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Geopolitical concerns weigh heavy on Middle East construction industry, study says

BEIRUT | - December 08, 2015, 10h46

A recent survey revealed a sharp drop in optimism, longer payment periods, less favourable contract conditions and rising disputes as market conditions harden. A snapshot of opinion from the GCC’s construction sector – the majority of which are companies involved in larger projects with a value of over AED 100 million – has shown a dramatic drop in optimism over the last year.
Pinsent Masons’ Annual GCC Construction Survey, which was presented to representatives from the industry at the international law firm’s recent Annual Construction and Engineering Law Conference, shows that just 32% of respondents are optimistic about the year ahead. This compares to 77% stating that they were optimistic about 2015 when asked the same question a mere 12 months ago.
This sudden shift in sentiment is consistent with the industry’s responses to questions about order books, contract conditions, payment periods and disputes, which are all less positive than a year before.
16% of those surveyed said that their 2016 order books had declined by over 10%, which compares to just 4% who said the same thing a year earlier. Asked about contract conditions, 93% of businesses said they had become less favourable during 2015, representing a 14% increase on a year earlier. In addition, 95% said payment periods were longer this year, and 60% said they were involved in more disputes during 2015 than had been expected before the year started.
The results are indicative of a hardening economic environment as the construction industry, like many others, grapple with the impact of ongoing low oil prices, simmering geopolitical tensions in parts of the MENA region, and a general concern related to emerging markets from many global investors.
Optimism surrounding Saudi Arabia saw a pronounced decline. Asked what country will provide the strongest growth opportunity in 2016, just 12% stated Saudi Arabia, representing a substantial drop from the 40% of respondents who believed it would be the strongest market during 2015.
In contrast, a growing portion of the industry now views Qatar as offering the strongest regional opportunity, rocketing up in positivity from 14% of respondents last year to 33% in this year’s survey. The UAE is considered the strongest market opportunity in 2016.
By sector, real estate saw the largest single reversal in sentiment, with 26% of those surveyed considering it to offer the strongest commercial opportunity next year, falling from 48% of respondents the year before. This may be due to the uncertainty around oversupply in places like Dubai in particular.
Away from the GCC, the construction industry remains tentative towards Iran and India, with only 40% and 42% respectively pursuing opportunities in these countries. This may simply be due to a wait and see approach being adopted for Iran, as sanctions have not yet been officially removed. However, the India result is surprising given the historic trade links between the GCC and India, the strength of the economic growth being seen there, and the recent promotional visit of Prime Minister Modi to the UAE.
Similarly surprising was the survey result on public private partnerships (PPPs). Two thirds (67%) of the industry stated that they are not currently involved in, or anticipating to be involved in, PPP projects over the next 12 months. With the fiscal environment under pressure across all the oil exporting economies of the region, a far healthier result around PPPs was expected.    
Commenting, Sachin Kerur, Head of Middle East Region at Pinsent Masons, said: “This is the sharpest annual decline in optimism our survey has seen, and there is no doubt that economic and geopolitical concerns are playing heavily on people’s minds. It would seem that good fundamentals in many places are being obscured by the role that politics is playing. However, it is possible that as these issues lift there could be just as a swift a return to positivity.
“Nowhere in the region is falling optimism as pronounced as it is in Saudi Arabia. This is to be expected given the challenges the country is facing and the central role oil maintains in its economy. Despite this, there is a general sense amongst the industry that if the current financial squeeze can deliver greater diversification of the economy, Saudi Arabia will remain a highly attractive market. Indeed there have been some positive diversification measures discussed in the Kingdom, which if implemented should enable greater private participation in the economic development of the country. Meanwhile, in Qatar, they are benefiting from a natural bounce as the World Cup edges closer.
“The lack of anticipation of more PPPs was a surprise, on account of the fiscal challenges facing many countries in the region. These arrangements could offer a favourable solution for numerous major infrastructure and construction developments, and there have been legislative changes made to make them more accessible and attractive. It may well be that the private sector still believes more reform is needed before PPPs become mainstream.
“The majority of the GCC construction industry is hesitant around pursuing opportunities in Iran and India. A cautious approach is always advisable when entering new markets, particularly ones that have been subject to sanctions. However, India is one of the few countries in the world to show strong economic growth and businesses located in the Gulf are ideally suited to access the country. I would encourage them to be more proactive on pursuing commercial opportunities in India, providing the right level of due diligence is conducted.”

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