Perspectives

MENA economies protected from oil price crash - but for how long?

Event-driven projects and relatively diversified economies have proven a saving grace against a difficult economic backdrop, as has continued government investment in infrastructure and energy projects across the region.

Mace’s MENA cost consultancy business has published its H2 tender cost report, finding that while regional tender prices have remained relatively stable, there are considerable variations

Over-reliance on oil revenues has caused government spending (and consequently growth) to fall as the oil price dropped, leaving the countries of the region seeking to reprioritise spending towards diversifying their economies and funding social investment. Despite a rebound in GCC contract awards in H1 2017 of 14% from a four year low in 2016, results are still down 20% from the same time last year, showing a challenging market. This competitive pricing environment has led to relatively stable tender price inflation across the region, ranging from 0.4% in Kuwait to 2.5% in Saudi Arabia.

The general reduction in government spending in a region where most major construction projects are at least part funded by the Government has had a direct impact on the construction industry, mainly in terms of gestation periods for project assessment and award getting longer, as well as the prolongation of project schedules.

The impact of low oil prices, geopolitical tension and global political events drove continued challenges in the economies of the MENA region through 2016. As these events develop through 2017 governments are continuing to implement strategic market reforms, making it likely 2017 will be a period of further adjustment to the new market structure.

Most countries have put strategies in place to diversify their economy away from oil after the recent dramatic drop in price impacted all of the economies in the region, whether through directly impacting on their revenues, or through the imported weak demand from neighbouring countries. Plans to combat dependency on oil revenues and reform markets include diversification of revenues, increased private sector participation and a focus on infrastructure investment.

Fergus Rossiter, Director of Mace Cost Consultancy - MENA, said: 

“Continuing the trend from 2016, the first half of 2017 has been competitive for the MENA construction market due to the low oil prices resulting in restricted government spending across the region. However, as the work for upcoming major events starts to ramp up, notably Expo 2020 in the UAE and the FIFA Football World Cup in Qatar, we are starting to see an increase in tender prices, which is further fuelled by recent increases in material prices, such as reinforcement steel.

“We are yet to see the full impact of the current blockade has on the construction industry in Qatar, particularly as it relies heavily upon a large quantity of materials being imported from Saudi Arabia and the UAE.”

Tender Cost Update: MENA