The collapse in crude oil prices over the past year is taking its toll on the economies of most oil producing nations in the Middle East, according to Danny Richards, Senior Economist at Timetric’s Construction Intelligence Center. Although countries such as Saudi Arabia, Qatar and the UAE have managed to retain continued economic growth in recent quarters, they are now starting to feel the pain, and their governments are having to adjust their investment spending plans. However, low oil prices is providing greater impetus for governments in the region to accelerate efforts to diversify their economies, and as a result generating some support for buildings and infrastructure construction.
According to the latest projections from the IMF, economic growth in the Gulf Co-operation Council (GCC) will slow to 2.8% in 2016, from 3.3% in 2015 and 3.4% in 2014, and their fiscal positions will plummet to deficits equivalent to around 13% of GDP.
Saudi Arabia will be the worst hit, suffering a marked economic slowdown, with growth slowing to 2.2% in 2016, and the UAE will also record much slower growth than in recent years. The outlook for Qatar, however, is relatively positive despite the lower oil prices. A big part of Qatar’s National Vision 2030 is economic diversification, with the construction sector set to receive a boost and become a more significant contributor to the country’s GDP.
The successful implementation of the Qatari government’s five year, US$210 billion infrastructure development plan, is crucial for the economic outlook. Some of the biggest projects in the pipeline are the US$43 billion Qatar Integrated Railway, the US$17.5 Hamad International airport, and the US$43 billion Lusail City Mixed-Used development. Preparations for the hosting of the Fifa World Cup in 2022 are also set to have a major positive impact on the economy and construction in particular. Nevertheless, in the wake of the sharp decline in oil prices, some energy projects have been cancelled. With a cost of US$6.4 billion and US$5.6 billion respectively, the Al-Karaana and Al-Sajeel petrochemical complexes are the two projects that are no longer being pursued.
The outlook for Saudi Arabia, which relies on energy exports for 80% of its revenue, is not as bright. It recorded a fiscal deficit of 2.3% of GDP in 2014, and the drop in oil prices will further widen the gap. In October 2015, Standard & Poor’s lowered the country’s sovereign credit rating by one notch to A+, as it expects the budget deficit to reach 15% of GDP in 2015. According to projections from the IMF, Saudi Arabia’s general government deficit will stand at 21.6% of GDP in 2015 and 19.4% of GDP in 2016.
The UAE is also expected to record a fiscal deficit in 2015 as a result of lower oil revenues, and it will adopt a more cautious fiscal policy in 2016. However, in view of its high levels of reserves, it is not expected to make major cuts in spending. Education and health will remain key priorities, accounting respectively for around 21% and 8% of the overall budget. In the UAE, there will likely be a reduction in energy subsidies as well as a reduction in spending on non-essential projects.
With oil prices expected to remain relatively low in the medium term, the major oil producers in the Middle East will continue to have to deal with weak fiscal positions, resulting in cuts in spending. Energy related construction projects will also continue to take a direct hit. However, on the bright side, the new reality of low oil prices will provide even more impetus for governments in Saudi Arabia, Qatar and UAE to develop their non-oil sectors, driving up investment in buildings and infrastructure construction.
Adapted from press release by Rosalie Starling
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