While the Gulf Cooperation Council (GCC) infrastructure projects aim to reduce the impact of oil price volatility on the Gulf economies, the projects’ viability remains directly linked to government spending, and thus revenues from oil, and are currently vulnerable to the oil price war, COVID-19 and, subsequently, the economic recession, supply-chain disruptions, and labor risks.
The infrastructure projects in the GCC – mainly the Saudi Vision 2030, Qatar National Vision 2030, UAE Vision 2021 and Abu Dhabi Economic Vision 2030 – are vital to their economic diversification plans.
Saudi Arabia’s construction sector has the highest value in the Middle East, linked to high government spending. The US-Saudi Business Council estimates that the contracts the kingdom awarded in 2019 reached an all-time high for the past 5 years with $52.6 bn (SR197.1 billion), with the surge in construction. Yet challenges are ahead for the kingdom and the other Gulf states.
Despite boasting one of the most favorable business climates in infrastructure globally, in 2019 analysts at Fitch Solutions forecast low-trajectory growth in the UAE construction sector following Expo 2020, with a rate of 1.9 percent only, due to limited activity in the sector and financial limitations.
Qatar’s 2020 budget assumes an oil price of $55 per barrel with expected revenues of $58 bn, according to the Ministry of Finance. The largest share of the budget was assigned to major projects and accounted for an additional spending growth of 0.6 percent compared to 2019, equivalent to $24.7 bn (QR90 bn).
Megaprojects are continuously being planned across the region, but implementation has been lagging behind. According to the Deloitte construction report 2018, the Gulf states have more than $2.5 trillion worth of planned projects. The latest global crises are adding challenges to their implementation across the construction sector.
The construction sector in the GCC is highly dependent on government spending due to weakness in attracting foreign direct investments and investors’ risk-aversion. The sector’s thriving is therefore interlinked to oil revenues. The GCC states are facing increased fiscal deficits resulting from lower revenues and foreign currency earnings due to the collapse of energy demand and oil war prices, met with higher spending in the health sector and economic stimulus packages and limiting spending for infrastructure, mainly construction, projects.
Saudi Arabia has been planning to slash government spending and rely on private sector financing for a while, but this has been easier planned than executed, with its low ability to attract foreign direct investment. The current global state of affairs has triggered the decision to launch a $32 bn economic stimulus package and cut 5 percent of budget spending, equivalent to $13.3 bn, but that remains insufficient to fund the expected deficit. While the factors of uncertainty are high, increasing the margin of error in forecasts, Goldman Sachs expects oil to average $20/bbl in Q2 2020 and $30-40/bbl in Q3 and Q4. According to Castlereagh Associates, the kingdom accrues a fiscal deficit of 21.8 percent of GDP at an oil price of $30/bbl. Covering this deficit requires extensive borrowing, as the kingdom announced it won’t be tapping into reserves. Yet, with the global liquidity crunches, borrowing ability is decreased and the kingdom will have to reallocate spending based on priorities, raising a major concern on its ability to foot the bill for the infrastructure projects, 12 of which surpass $828bn in the construction field.
The UAE announced a $4.4 bn (AED 16 bn) stimulus package to accelerate some priority infrastructure projects, in addition to the central bank’s credit to provide some temporary exemptions to private sector loans. The infrastructure projects in times of crisis typically favor healthcare and utilities.
The Qatari authorities announced a $20.5 bn stimulus package to provide financial stability in response to the COVID-19 outbreak, equivalent to 10 percent of GDP. The stimulus package is expected to cover the suspension of utility payments and loans, assist SMEs and malls to mitigate the crisis. A month ago, the state delayed LNG expansion plans. Further cuts on spending and project delays are forecast.
OPEC++ talks are scheduled to attempt to agree on oil production cuts. Regardless of the outcome and agreement, the reduced energy demand driven by the pandemic will translate in low oil prices for longer, until growth recovery.
The prices of building materials have surged in recent years, hiking construction costs. In Saudi Arabia a 27 percent increase in the construction cost per square meter was recorded in Q1 2020, reaching $373/ m2, up from $293 in 2019. This upswing was caused by the construction boom in the kingdom and higher materials costs, mainly for steel. In Qatar, the blockade and subsequent disruption of transport routes had an additional negative impact on the sector.
Steel prices have been on a downward trajectory in the crisis, but contractors haven’t reaped the benefits yet, as COVID-19 is disrupting the supply chain in the construction sector, slowing processes and the progress of projects. The risks for stakeholders are high as manufacturers have reduced their operation hours and suppliers have postponed or halted shipments of materials, and projects are left with delays and associated overhead costs that are not necessarily compensable.
Beyond the supply chain, COVID-19 is creating a health risk for migrant workers, who are at the core of the sector in the GCC and are typically lodged in highly concentrated numbers in camp facilities. The threat of contagion is high and the potential shortage in migrant workers presents an additional risk of project disruptions.
The graph below shows some projects in Saudi Arabia, United Arab Emirates and Qatar, in terms of value (bubble size) and vulnerability level (x-axis).
Figure 1: GCC projects value and vulnerability. Source: Author. Data from Castlereagh Associates, Zawya and news agencies
Neom project size has been rescaled 6.25 less in size.
The oil price war and COVID-19 have a negative impact on infrastructure projects in the GCC, mainly in the construction sector. The reduction of government spending coupled with the risk-aversion of investors in an economic recession, and the GCC’s struggle to attract investments result in weak recovery and limited investments in construction projects, which are also subject to supply-chain and labour disruptions. Improving investor appeal through solid legal and regulatory frameworks, reduction of bureaucracy and improvement of the overall business investment climate will be necessary to carry on diversification plans and construction projects in a time of low oil prices.