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Why the GCC's construction sector remains under pressure

Dubai - In 2016, construction companies across the GCC witnessed an increase in their losses by three per cent.

The GCC construction market will continue to be challenging in 2017 due to continued uncertainty surrounding government spending, but the outlook is brightening, according to the latest industry research report from Middle East business intelligence service Meed.
The recovery in oil prices and the implementation of reforms will ensure that the outlook will turn brighter in 2017, said the report.
The Gulf region, following a period of slump in construction activities, still offers significant opportunities for construction companies despite the slowdown in project spending. However, a fall in the volume of new opportunities coupled with increased uncertainty about project timelines will see the construction market further hardening in response to increased competition, analysts at Meed said.
"There is no doubt that the worst is behind us for the region's construction market," said Meed editorial director Richard Thompson.
"The sharp cuts to spending in 2015 and 2016 across the region, but particularly in Saudi Arabia, Qatar and Abu Dhabi, has been very painful for the GCC construction industry. But the recovery in oil prices and the implementation of reforms means that we will see things improving throughout 2017," he said.
"Contractors should still be prepared for a challenging year however," said Thompson. "The reform programme will take time to kick in and while we can expect to see key projects moving forward this year, there is still considerable uncertainty about delivery timelines."
The report observed that the recovery in oil prices in 2016 has eased some of the pressure on government finances, while the increased pace in the rollout of economic reforms will see an improvement in confidence as well as an increase in new forms of project model, such as public private partnerships.
According to a recent BMI Research report, the Middle East and North Africa's construction market is set to top $300 billion by 2019, and grow by 43 per cent from $235 billion in 2016 to $336 billion by 2020.
Private sector investment, which is vital to easing pressure on government finances, will be a key driver of new construction opportunities in 2017, the report pointed out.
Dubai, Kuwait and Bahrain were the GCC's strongest construction markets in 2016, when the overall region in project contract awards plunged 33 per cent.
Dubai recorded the lion's share of the project activity in the UAE in 2016, accounting for 72 per cent of all construction and transport deals in the country, while project spending fell sharply in Abu Dhabi.
The worst-performing countries were Saudi Arabia, which saw a 62 per cent drop in contract awards, followed by Qatar and Oman. Delays in payments from government clients were a huge problem in Saudi Arabia, Oman and the UAE, affecting the cash flow of contractors and forcing thousands of layoffs.
Hettish Karmani, head of research, Ubhar Capital, said as a result of cutback on projects in the aftermath of the oil price plunge, most construction companies apart from some continue to remain in an alarming situation because they depend heavily on government business for their cash flow.
"To contain this issue, many companies have come up with recapitalisation programmes, including and not limited to capital reduction, rights issues, selling their stake [bringing in new strategic investor] and offsetting losses with reserves."
In 2016, construction companies across the GCC witnessed a further increase in their losses by three per cent to $1.22 billion compared to $1.18 billion in 2015. Out of eight listed construction contractors in the GCC, five are in losses while the ones in profit are either very well-diversified or are mainly operating in a country which requires lesser oil price below $50 per barrel to breakeven their budgets, Ubhar Capital said in a report.
"With consensus estimates of oil price averaging below $60 per barrel for 2017-18, we expect contractors to continue to remain under pressure over the next couple of years. The only way forward for the companies operating in this business is to either diversify their income sources or to focus their operations more in those countries which have ambitious plans of dealing with low oil prices or to carefully bid for contracts which come from financially strong developers so that their receivables remain under control," said the report.
- issacjohn@khaleejtimes.com