Economic Outlook: Middle Eastern investment growth

14 October 2014

IHS Global Insight's total construction forecasts for the Middle East.

IHS Global Insight's total construction forecasts for the Middle East.

The economic outlook for the Middle East is clouded by regional political instability, including the Islamic State’s attacks in Iraq, the Israeli-Palestinian conflict and Syria’s long civil war.

On the positive side, Iran’s economy is stabilising after two years of contraction, despite ongoing sanctions on the energy and financial sectors.

The region depends on oil revenues and the construction market is even more attuned to oil prices than the overall economy. The continuing boom in US oil production, combined with a cooling Chinese economy, is restraining prices, and crude oil prices are likely to decrease in 2015.

However, global spare capacity will remain tight, with little cushion to absorb additional disruptions. Also, while North American supply growth is strong, other potential new sources (Iraq, Brazil, and Kazakhstan) face hurdles.

Geopolitical tensions, not only in Iraq and Syria, but also Ukraine, Libya, Venezuela, Nigeria, South Sudan and Yemen, continue to pose further upside price risks.

The overall effect in the Middle East will be for solid growth in regional GDP growth. Indeed, the slowing growth of many emerging markets means the Middle East is set to be the third fastest growing region, behind Asia (excluding Japan) and sub-Saharan Africa. The Middle East also offers a bigger market and less investment risk than sub-Saharan Africa.

Within the Middle East, the link between higher per capita income and lower investment risk holds. The highest risks are in poorer countries like Syria, Lebanon and Jordan, while the richer countries, such as Saudi Arabia and the UAE offer investment risk on a par with western economies.

Saudi Arabia, the largest economy in the region, will sustain +4.5% GDP growth over the next five years, as oil revenues support strong government spending and investment. The UAE will perform nearly as well, with GDP growth accelerating modestly in both economies as oil prices slowly rise.

Regional stability

For most of the region’s economies, plans for job creation, economic diversification and greater competitiveness will aid construction markets, and is crucial to regional stability over the medium term.

The graph for total construction indicates the effect of a recovering regional economy and stable oil prices. In general, 2014 is looking better than 2013, and 2015 offers more potential than 2014. Flat oil prices will hold regional growth steady, but the historically weaker markets, such as Bahrain and Jordan, will improve while the stronger markets such as Saudi Arabia and Qatar see some deceleration but remain regional leaders.

Over the next five years, total construction spending in the Middle East will increase at an annual rate of about +4.5% in real terms.
This is quite similar across structure types for the region, with residential markets performing less well and infrastructure faring better, although there is more significant variation within individual countries.

Over the next five years, Qatar offers the strongest construction market growth at +7.1% in real terms. Saudi Arabia is a close second with a rate of +6.0%, but its construction sector is twice the size of Qatar’s.

This strong growth for Saudi Arabia represents a slight slowing from the past five years, where it had accelerated housing and similar programs to mitigate unrest from the Arab Spring.

Saudi positivity in the medium term is oriented toward infrastructure. A key driver of this is the US$ 22.5 billion metro project in Riyadh over the next five years. Work has started on a system that includes 85 train stations on six metro lines totalling 176 km.

Growth in Qatar

Qatar’s growth is more remarkable in that it is a turnaround from the previous five years when construction spending contracted.

The need to prepare for the 2022 FIFA World Cup will drive venue and infrastructure construction spending on top of the country’s ambitious energy infrastructure improvements.

The challenge for Qatar will be prioritising projects to avoid overheating the construction economy. Qatar lacks a significant manufacturing base and most building materials need to be imported. The country also lacks the port capabilities of Dubai, UAE, for example.

There is also competition for labour with the other fast growing GCC countries, but Qatar has still made a strong start on stadium construction for the World Cup.

While this means that some stadiums will not be brand new for the 2022 event, it helps level out infrastructure investment while demonstrating progress to those sceptical of its ability to deliver. Hence IHS Global Insight’s view of a gradually accelerating construction market through 2019.

The UAE is also forecast to perform well. With its economic turnaround nearly complete, Dubai is investing in a variety of projects, including new industrial cities, airport terminals, hospitals, schools and thousands of new homes.

Retail sales are performing well, and new retail space is also being planned. Dubai Land Development has announced plans for ‘The Perfect City’, which is intended to be 100% sustainable and feature 75% green space, including 20,000 trees.

Indeed, announced projects for Dubai tend to be more ‘horizontal’ than ‘vertical’ as developers take advantage of land availability and avoid the high cost of building up. Spreading development over a wider area also reduces infrastructure density. Total construction growth is expected to average +4.6% over the next five years, but infrastructure growth will be below average.
Indeed, it is instructive to view the composition of construction growth across different sectors, as illustrated in the second graph.

Across much of the region, non-residential structures are resurgent as economies recover (retail space), witness an upturn in tourism (hotels) and diversification from energy dependence continues (office and industrial buildings).

Quality of life

The need to improve quality of life in some countries also boosts institutional spending on health care and education.
Residential construction also looks good, 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 look stable and are at a relatively strong level of growth.

Several years of flat energy prices limit the uplift potential, but prices are high enough to combine with improving global economic conditions to create lift, particularly in countries with plans for diversification.

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