As we say goodbye to 2017 we’ve taken stock of what has happened over the past year and give our outlook for the new year. The GCC construction industry 2017 has been one of contracting backlogs and uncertainty around whether the industry has reached the bottom of the economic cycle.
Funding is expected to be slightly easier to source
From a regional perspective, funding is expected to be slightly easier to source as we look at the requirements to seek returns for investors from a macro perspective – with central banks reigning in QE and returns getting lower and lower on high grade government bonds. With alternative financing becoming ever more a focus for regional governments and an appetite from the international markets to engage with experienced consortia, the trend of attracting some international financiers will continue - which bucks the historical vogue for projects to be financed from regional banks.
As we look to 2018 there are numerous signs to stoke optimism for the industry
As we look to 2018 there are numerous signs to stoke optimism for the industry. During the last 24 months in Saudi Arabia we’ve seen a significant contraction of work in pipeline or delivery fall from $1.1 Trillion to $800 Billion in early 2017 and now rapidly expanding to $1.75 Trillion. Even if a minority of the giga and mega projects recently announced gained traction, the outlook is clearly positive and the industry will see the end to the contractionary period and move into growth again. In the UAE, there is still significant ongoing work towards Expo 2020, although the region’s project upturn has a key sector that is expected to drive growth in construction which is Oil and Gas (O+G).
Since the oil price collapse in 2014, regional investment in capital projects has shrunk significantly in the O+G sector. With three years of low investment and a midterm stabilisation in oil prices, oil companies are beginning the reinvestment cycle. This can be seen with examples such as Saudi Aramco’s commitment to lift spending to $414 Billion over the coming decade and BP’s move to develop the second phase of the Khazzan gas project in Oman. Couple this with the low tender prices in the construction market, due to the low levels of work over the past two years, and the scene is set for an attractive time to procure, whilst ensuring the revenue that is still critical to regional government balance sheets is kept flowing. We have seen projects already closing as ADNOC commits to the further expansion of Zakum offshore gas field. There is a precedent for this significant investment in the O+G sector at the bottom of the market which was ADNOC’s original signing of the Zakum project.