MENA Economic Review 2020

Growth in the Middle East and North Africa is anticipated to grow at a subdued rate of 0.6% in 2019 and rise to 2.9% in 2021, reported by The World Bank in October 2019. This is a broader forecasted range than previously of 3.2%-3.5% between 2018 and 2022.

Oil growth prospects and oil price certainty are key factors for the MENA region and deeper reforms are required to encourage growth. According to the IMF, public debt is still a risk within the region as increased borrowing has meant higher interest expenditures. Egypt and Morocco remain as the greater performers for GDP growth compared against others in the region.

GCC country forecasts suggests an improved growth rate led by infrastructure investment within the Emirate of Dubai, an economic stimulus package for Abu Dhabi and Saudi Arabia’s economy benefitting from higher oil prices from 2020.

The IMF and MEED reported GDP growth of 1.3% in 2019 for the MENA region whilst the World Bank estimated GDP growth of 0.6% during 2019.

For 2020 the IMF and MEED are forecasting GDP growth of 3.2% against a forecast of 2.6% by the World Bank

Insight: Saudi Arabia

Emirates NBD reports that for the first half of 2019 spending on economic resources grew from the previous year. This expenditure could be related to the country’s Vison 2030, associated to ‘mega projects’ and developing infrastructure relating to water, sanitation and renewable energy schemes. Another significant spend increase was seen in infrastructure and transportation. Expenditure on defence held the largest proportion with a 20.3% share of the overall spend.

This was closely followed by health and social development, where investments include spending on construction and equipment for hospitals, primary healthcare centres, sports facilities and amusement parks.

Arabian Business reports that Saudi Arabia could be the main contributor to growth in construction activity for 2020 across the Middle East, with a reported $1.6 trillion worth of projects amounting to 5,000 in total currently in the pre-execution stage.

MEED reported in September 2019 that Saudi Arabia held a 46% share in GCC planned and projects underway.

Fiscal indicators for Saudi Arabia are forecasted for 2020 by Emirates NBD against the percentage GDP. This provides an anticipated insight into the country’s financial economic plans to the end of the year with government expenditure estimated at circa 35%.

MENA GROWTH PROSPECTS

OUTLOOK and RISKS 2020-2021

MENA real GDP growth is predicted by MEED at 1.3% for 2019 and with an estimated growth of 3.2% for 2020. The main risks faced by MENA growth is the expected slowdown of the region’s largest export markets including the European Union and United States. Looking into the medium term, the World Bank expects the strengthening economy will be driven by policy reforms diversifying the economy and strengthening the business environment, although the oil price could impact this with the risk of prices becoming more volatile. Oil importing countries are leading the growth within the region with Egypt being an emerging growth star. It is reported that implementation of value-added tax (VAT) aids fiscal reforms and boosts revenue. In 2019, Bahrain introduced a standard rate of 5% VAT following the U.A.E. in 2018 and Egypt in 2016 whereby introducing a rate of 13% resulted in a 30% increase in government tax revenue the following year.

The World Bank also places emphasis on the need for international trade reforms for MENA and encouraging their participation in the global value chain and production, which in turn will create opportunities for firms and workers in the region. In support of regional growth, a number of business-friendly reforms have been implemented by MENA countries.

Key business-friendly reforms in MENA

Source: The World Bank Doing Business 2020

UAE

16

• Starting a business made less expensive by reduced fees for business incorporation.
• Construction permit process simplified using a risk-based approach to reduce the number of inspections.
• Increased minority investor protections by providing for disqualification of directors in cases of prejudicial conflicts of interest.
• Value added tax introduced.
• Cross-border trading made easier by reducing the time to export by fully digitising certificates of origin and the cost to import by issuing certificates of conformity that cover multiple shipments.

Morocco

53

• Construction permit process made easier by an improved online platform and further streamlining of the process, making it possible to apply for and obtain certificates of conformity online.
• Getting electricity made easier by generalising online applications for new connections and expanding the use of prebuilt transformers.
• Strengthened minority investor protections by expanding shareholders’ role in major transactions, promoting independent directors, increasing transparency on directors’ employment in other companies, and making it easier to request general meetings.
• Corporate income tax rate reduced.
• Cross-border trade enhanced through the introducion of e-payment for port fees, streamlined paperless customs clearance, and extended port hours of operation.
• Enforcing contracts made easier by introducing an automated system that randomly assigns cases to judges and by publishing court measurement performance reports.

