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Fall in confidence in Middle East will improve as markets adjust to new position, says expert

There has been a sharp fall in optimism in the GCC (Gulf Cooperation Council) construction industry over the past year, according to the latest annual GCC construction survey by Pinsent Masons, the law firm behind Out-Law.com.08 Dec 2015

However, the situation is not as bad as it seems, and the industry will quickly adjust, said Sachin Kerur, Dubai-based infrastructure expert with Pinsent Masons.

The survey shows that just 32% of respondents are optimistic about the year ahead, compared to 77% last year. 

"Although this may look a little bleak, I think we need to look beyond the headlines," Kerur said. "Things certainly are not as bad as in 2008, neither empirically nor anecdotally: from conversations with clients I really don't think it's that bad. It's more a case of having to adjust to a new economic landscape," he said.

Order books have declined by over 10% for 16% of respondents, compared to just 4% the year before, and 93% of businesses said contract conditions have become less favourable. Payment periods are longer, according to 95% of businesses, and 60% of respondents said they were involved in more disputes than they had expected in 2015.

Where there is more pressure on project delivery, Kerur said, "there's going to be a hardening of the positions that major procurers take, so you will see tougher contract conditions".

Payment periods are "extending out, when they're already pretty lengthy in this part of the world, and becoming more of a concern for those in the supply chain," Kerur said.

Optimism about Saudi Arabia saw a particularly pronounced decline from last year's survey. Asked what country would see the strongest growth in 2016, only 12% said Saudi Arabia compared to 40% who expected it to be strongest in 2015.

The UAE and Qatar have become the most positively viewed markets, with 35% considering the UAE as the strongest market opportunity, and 33% choosing Qatar.

Only 12% saw real estate as the strongest sector, down from 48% the year before.

The results on public private partnership (PPP) contracts were surprising, Kerur said, with 67% of the industry saying it is not currently involved in, or expecting to be involved in, PPP projects in 2015.

“This was a surprise, on account of the fiscal challenges facing many countries in the region. These arrangements could offer a favourable solution for numerous major infrastructure and construction developments, and there have been legislative changes made to make them more accessible and attractive. It may well be that the private sector still believes more reform is needed before PPPs become mainstream," he said.

Another surprise was the industry's response on Iran and India, with only 40% and 42% respectively pursuing opportunities in these countries.

"A cautious approach is always advisable when entering new markets, particularly ones that have been subject to sanctions," Kerur said. "However, India is one of the few countries in the world to show strong economic growth and businesses located in the Gulf are ideally suited to access the country. I would encourage them to be more proactive on pursuing commercial opportunities in India, providing the right level of due diligence is conducted."

Kerur cautioned against reading too much into the apparent fall in optimism: "While this is the sharpest annual decline in optimism our survey has seen, and there is no doubt that economic and geopolitical concerns are playing heavily on people’s minds. It would seem that good fundamentals in many places are being obscured by the role that politics is playing. However, it is possible that as these issues lift there could be just as a swift a return to positivity," he said.

Last month, Fawwaz Al Khodari, chief executive of Abdullah Abdul Mohsin al-Khodari Sons said the construction industry in Saudi Arabia should prepare itself for the end of the construction boom of the past decade.

State budget cuts will soon begin to bite and labour reforms will begin to affect the industry, he said.

The Saudi Arabian government is believed to be considering significant cuts to its capital spending plans for 2016.

Saudi Arabia is likely to post a budget deficit of almost 20% of gross domestic product this year, according to the International Monetary Fund.

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