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GCC construction survey – the changing geopolitical environment

There has been a sharp fall in optimism in the Gulf Cooperation Council (GCC) construction industry over the past year, according to our latest GCC construction survey. However, confidence is likely to improve as markets adjust to the new economic landscape.

From InSite - construction issues for the Middle East, issue 12. 

View a PDF version.

Pinsent Masons’ Annual GCC Construction Survey, which was presented to representatives from the industry at our recent Annual Construction and Engineering Law Conference, shows that just 32% of respondents are optimistic about the year ahead. This compares to 77% stating that they were optimistic about 2015 when asked the same question a mere 12 months ago. 

This sudden shift in sentiment is consistent with the industry’s responses to questions about order books, contract conditions, payment periods and disputes, which are all less positive than a year before. Where there is more pressure on project delivery, there is likely to be a hardening of major procurers' positions, resulting in tougher contract conditions.

Similarly, payment periods are extending out, when they are already quite lengthy in the region, and are likely to become an increasing concern for those in the supply chain.16% of those surveyed – the majority of which are companies involved in larger projects with a value of over AED 100 million –  said that their 2016 order books had declined by over 10%. This compares to just 4% who said the same thing a year earlier.

Asked about contract conditions, 93% of businesses said they had become less favourable during 2015, representing a 14% increase on a year earlier. In addition, 95% said payment periods were longer this year, and 60% said they were involved in more disputes during 2015 than had been expected before the year started.  The results are indicative of a hardening economic environment as the construction industry, like many others, grapple with the impact of ongoing low oil prices, simmering geopolitical tensions in parts of the MENA region, and a general concern related to emerging markets from many global investors.  

Saudi Arabia

Optimism surrounding Saudi Arabia saw a pronounced decline. Asked which country will provide the strongest growth opportunity in 2016, just 12% stated Saudi Arabia, representing a substantial drop from the 40% of respondents who believed it would be the strongest market during 2015.

This is reflected in forecasts by the International Monetary Fund in August that Saudi Arabia is likely to post a budget deficit of almost 20% of gross domestic product this year.Despite this, Saudi Arabia is likely to remain a highly attractive market. As the Kingdom's economy adjusts to lower oil prices, there have been some positive diversification measures discussed in the Kingdom, which if implemented should enable greater private participation in the economic development of the country. 

Other countries and sectors

In contrast, Qatar is benefiting from a natural bounce as the World Cup edges closer. A growing portion of the industry now views Qatar as offering the strongest regional opportunity, rocketing up in positivity from 14% of respondents last year to 33% in this year’s survey.

The UAE is considered the strongest market opportunity in 2016.By sector, real estate saw the largest single reversal in sentiment, with 26% of those surveyed considering it to offer the strongest commercial opportunity next year, falling from 48% of respondents the year before. This may be due to the uncertainty around oversupply in places like Dubai in particular.  

Away from the GCC, the construction industry remains tentative towards Iran and India, with only 40% and 42% respectively pursuing opportunities in these countries. This may simply be due to a wait and see approach being adopted for Iran, as sanctions have not yet been officially removed.

However, the India result is surprising given the historic trade links between the GCC and India, the strength of the economic growth being seen there, and the recent promotional visit of Prime Minister Modi to the UAE.

PPP opportunities

Also surprising was the survey result on public private partnerships (PPPs). Two thirds (67%) of the industry stated that they are not currently involved in, or anticipating to be involved in, PPP projects over the next 12 months.

With the fiscal environment under pressure across all the oil exporting economies of the region, a far healthier result around PPPs was expected.  PPP arrangements could offer a favourable solution for numerous major infrastructure and construction developments, and there have been legislative changes made to make them more accessible and attractive, the most recent being the Dubai PPP law in November 2015. It may well be that the private sector still believes more reform is needed before PPPs become mainstream.

Meeting the challenges  

This is the sharpest annual decline in optimism our survey has seen, and there is no doubt that economic and geopolitical concerns are playing heavily on people’s minds. It would seem that good fundamentals in many places are being obscured by the role that politics is playing. Although this apparent fall in confidence within the GCC construction industry may look a little bleak, it is necessary to look beyond the headlines. 

Things are certainly not as bad as in 2008, neither empirically nor anecdotally, and it is possible that as these issues lift there could be just as a swift a return to positivity.  It is a case of the industry meeting the challenges and adjusting to a new economic landscape.

For more information on the issues raised in this article and other enquiries about our services, please contact:

Pinsent Masons Dubai: +971 (0)4 373 9700

Pinsent Masons Qatar: +974 4426 9200