MENA Infrastructure: Key Themes For 2017

BMI View: 2017 broadly signals a more positive outlook for the MENA infrastructure markets, which will benefit from oil prices starting an upwards trend and the corresponding general improvement in investor sentiment. Growth in key markets will tick upwards, although Saudi Arabia will disappoint and Iran's future attractiveness is at risk from a new US administration.

We have identified five key themes for the Middle East North Africa (MENA) region in 2017:

  • Oil Price Recovery Not A Panacea, But Signals Improvement For Infrastructure

  • MENA Will Be The Fastest Growing Region Globally, Overtaking 2016 Leader Asia

  • UAE Back On Top As Largest MENA Market

  • Perceptions Of Iran At Risk Under A Trump Presidency

  • PPPs Growing More Prominent

Oil Price Recovery Not A Panacea, But Signals Improvement For Infrastructure

Oil Prices Supports Stronger Growth Outlook
MENA - Construction Industry Real Growth and Brent Oil Price
e/f=BMI estimate/forecast. Source:BMI

MENA Infrastructure: Key Themes For 2017

BMI View: 2017 broadly signals a more positive outlook for the MENA infrastructure markets, which will benefit from oil prices starting an upwards trend and the corresponding general improvement in investor sentiment. Growth in key markets will tick upwards, although Saudi Arabia will disappoint and Iran's future attractiveness is at risk from a new US administration.

We have identified five key themes for the Middle East North Africa (MENA) region in 2017:

  • Oil Price Recovery Not A Panacea, But Signals Improvement For Infrastructure

  • MENA Will Be The Fastest Growing Region Globally, Overtaking 2016 Leader Asia

  • UAE Back On Top As Largest MENA Market

  • Perceptions Of Iran At Risk Under A Trump Presidency

  • PPPs Growing More Prominent

Oil Price Recovery Not A Panacea, But Signals Improvement For Infrastructure

For infrastructure in oil exporting markets we expect that more supportive prices will allow for governments to firm up their spending plans following a number of years of uncertainty surrounding which projects within the pipeline would be prioritised or cut in a low oil price environment. By no means do we expect prices to recover to previous highs over the next five years and allow for significant increases in spending on infrastructure, but 2017 signals the beginning of the reprieve from recent price lows. We have upgraded our oil price forecast for 2017 from USD55/bbl to USD57/bbl on the grounds of greater conviction in OPEC members complying with their allocated quotas under the agreed OPEC, non-OPEC production cut ( see 'Fundamentals Aligning To Support Price Growth', 9 January 2016). We have also slightly raised our price forecast in 2019 and 2020 given a readjustment of our global supply/demand balance showing a growing deficit in the market at the later part of our forecast period.

2017 will still be a year of budgetary pressures in the oil exporting markets within MENA, and our estimates see the GCC posting an average budget deficit of 11.0% of GDP for 2016 and 8.0% in 2017, with Saudi Arabia, Bahrain and Oman being by far the worst offenders. However, more supportive prices and a willingness of governments to issue debt should see project activity begin to improve, which will in turn improve investor sentiment towards the region.

Oil Prices Supports Stronger Growth Outlook
MENA - Construction Industry Real Growth and Brent Oil Price
e/f=BMI estimate/forecast. Source:BMI

MENA Will Be The Fastest Growing Region Globally, Overtaking 2016 Leader Asia.

Driven by the likes of Qatar, the UAE, Oman and Egypt, the MENA region will be the fastest growing construction market globally over 2017. With oil prices set to tick upwards, clearer spending priorities prevailing in a lower oil price environment and major events drawing closer, we are forecasting that growth in the MENA region will accelerate to 6% y-o-y in real terms, versus 5.3% in 2016. This outpaces long-time leading region Sub-Saharan Africa, which will take longer to recover from the end of the commodity price super cycle and struggles comparatively to MENA in attracting foreign investment in real estate and infrastructure.

Key Growth Markets in 2017:

  • Qatar: We continue to anticipate robust growth in Qatar's construction market over our forecast period up to 2025 as the country prepares to host the FIFA 2022 World Cup and works to diversify its economy away from the hydrocarbons sector. The most significant industry expansion will come between 2017 and 2022 at an annual average of 12.0% in real terms, after which growth will slow as big-ticket projects related to the major sporting event conclude.

