Oil, Tourism And More

25 March 2008

Despite the recent escalation of tensions in the Middle East, the region continues to be a vibrant construction market. Indeed, Global Insight's most recent analysis of the region suggests the sector will be even a little stronger in 2007 than was previously anticipated. Even Iran, the source of the most recent war of nerves, has a robust construction outlook, although dimmed somewhat by the increasing likelihood of economic sanctions and an increased perception of risk.

The Middle Eastern construction market will be worth approximately US$ 66 billion in 2007, up nearly +10% from its 2006 value. Continued high nominal energy prices combined with the region's majority of the world's proven oil reserves have led to a fow of cash that needs investing.

With the strong regional economy, and the desire of even the oil-rich nations to diversify from their dependence on one industry, there is no shortage of projects in which to invest. This is particularly true for infrastructure, which is vital to getting products to markets as well as improving quality of life in general.

Growth will not be uniform throughout the region, however. As the chart indicates, oil poor, but economically well-developed Israel lags the regional average, while the high fiying UAE and more free market minded Egypt lead the area in growth.

Tension

Iran is likely to come under increasing economic pressure in 2007. The US has had highly restrictive economic sanctions in place for over a decade. More recently, several major European financial companies have restricted their transactions with Iranian entities, and these restrictions have hurt Iranian businesses that trade with Europe.

Rising political tension over Iran's nuclear development programme will see European governments quietly pressuring private businesses to cut back their trade and investment relations with Iran. This will have an adverse effect on Iran's import-dependent industries.

Indeed, the Iranian president was already under fire for his handling of the economy. Despite its high oil revenues, Iran is facing an array of economic problems, including a rapid increase in fiscal spending that has led to a sharp increase in inflation, and these infiationary pressures are likely to continue.

The government has proposed a conservative fiscal budget for 2007-08, which will shift resources from current expenditures to development projects. As long as this budget becomes reality, construction spending, particularly on large infrastructure projects, will remain on solid ground.

The Isreali economy has sustained considerable momentum despite difficult security conditions. There was a mild slowdown in the third quarter of 2006 because of the war with Hizbollah, but post-confiict economic activity has been strong.

Israel's high-tech focus has invigorated industrial output, bolstered exports and drawn investment into the country. Furthermore, the rapid recovery of the country's currency and financial markets in the aftermath of the confiict underscores Israel's strong macroeconomic fundamentals. The tourism sector will take more time to recover, however.

In the near term, it is Israel's manufacturing sector, and to a lesser degree, residential activity that will buoy construction spending. The outlook for commercial and institutional investment looks weak for the near future.

Both consumers and investors remain optimistic about the UAE's economy. Results of the latest consumer confidence survey in the Emirates show that overall consumer confidence increased in the second half of 2006 and points to strong consumer demand in 2007.

Tourism

International tourist arrivals are also expected to remain strong as the turmoil in Lebanon leaves Dubai as the top regional destination for Middle Eastern travellers. Global Insight expects consumer demand to remain strong and contribute to the growth of retail construction in Dubai and Abu Dhabi.

The business community is equally optimistic. The real estate sector in Dubai will slow down in 2007 after the rapid growth over the past three years, but the construction market will gain strength in Abu Dhabi and Sharjeh. Manufacturing construction will remain strong, but it is the office and commercial sectors that will set the pace of construction activity.

As noted in the December 2006 edition of iC, the Egyptian economy has the salutary confiuence of strong export growth and private investments, as well as healthy revenue fiows from both tourism and the Suez Canal.

In addition, reforms to the tax code to foster domestic demand and private investment, as well as privatisation initiatives and financial sector reforms, will continue to bear fruit in 2007 in the form of renewed investment activity which will be reflected in the construction sector.

Outlook

In short, the Middle East remains an attractive construction market. As with most regional markets, it is important to note the countries on the upswing and pay attention to the economic fundamentals implicit in any investment outlook.

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