Oman

68

• Getting electricity made faster by investing in prepaid meters and enforcing service delivery time frames.
• Registering property made faster by reducing the time to issue deeds and improved its land administration system by publishing official service standards on property transfers.
• Strengthened minority investor protections by increasing shareholder rights as well as clarifying ownership and control structures.
• Import and export process improved by upgrading infrastructure at the Sohar Port as well as introducing risk-based inspections and post clearance audits.

Qatar

77

• Getting electricity made faster by reducing the time to process online applications for a new connection.
• Property registration made easier by streamlining property registration procedures. Qatar also improved the quality of its land administration system by publishing official service standards on property transfers and court statistics on land disputes for the previous calendar year.
• Improved access to credit information by reporting credit data from a telecommunications company.

Saudi Arabia

62

• Improved the reliability of electricity supply by imposing a new compensation scheme to incentivise the utility to improve service reliability.
• Strengthened minority investor protections by providing clear rules for the liability of directors and increasing the role of shareholders in major decisions.
• Made exporting and importing easier by launching a new electronic single window and extending the hours of operation of customs at the Jeddah port.
• Made enforcing contracts easier by introducing an e-system that allows plaintiffs to file the initial complaint electronically and amending the civil procedure rules to introduce time standards for key court events.

Kuwait

83

• Starting a business made easier by merging procedures to obtain a commercial license and streamlining online company registration.
• Dealing with constructions permits made easier by streamlining its permitting process, integrating additional authorities to its electronic permitting platform, enhancing interagency communication, and reducing the time to obtain a construction permit.
• Getting electricity made easier by digitising the application process, streamlining connection works and meter installations, and using a geographic information system to review connection requests.
• Property registration made easier by streamlining the inspection and registration processes. also improved the quality of its land administration system by publishing official service standards on property transfers.
• Improved access to credit information by guaranteeing borrowers the legal right to inspect their credit data and offering credit scores as a value-added service to banks and financial institutions.
• Strengthened minority investor protections by providing a 21-day notice for general assembly meetings.
• Made trading across borders easier by improving the custom’s risk management system and implementing a new electronic clearance system.

Egypt

114

• Made starting a business easier by abolishing the requirement to obtain a certificate of nonconfusion and improving its one-stop shop.
• Improved the reliability of electricity supply by implementing automated systems to monitor and report power outages.
• Strengthened minority investor protections by requiring shareholder approval when listed companies issue new shares.
• Made paying taxes easier by implementing an online system for filing and payment of corporate income tax and value added tax.

GLOBAL and MENA facts,

RISKS and CHALLENGES

1. 2018 was the 4th warmest year on record
2. Algeria had the hottest temperature recorded at 51.3⁰C across the MENA region
3. Youth unemployment
4. Geopolitical shifts
5. Global energy shifts
6. Trade wars

Top Global Risks Identified

from THE World Economic Forum

The World Economic Forum provides a risk assessment of both global and local perspectives, across all markets, industries and regions.

Mena risks

As part of the MENA Executive Option Survey, business leaders in the region identified the primary risks as economic and governance issues, perhaps underestimating the risk of climate change. The list also highlights the dependency of many MENA economies on oil and gas industries.

1. Energy price shock
2. Unemployment or underemployment
3. Terrorist attacks
4. Failure or regional and global governance
5. Fiscal crisis
6. Cyber-attacks
7. Unmanageable inflation
8. Water crises
9. Illicit trade
10. Failure of financial mechanism or institution

Source: World Economic Forum, Regional Risks for Doing Business 2018

MENA Construction Market

Although 2019 was a challenging year for the construction market within the MENA region and other global markets, a positive outlook is forecasted into 2020 and beyond.

The MENA construction industry is estimated to grow at a reasonable pace during 2019 and into 2020 with Oman, Egypt and Iraq set to see the strongest growth in the Middle East and North African markets.

