Economic Outlook: Middle East

15 October 2013

The good news is that the Middle East is less vulnerable to an oil-price collapse or other shocks than in the past. This is because nearly every country in the region used the strong commodity price environment of the recent past to improve their domestic and external finances.

These reserves have proven useful in dealing with the Arab Spring revolutions and continuing political turbulence and social unrest. Most countries have been able to engage in employment-generating construction programmes, as well as outright subsidies.

Even so, countries without oil wealth, such as Jordan and Lebanon, are struggling to finance greater social spending and many countries are seeing stunted recoveries in tourism and investment. Of course, the problems run even deeper in Syria and Iran.

But the region’s medium-term outlook still hangs on its petroleum resources, along with its close proximity to energy-hungry Asian economies, growing tourism potential and strategically important geopolitical location.

In the near-term, while turmoil associated with the Arab Spring continues in some countries, notably Syria and Egypt, supply anxiety has given way to economic concerns in the oil market.

The oil price outlook sees Brent decreasing to US$ 105 per barrel in 2013, US$ 95 per barrel in 2014 and US$ 94 per barrel in 2015. While many of the geopolitical factors serving to bolster oil prices remain in place, oil supply will expand vastly in years to come.

Oil prices are expected to rise post-2015, as global economic fundamentals reassert themselves, helping restore the oil price cycle. Indeed, upstream oil sector investment should eventually rebound, leading to a gradual expansion of the region’s production capacity.

Non-oil sector

The non-oil sector holds out the promise for growth, with countries continuing to diversify their economies. In this respect, Dubai, UAE – despite having suffered from the global economic crisis – has emerged as a successful model for others to emulate.

Saudi Arabia is also engaging in aggressive diversification efforts, but while Dubai has focused on commercial development, the Saudis paint with a broader brush that includes significant industrial facilities.

Over the next five years, total construction spending in the Middle East will increase at an annual rate of about +5%. Infrastructure spending will see the fastest growth (+6.4%) and residential construction will be the slowest growing (+3.1%).

Saudi Arabia is not only the region’s largest construction market, it will also offer the potential for strongest growth. The Saudi budget includes significant social support measures that will create construction opportunities in education, health care, housing and infrastructure. We expect total construction spending in Saudi Arabia to grow at +6.7% per year over the next five years.

Qatar, with expected growth of +6.8%, is the only country in the region that will outpace it, but it is a far smaller market. The country, which will host the 2022 World Cup, will see steady acceleration in construction growth from +4.9% in 2013 to +9.0% in 2019. The increase reflects its preparations in terms of the infrastructure and venues needed to welcome athletes and fans – this over and above its energy infrastructure improvements.

The UAE will also perform well. Dubai has approved numerous projects, including the construction of new industrial cities, airport terminals, 14 hospitals, 24 new schools and thousands of new homes.

Other emirates seek to follow its path, focusing on tourism mega-projects and financial and business service centres. Total UAE construction growth is expected to average +5.5% over the next five years.

Temporary slowdown

In general, the Middle East market will see slowing construction spending in 2013 compared to 2012. Flat oil prices will hold growth on a regional basis to about the same as 2014, with some markets, such as Oman and Qatar doing slightly better while others, such as Kuwait and the Saudi Arabia backing off.

Israel requires further fiscal consolidation. The economy as a whole, and construction markets in particular, will be constrained by the government’s need to maintain strict fiscal measures over the medium term.

The government allowed for larger deficits during the global recession to accommodate increased fiscal spending with lower revenue collections. However, Israel now needs to bring its public debt-to-GDP ratio into line with that of other OECD nations.

This is now underway with the government approving an austerity budget in mid-2013. Given infrastructure needs in the medium term to accelerate economic growth, the impact will be felt on structural investment.

As with Saudi Arabia, Kuwait would like to diversify from a reliance on hydrocarbons, but political gridlock is an obstacle. The national assembly approved a US$ 104 billion development plan that outlines capital spending through to 2014 – the first such plan since the 1980s.
It comprises nearly 1,000 projects, including a US$ 77 billion business hub, a metro system, rail lines, a major harbour for container ships, a 25 km causeway and new healthcare and education services as well as a myriad of smaller projects.

However, political disputes have hindered implementation, with only a fraction of the intended amount invested. The new parliament put in place in late 2012 may prove more amenable to implementing the plan, although political tensions remain.

Even so, hydrocarbon revenues will remain the primary funding source for new development, and the long-term strategy includes expansion of the oil sector in tandem with diversification.

A major expansion in Kuwait’s oil sector would require development of rather complex deep oil reserves and moving off shore, where the Kuwaiti industry has limited experience.

This has prompted a call for increased participation of foreign oil companies, an idea that the parliament has so far resisted. As such, a massive expansion of Kuwait’s oil capacity may be difficult to accomplish, and IHS Global Insight forecasts only a moderate pace of development in Kuwait’s energy sector over the forecast horizon.

Outlook

Middle Eastern construction markets have slowed and stable to declining oil prices in the near and medium term suggest some slowing of construction growth.

However, infrastructure and diversification efforts will keep the level of activity relatively strong. A resurgence is expected after 2015 as the global economy, particularly Asian markets, requires additional energy and puts oil prices back on an upward track.

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