saudi Government. However, Saudi Aramco recently confirmed reports that it plans to acquire a controlling stake in Saudi Basic Industries Corporation (SABIC) from the Public Investment Fund (PIF), and this is delaying the initial IPO offering.
While there are a number of indicators suggesting that the region has passed the worst, political risks threaten to hamper investor sentiment. The severing of dDiplomatic ties with Qatar , unpredictable US policy announcements and KSA’s ongoing conflict in Yemen all weighed on investor confidence. Saudi Arabia is undergoing a period of political and cultural transition, led by the appointment of HH Mohammed bin Salman bin Abdulaziz al-Saud, the son of HH King bin Abdulaziz al-Saud, as Crown Prince. The Crown Prince has shaken up the Saudi business community with his anticorruption purge. The cultural transition seen in 2017, which included the the introduction of cinemas, and brought an end to restrictions on women driving and attending events, have all materialized during the first half of the year . Given the pace of change currently sweeping the Kingdom, major financial investments, particularly foreign direct investment, may be put on hold until a level of stability or certainty is established. Nonetheless, the announcement of a number of megaprojects, including the Red Sea Development, the US$ 4 billion Qiddiya Entertainment City and the US$500 billion NEOM Project, signal exciting times are in store for the Kingdom.

Dubai’s construction market remains remarkably buoyant, owing to a resilient private sector and strong demand from investors for new residential properties. Key Dubai developers, including Dubai Holdings, Nakheel, Emaar and Meraas, have relied on revenue streams from existing assets to invest in new developments, which negate the need for public investment. A number of major projects have been announced in recent times, including Dubai Creek Harbour, Marsa al-Arab. Museum of the Future and the MGM Bellagio Resort. However, market conditions continue to affect the real estate market, particularly in Dubai, resulting in developers focusing on more affordable options across all segments of real estate. Affordability is becoming a key consideration as rents continue to fall across office and residential sectors, as well as the retail market, due to low performance with a number of retail brands vacating underperforming stores. Oman, Kuwait and Bahrain have seen a significant drop in new tenders over the past two years. Qatar continues to reap the benefits of construction activity associated with the FIFA World Cup 2022, despite investor confidence and activity having suffered as a result of the embargo imposed by other GCC states last June 2017. 

In spite of a somewhat muted short-term outlook, long-term economic indicators and project drivers remain positive. There are grounds for optimism in 2018 and beyond, with more than a trillion dollars’ worth of projects still expected in the GCC’s pipeline. Continued economic growth coupled with a growing population creates an increased demand for housing, education, healthcare, infrastructure and utilities. Ongoing economic reforms, PPPs, sale of high-grade government bonds and stocks, while stabilizing oil prices should strengthen investor confidence throughout the region. 

Contributors:Damien Gallogly, John Chavez, Oliver Keegan, Rasanga Wickramage, Matt Turner, Kevin Gardiner, Damien Keane, Ameer Hamdam, Garvan Barry, Michael McLoughlin