GCC Infrastructure & Construction: Impact of COVID–19

Amongst the GCC nations, Saudi Arabia and the UAE account for nearly 2/3rd of the construction & infrastructure projects planned in the GCC region. With some of the mega infrastructure projects mainly driven by government, the unprecedented decline in oil prices due to COVID-19 will make a huge dent in government’s revenue streams indirectly cutting back spends on infrastructure projects. While construction sector in the GCC witnessed a slowdown in 2020, the strong pipeline of projects across the region and the governments’ focus on diversification towards non-oil sectors will drive the revival in construction post 2020.

COVID-19 and declining oil prices impact construction expenditure in GCC
Infrastructure development is a key prerequisite for sustainable economic growth of a nation. The COVID–19 outbreak has rendered the future of infrastructure and construction projects globally highly uncertain. Given their long gestation period, the economic benefits expected to accrue have now been delayed, raising red flags on nations’ long-term growth prospects.

For GCC nations, revenue from oil & gas is the key source of government expenditure. The current pandemic could lead the governments to realign their priorities, which would impact both ongoing and planned infrastructure and construction projects through 2020 and beyond.

The sector had witnessed a revival in 2019 after the below-par performance during 2015–18 brought about by the decline in oil prices from late 2014 to 2017. The revival in oil prices in 2018 and 2019 had prompted growth in infrastructure projects in the region. However, the current scenario, with the economic downturn and low oil prices, is dragging the construction sector back to pre-2019 levels.

Revival of construction sector post 2018
Production cuts by oil producing nations from early 2017 pushed oil prices up to more than USD60 per barrel in early January 2018 (from USD29.59 per barrel in February 2016). Accordingly, stakeholders in the construction industry expected a revival in the sector after 2018, which did not happen completely due to the lead time required for sanctioning of budgets and actual spending on the projects. Project activity did gain traction in 2019, backed by governments’ resolve to diversify their respective economies to non-oil sector. As of 2019, projects worth more than USD140 billion were awarded across the GCC region, with the UAE and Saudi Arabia jointly accounting for 62% of this.

In line with its Vision 2030 program, Saudi Arabia’s strategic roadmap to reduce dependence on oil, construction activities in transport, infrastructure and housing in the country gained momentum. Construction in Qatar and the UAE also picked up as these countries prepare to host prestigious events such as the 2022 FIFA World Cup and the World Expo 2020 (now postponed to October 2021).

The improved performance of the construction sector in 2019 vis-a-vis previous years convinced the stakeholders and market participants that 2020 would herald a new decade of sustainable growth in the construction sector in the GCC region. Structural changes aimed at increasing the participation of private entities and facilitating higher spending by the government on key non-oil sectors only strengthened the belief.

The GCC construction sector was expected to record a CAGR of more than 8% during 2019–23, considering the strong pipeline of projects across sectors including:

• The futuristic mega city NEOM in North West Saudi Arabia, with an estimated cost of USD500 billion; the first phase is expected to be completed by 2025
• Qatar Rail network program and Doha Metro, with an estimated cost of USD80 billion; it is expected to be completed by 2026
• The Saudi Arabia Ministry of Housing’s program to build 500,000 houses
• Abu Dhabi National Oil Co’s new refinery project in the industrial hub of Ruwais, UAE, by 2025; the project cost is estimated at USD45 billion

COVID–19 impact
The Kingdom of Saudi Arabia and the UAE account for more than 65% of the projects planned in the GCC region. Some of the high budget infrastructure projects planned in Saudi Arabia are part of its Vision 2030 framework aimed at diversifying the economy. The fall in oil revenues due to COVID–19 will affect the government’s cash flows. In addition, the USD32 billion stimulus package announced by the Saudi Arabian government to provide the necessary economic support during the COVID–19 crisis would impact the funds earmarked for infrastructure and construction projects. With the government realigning its priorities in the short term, the completion of projects underway would be delayed.

Outlook
Due to the pandemic, economic activities have declined, directly impacting the revenues of oil producing nations. This is bound to affect the GCC countries’ expenditure on construction. In addition, disruptions in supply chain and repatriation of labor to their home countries would impact construction projects underway in the GCC region over the short to medium term. For projects in the planning stage, finalization of contracts would get delayed.

The repercussions of COVID–19 would be felt on the construction sector for the next few years. However, considering the strong pipeline of projects in GCC nations and governments’ focus on diversifying their respective economies to non-oil sectors, the construction sector should witness sustained growth in the long term.