7 minute read
Analysis
Economics
The Growing Influence of the GCC
MIDDLE EAST David Clifton, regional director –Faithful + Gould, an SNC-Lavalin Company, looks at how current regional geopolitics will impact the UAE economy and how that will affect the country’s real estate and construction landscape
With UAE and KSA the only nations that can realistically up production in the OPEC and OPEC+ group, what does that mean for their economies post the Arab summit attended by them, Joe Biden, and the leaders of Egypt and Jordan?
We know that KSA’s maximum output is circa 13 million barrels per day (bpd) and UAE c.3.7 million bpd and they are currently producing at a level of 11.4 million and 3.2 million respectively. This is a lower level from KSA, as it can typically deliver 12.4 million bpd (in line with OPEC+ agreements). With $732 million and $185 million per day as extra revenues since the oil price spike, the questions remain, why pump more? What is in it for these countries, and what do they get in return?
Looking at local and regional issues, we see that in recent years, both the UAE and Saudi Arabia are politically becoming incrementally more powerful globally. The UAE in particular is very well placed to maximise not just its influence, but also its view that post-pandemic infrastructure stimulus and direct economic investment will drive the current economy and encourage future economic growth.
When we look at the development and construction sector, we can see that whilst the anecdote of all roads lead to Saudi Arabia that has existed in the last five years is broadly true, we are seeing a trickle-back effect to the UAE, primarily Abu Dhabi.
There is a significant pipeline of opportunity within the Emirate that is being developed by government and sovereign wealth fund (SWF) derived investments.
This has great potential to start the recovery for the industry. Although it should still be added that UAE is still a place where we have too many contractors and not enough work,
Driving growth
The UAE, and Abu Dhabi in particular, believes that post-pandemic infrastructure stimulus and direct investment will drive future economic growth.
3.7m
Current number of barrels being produced by UAE per day
$60.0
$30.0
$0.0
FIGURE 1: MAIN CONTRACT AWARDS VS. COMPLETIONS ($ BILLIONS), 2012-2021 CONTRACT AWARDS CONTRACT COMPLETIONS
-$30.0
-$60.0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
whereas the reverse is becoming truer by the day in Saudi Arabia.
So, what is next for UAE? We’ve already seen the commitment for the development of passenger rail from Etihad Rail, the continued community developments by ALDAR and commitments from other ADQ (or related) companies such as KIZAD, MODON and TAQA to deliver ground-breaking schemes that align to Abu Dhabi 2030, Net Zero and the government’s strategic objectives to diversify the economy and support to citizens and residents.
We also see a pre-contract pipeline of work that is worth $232 billion for the next two years in UAE. This is highly unlikely, but the fact it exists is a positive. It should be expected that we can expect a managed return to growth.
With the centralisation of development around a small group of entities, we would expect to see a levelling of projects to market. A compound annual growth rate (CAGR) of c.4-5% is reasonable, but dependent on an approval process that hasn’t been tested to its fullest as yet.
The need to stimulate this area of the economy is significant if UAE is to capitalise on outgrowing its competitors and also continue its ascension to a major player. All while supporting an industry that represents nearly 8% of GDP, 15% of the population and 13% of the wages paid in the country.
We are also seeing a view to diversify the funding models for the schemes we see in the pipeline.
On face value, this is sound logic (think back to being a graduate and trying to get a loan versus having money and not necessarily needing one), the challenge of the PPP offices in Dubai and Abu Dhabi is to develop the guarantees that are needed outside of IWP / IWPP / IPP and renewables to ensure a suitable level of attraction.
This is especially important given the flight from equities and funding to bongs as we see central back interest rates rise (and they will rise a significant level more).
With the US dollar strengthening over and above fair value, for the GCC, this should mean acceptable inflation at most levels compared to the rest of the world.
When we look at construction, we’ve seen an 8% regional spike in inflation this year (average) driven by geopolitics (war), materials price spikes (war and fear) and in Saudi Arabia, the assumption that the industry is currently or shortly to be overloaded.
However, some relief will occur due to imports not being a fair value and thus trading at an historical discount. Even when factoring shipping cost increases.
In effect, with UAE and indeed KSA having a greater geopolitical sway in the international community, it is reasonable to expect increased countrywide investment as governments look to shore up their infrastructure and keep the countries attractive for FDI, talent and visitors alike.
2030
The Abu Dhabi Economic Vision 2030 aims to build a sustainable and diversified, high valueadded economy by 2030
$480
FIGURE 2: UNITED ARAB EMIRATES GDP, 2012-2024 $ BILLIONS % GROWTH RATE UPPER LEVEL LOWER LEVEL TRENDLINE
$360 10%
$240 0%
$120
DUBAI / UAE DUBAI / UAE Celebrating the projects, teams, and individuals supporting innovation and technology in the built environment.
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