  • UAE: The UAE construction industry will record robust growth throughout our forecast period as investment flows into readying Dubai for Expo 2020 and the emirates' prioritise infrastructure development in an attempt to reduce their economies' reliance on oil revenues in the depressed commodities environment.

  • Oman: Oman's construction sector growth will accelerate in 2017 and beyond on the back of continued deficit spending and a favourable regulatory environment. Growth patterns in the coming years will reflect the government's commitment to diversifying the country's economic base, with non-residential building driving growth in 2017 and transport emerging as a growth engine over the longer term.

Underperformer:

  • Saudi Arabia: Saudi Arabia's construction sector will continue to struggle through 2017 as the industry copes with lower levels of investment, as well as the effects of the government restructuring the infrastructure project pipeline.

MENA Takes The Lead
Global - Regional Construction Industry Value Real Growth
e/f=estimate/forecast. Source: BMI

UAE Back On Top

The UAE construction sector will retake the title of the largest in the MENA region in 2017, benefiting from an uptick in growth especially relative to the troubled Saudi Arabian market. Saudi emerged as the largest construction market in the MENA region in 2013; with at least five cities of over a million inhabitants, as well as being the destination for annual religious pilgrimages which sees millions travelling to Saudi Arabia, there are significant centres of demand for housing and infrastructure ( see 'Saudi Arabia And India: Top Picks For Infrastructure By 2023', 24 October 2014). However, the crash in oil prices significantly dampened the short-term outlook for Saudi Arabia, whereas activity in Dubai allowed the UAE's industry to escape a significant downturn.

Saudi Arabia entered a period of project pipeline rationalisation and reform of how projects are managed over 2016, which is still affecting growth in the sector and will continue to do so into 2018 ( see 'Construction: Liquidity Crunch Slashes Growth Forecast', 15 August 2016). While Saudi struggles, the UAE's construction sector has entered a bullish growth period as project activity related to and leveraging off the Expo 2020 event picks up (see 'Entering Bullish Growth Period Despite Lower Oil Prices', 16 March 2015). We note that it will be 2020 before Saudi Arabia again overtakes the UAE as the largest construction market in the MENA region.

UAE Leapfrogs Saudi
MENA - Construction Industry Value
e/f=BMI estimate/forecast. Source:SAMA, UAE National Bureau of Statistics, BMI

Perceptions Of Iran At Risk Under A Trump Presidency

We expect that the new Trump administration will likely preside over a shake-up to the relationships between the US and key markets in the MENA region, which could have significant implications for infrastructure ( see 'Trump Presidency: Implications For The Middle East', 9 November 2016). Most prominent of these relations which are likely to change will be with Iran - a market which over 2016 we consistently highlighted the outlook for was set to improve as sanctions related to its nuclear program were gradually rolled back following a landmark agreement reached in July 2015 ( see 'Growing Investment Commitments To Support Construction Sector', 9 June 2016). We have noted that regional neighbours, Europeans, and Asian nations are expanding their investment in Iranian infrastructure thanks to a reduction in risk factors and an improving economic climate. However, with president-elect Trump having previously called the Iran deal a 'disaster' we note that sentiment towards the market could sour; US firms remain barred from dealing with Iran, however other international firms with operations in the US may think twice about looking to the Iranian market for fear of jeopardising their US business. This is particularly pertinent when a number of major international construction firms and infrastructure investors continue to target the US as a growth market, with the prospect further opportunities to come ( see 'Construction: Trump Plan Not Factored In', 20 December 2016).

PPPs Growing More Prominent

Despite our expectation for an improvement of oil prices to relieve some budgetary pressures on oil-exporting markets, we believe that a concerted effort is underway in the MENA region to leverage private financing into infrastructure projects on a greater scale than has been in the case in the past ( see 'MENA Infrastructure: Budgetary Pressure Making Space For Private Sector', 15 September 2016). In markets which have already begun establishing PPP frameworks we expect continued traction to build, with increasing amounts of international capital looking to tap well structured deals in markets with strong business environments such as Oman and Morocco.

MENA A Regional PPP Laggard
Global - PPPs By Region
Source: BMI Infrastructure Key Projects Database

We expect others to follow suit, with Egypt and Kuwait emerging as PPP markets with significant potential, although we note business environment weakness will keep these markets off limits for most investors for the time being. Major markets like Saudi Arabia and the UAE are increasingly looking to utilise the model and should they establish robust frameworks over 2017, then they are likely to be investor favourites which would significantly buoy their respective infrastructure markets.

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