he Middle East will face continued challenges to its economic prospects into 2016. Sharply lower global oil and commodity prices pose a threat to growth, government finances and external balances. Some of the region’s commodity exporters are however more vulnerable to the price slide than others.
Countries with large financial buffers, such as Saudi Arabia and other large Gulf Cooperation Council (GCC) oil exporters, should be able to endure a short period of weak oil prices without serious difficulty. However, other countries with thinner financial cushions, like Bahrain and Oman, and those with weaker economic fundamentals will face increased pressure from lower oil prices. With oil prices not expected to return to US$ 100/barrel until 2022, pressure from will remain for an extended period.
The impact of lower oil prices on construction will depend on the reaction of the region’s exporters. Saudi Arabia, Kuwait and the UAE have resisted cuts in output to protect their market share and have continued pumping oil at a high rate.
As a result, energy-related construction has not been dramatically affected. However, oil exporters rely on the non-oil sectors of the economy to drive overall activity. This creates a challenge as government’s recycling of oil revenue drives non-oil related construction.
Oil-importers in the region will however see some relief from weaker oil prices. These savings should help domestic demand and improve construction prospects. However, risk and social challenges dampen the Middle Eastern outlook in the medium-term.
Fallout from the regional crisis will continue to increase perceived risk and instability, hindering investment, with fallout from the Syrian crisis weighing heavily on Iraq, Lebanon and Jordan. Meanwhile, temporary sanctions relief has helped stabilise Iran, but the oil price collapse threatens to squeeze activity and possibly push Iran back into recession in 2016.
Addressing issues such as job creation and competitiveness will gain new urgency in terms of regional stability and economic success, given the prolonged weak oil price environment.
Unemployment remains high, especially among the young, leaving some countries vulnerable to future unrest.
This could prompt further development of physical and social infrastructure by governments to boost economic activity and employment. However, some countries will need foreign funding to complete their plans.
The region’s oil wealth, combined with its proximity to a still rapidly growing Asia, suggests that the region still has long term growth potential. Upstream oil-sector investment should eventually rebound as oil prices drift upwards, leading to a gradual increase in the region’s production capacity.
Over the next five years, total construction spending in the Middle East will increase at a compound annual rate of about +4.5% in real terms.
This growth will be quite similar across all structure types for the region, with residential building performing slightly worse and infrastructure somewhat better. There are however more significant variations within individual countries.
Over the next five years, Qatar offers the strongest construction market growth at an average of +9.2% in real terms, although there is some risk to this outlook should FIFA backtrack on its plans for the 2022 World Cup competition.
As strong as Qatar’s growth may be, it does represent a slowing from the past five years. The need to prepare for the 2022 World Cup is not the only driver of marquee construction, but it will see infrastructure construction spending, and ambitious energy infrastructure improvements.
The challenge for Qatar will be prioritising projects to avoid overheating the construction economy.
Saudi Arabia offers the second strongest growth at +7.1%, and the market is twice the size of the Qatari construction industry. The strong growth for Saudi Arabia represents a slight slowing from the prior five years, when it accelerated housing and similar programmes to mitigate unrest from the Arab Spring.
Saudi growth in the medium-term is oriented towards infrastructure, with major rail and road projects either underway or soon to be started. Residential construction will also do relatively well, due to work within the country’s industrial cities – a national hedge against excessive oil dependence.
The UAE also looks promising. Dubai is investing in a variety of projects, including new industrial cities, airport terminals, hospitals, schools and thousands of new homes.
Dubai Land Development has announced plans for ‘The Perfect City’, which is intended to be 100% sustainable. In contrast to prior development, construction in Dubai is trending to be more ‘horizontal’ than ‘vertical’ as developers take advantage of land availability while avoiding the cost of high-rise construction projects.
Spreading development over a wider area also reduces infrastructure density. Total construction growth is expected to average +4.9% over the next five years, but infrastructure growth will be above the average.
Indeed, it is instructive to view the composition of construction growth across countries.
In much of the region, non-residential structures will recover as tourism gains a greater share of many economies, and low oil prices will continue to divert from the mentality of energy dependence.
The need to improve quality of life in some countries will also boost institutional spending on health care and education. Residential also looks positive, partly due to improving economics, but also due to demographics – the Middle East has some of the strongest household formation rates in the world.
Overall, Middle Eastern construction markets have seen their growth prospects curtailed compared to prior expectations. Nevertheless, the region remains a global leader. While several years of relatively flat growth limit the upside potential, the worst of the oil price shock is over and improving global economic conditions will gradually create a lift - particularly in countries with specific plans for diversification.