Analysis: Oil price rise boosted construction in H1 2019

The MENA region is currently expanding at a moderate pace, with a significant construction project pipeline and sizeable schemes working their way through design and planning, according to a new report released by Mace, an international consultancy firm.

According to its MENA H1 2019 Market View, economic growth in the region is predicted to accelerate from 1.5% in 2019 to 3.2% in 2020, fuelled by a strong outlook for oil prices. Meanwhile, GDP growth is expected to climb to 3.2% in 2020 after being relatively low at 1.5% in 2019, despite the varying prospects of individual MENA nations.

However, a healthy project pipeline doesn’t necessarily mean a buoyant construction sector, due to the region’s predicament with rising public debt and asset price weakness in the commercial and residential sectors, the report affirms. Additionally, new projects are generally slower to commence than originally planned, with certain regions experiencing this more than others.

The report highlights that in spite of a slowdown in the pace of global economic growth, oil supply has tightened due to factors such as US sanctions on Iran and Venezuela, escalating tensions in Libya and OPEC’s decision to reduce production to a four-year low.

“With oil prices recently exceeding $70 per barrel, the outlook for public sector finances has improved significantly,” says Mark Taylor, MENA regional director at Mace. He explains that despite oil-producing nations striving to broaden their economic base, oil revenues still make a significant contribution to economic activity across the MENA nations: “If this boosts public sector project delivery, there is a risk that available capacity – depleted during the recent downturn – will be swiftly absorbed.”

Regardless of this potential for growth, the report notes that the volatility of oil prices creates uncertainty around projections. In the UAE, where the oil sector accounts for about a third of GDP, the economy grew by an estimated 1.7% in 2018, which is forecast to accelerate to 2.8% in 2019 and 3.3% in 2020, supported by an expansionary fiscal policy, according to the International Monetary Fund (IMF).

In addition, construction activity increased by 6.6% in 2018, as work progressed on projects ahead of Expo 2020 in Dubai. Transport infrastructure has been a key growth area, and impetus from these projects is expected to drive a further year of 6% growth in construction activity in 2019 across the country.

Meanwhile, in Saudi Arabia, Vision 2030 will drive industry growth over the coming years, the report states, but the speed at which the privatisation programme is delivered will influence the outlook. BMI forecasts a steady acceleration in construction sector growth over the coming years, predicted to hit 5.5% in 2019 and 7.8% in 2020, after climbing by 4.1% in 2018.

However, Mace also cites other data specialists who estimate that project awards fell by around $5bn to $21.7bn in 2018 as the government’s attention turned to reducing debt, which may make BMI’s growth projection for 2019 difficult to achieve.

The case in Oman is similar – with the government’s focus firmly on debt reduction, the near-term outlook for construction is subdued. Over the medium term, the project pipeline is expected to increase, providing a boost to the construction sector. Mace’s report says Oman’s construction sector grew by an estimated 10.4% in 2018, according to BMI, and that the pace of growth is set to accelerate to 11.5% in 2019 and 12.1% in 2020.

Projects with a total value of $177bn are planned or underway in Oman, says MEED Projects, which states that the country has planned a healthy pipeline of projects designed to support its aims for diversification away from oil.

In Saudi Arabia, the Public Investment Fund, the country’s sovereign wealth fund, manages assets with a combined value of $250bn, backing some of the country’s largest projects, the $500bn NEOM economic mega zone and the Red Sea Project.

However, Mace’s report says that even though construction costs are generally rising across the country, project-specific factors will have a bearing on the rate of increase.

“Construction cycles across MENA’s primary markets are at different stages of maturity, and procurement strategy needs to recognise this in order to secure the most economically advantageous tender prices while still being sufficient to deliver projects on budget,” confirms Paul Donaghy, Head of Cost Consultancy, MENA at Mace. “In aggressively competitive markets, the lowest tender price may not deliver the lowest out-turn cost, so it’s important to take a balanced approach to assessment.”

Egypt’s economy is forecast to expand at a relatively rapid rate over the next two years, according to the IMF, beating the 2018 rate of 5.3% in both 2019 and 2020, driven by sustained growth in natural gas production and a recovery in tourism. The report says delivering an ambitious renewable energy programme is a priority for the government.

BMI offers a strong outlook for the construction sector as well. After climbing by 7.5% in 2018, output is forecast to rise by 10.8% in 2019 and 9.7% in 2020, as power, infrastructure and industrial projects build up a head of steam. Meanwhile, schemes currently working their way through planning have an estimated value of $247bn.

Although performance in 2019 has been subdued, figures remain promising and many of the MENA nations have ambitious strategies in place to promote private sector investment and enhance existing infrastructure. Against this backdrop, a positive forecast is boosting the overall economic confidence and helping to lay the foundations for a solid performance in the construction sector, despite BMI’s prediction that the construction sector across MENA will slow from 6.4% in 2018 to 5.9% in 2019 and 5.7% in 2020.

Construction output growth (real growth, % change)

The pace of growth in construction activity across MENA is forecast to slow from 6.4% in 2018 to 5.9% in 2019 and 5.7% in 2020, according to BMI.