New Gulf projects to hit $180 bln this year despite oil price -study

About $180 billion of contracts for new construction projects will be awarded in wealthy Gulf states this year, the largest amount for six years, despite falling oil prices, according to a study published on Thursday.

Brent crude oil sank to a four-year low below $83 a barrel on Thursday because of ample supply and the prospect of a weak global economy. It has dropped from a peak of $115 in June.

If current prices are sustained for a long period, perhaps a year or so, oil revenues of the Gulf states will be reduced and governments could become less willing to spend, and decide to cut back on projects, construction industry executives and analysts said.

So far, however, there is no clear sign that cutbacks are looming in the six-nation Gulf Cooperation Council, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, they said.

“We are going to beat the 2013 figure this year with $180 billion worth of contracts awarded,” said Edward James, director of analysis at MEED Projects, an online project tracking firm which conducted the study.

“This is driven by substantial projects that were awarded this year by Qatar, the UAE and Kuwait.”

Last year, $156 billion of projects were awarded in the GCC, largely by governments and state-backed companies, as most Gulf countries recovered strongly from the global financial crisis and spent on major infrastructure projects designed to help their economies diversify beyond oil. At the peak of the boom in 2008, GCC contracts totalled about $200 billion.

The concern for the construction industry is that oil prices could drop for an extended period below the “break-even” levels which governments need to balance their budgets.

This would not be disastrous for the governments; they have built up huge financial reserves which in many cases could cover heavy spending for years to come. Also, governments in the big GCC economies have little debt and could easily borrow from markets.

But the experience of running budget deficits could cause governments to become more cautious about spending. Saudi Arabia will have a break-even price of $90.70 a barrel in 2015, the International Monetary Fund has estimated; the UAE would face a level of $73.30, Kuwait $53.30 and Qatar $77.60.

“I would say Saudi Arabia and the UAE are most likely to delay projects or put some on hold if there’s a sustained drop in prices,” said Regard Aboo Yakou, Qatar country manager at construction consulting firm Hill International.

Steven Miller, senior vice president for business development at construction firm Shapoorji Pallonji, said: “I’ve heard that the time to worry is if it goes below the $80 mark.”

He added, “We have not seen anything stopping yet, but if prices continue falling maybe it will. Metro projects may stop, but housing and hospitals will be built.”

In the wake of the Arab Spring uprisings, Gulf governments are keen to buy social peace with welfare spending, so building projects in this area might be the last to be cut back.

David Clifton, regional development director for the Middle East at consultancy Faithful+Gould, said: “Should the oil price remain low for a sustained period or fall much further, it is quite reasonable to expect that there will be an evaluation of the feasibility of future government-related projects.

“This would appear to be an unknown at present. Should this occur, a slowing or suspension of some developments in the pipeline would almost certainly occur as governments look at the oil price barrel versus the break-even point for their budgets.”

SAUDI SLOWS

One surprise in the MEED report was that Saudi Arabia, the biggest market in the region, looks set to slow its contract awards substantially this year. It is expected to award projects worth about $40 billion, down from $66 billion in 2013, MEED said.

This appears to be part of a trend towards fiscal prudence which started well before the oil price slide began. After years of rapid spending growth, the government last December announced a 2014 budget which envisaged total state spending rising just 4.3 percent – the slowest rate in a decade.

“Saudi’s performance this year has been surprising…We were expecting a lot more contracts. We certainly have seen a decline in tendering and awarding projects,” said James. “Whether or not that’s related to the oil prices is not known.”

Some construction firms in Saudi Arabia have blamed delays to projects on government bureaucracy, difficulties in making land available, and labour reforms designed to reduce the country’s reliance on foreign workers.

An estimated one million foreign workers left Saudi Arabia last year during a crackdown on illegal immigrants, and construction firms have sometimes struggled to assemble enough staff.
Source: http://www.reuters.com/article/mideast-construction-spending-idUSL6N0SB3Q120141016