MEED reports that 2019 was a challenging year for the projects market which fell below the expected forecast at the start of last year. Egypt and Saudi Arabia appear to be the strongest countries for construction output and real estate opportunities. Strengthening oil prices could provide a positive outlook for construction growth moving into 2020.

The Middle East should see a recovery in the construction market after 2019, which could be supported by a rise in oil prices, government investment support and global demands. MEED reports that these factors will be key drivers for capital and infrastructure projects, with several pending projects within the GCC region associated with transport, social infrastructure and tourism among the key topics.

Saudi Arabia announced a construction projects list in 2019, which comprises a range of ‘gigaprojects’ to urban schemes, with construction being at the forefront for job creation. Some of the larger and most talked-about developments include Riyadh Metro, The Red Sea Development Project, Neom and social infrastructure schemes like the Ministry of Housing’s Sakani homes and energy megaprojects. Neom is currently the most prevalent and is cited by Construction Week as “the centrepiece of Saudi Arabia’s gigaproject ecosystem and the Vision 2030 programme”.

The construction market is predicted to record a compound annual growth rate (CAGR) of 6% between 2019-2024 according to Mordor Intelligence. Vision 2030, introduced in 2016, is set to transform the country and diversify the economy away from oil. The vision will see an increase in non-oil investment with growth instead being derived from tourism and foreign investment.

Qatar’s construction output growth was estimated at 30% for 2019 with continued construction plans in place preparing for the FIFA World Cup 2022. Leading up to 2019, the country’s key focus was developing sporting, transport and tourist infrastructure. Moving forward, another objective for Qatar is positioning themselves as a cultural destination. Currently the country’s largest projects include the expansion of Hamad International Airport, Lusail Plaza Towers and Doha Metro. In 2018, MEED reported that Qatar had the third highest value of awarded construction contracts in the GCC, behind Saudi Arabia and the U.A.E.

The prospects for North Africa has a key focus on Egypt. IMF reports that the population reached 99.2 million as of 2019 and is expected to reach over 100 million in the near future. With this growth in mind the demand for new cities and increased housing is likely to support increased construction developments. Egypt generally has a number of ongoing large-scale construction projects, including the world’s largest museum and an oil refinery facility, which is cited by KHL as being one of the country’s largest projects aiming to reduce Egypt’s dependence on imported diesel by an estimated 40%.

Although North Africa does not hold the highest number of projects across Africa as a whole, it holds the largest share for construction projects in terms of value.

Across the Gulf region, MEED reported that for 2019 (Q1-Q3), transport, oil and gas were the largest value of awarded projects in 2019.

Middle East trends

A report in 2019 by RICS estimated that the current total value of GCC construction projects was $2.3 trillion. This is expected to grow in line with the GCC population and evolving economies away from the historical norm. The GCC construction industry still faces an above global average rate of disputes, with construction projects under immense pressure to finish on time and within budget. The industry sees reoccurring themes causing delays, which can be mitigated in future. Risk factors that can have a major impact on the successful completion of projects include the following:

• Finance constraints and slow payments
• Ineffective planning and scheduling (derived from unrealistic timescales/estimation and completion dates)
• Shortage of materials
• Inadequate site management
• Design change by owners
• Slow decision making
• Delays by subcontractors
• Slow process of permits/delays in obtaining government approvals
• Weather conditions
• Unsuitable procurement method
• Inaccurate or unaligned cost estimation.

A key trend seen in many disputes across the Middle East was unsuccessful administration of the contract at the offset and lack of collaboration. General improvement of relationships between parties and a ‘conflict avoidance’ approach can resolve issues and avoid legal action. Adequate risk management implemented early on in construction contracts can also assist in preventing programme (and cost) over runs. The key benefits to risk management on construction projects include:

• Implementation of a formal process for the identification, assessment and evaluation of risks and opportunities.
• Establishing a rational method for calculating realistic and defendable contingencies for cost and programme.
• Increasing the comprehension and the ability of stakeholders to influence the project outcomes.
• Assisting in the decision making and evaluating alternative options.
• Providing managers with the means to decide where best to invest the project’s time and money.
• Ensuring the procurement route and contract’s conditions reflect the risk appetite and project objectives.

Following recommended guidelines and solutions surrounding risk management and alternative dispute resolution can in turn create positive change throughout the construction industry.