As of Q3 2021, the IMF forecasted that the Middle East and North Africa (MENA) region’s GDP was set to grow by 4.1 per cent in 2021. This is a significant increase from the contracted 3.2 per cent reported in 2020, and somewhat exaggerated compared to the figures reported by the World Bank who estimated growth at 2.8 per cent for 2021. This disparity of forecasted figures further highlights the uncertainty and projected uneven recovery across markets and countries.
The Middle East alone accounts for approximately 48 per cent of the world’s proven reserves of crude oil. Whilst enduring high oil prices, this has created fiscal surpluses and supported economic recovery for those oil exporting countries (e.g. Saudi Arabia, UAE, Kuwait). In addition, this also widens the deficit and continues to impose substantial economic burdens to the oil importing countries (e.g. Egypt, Jordan, Lebanon).
During 2022, oil prices are expected to stabilize and somewhat reduce from those peaks seen in 2021. This will also be supported by rising production outputs from OPEC+ countries and in line with the relaxations of restrictions globally.
The disparity and pace of recovery for the MENA countries will be heavily reliant on oil prices. Key risks remain in terms of OPEC+ as they continue to uphold their 2022 plans for increased production and the continuation of coronavirus restrictions to international and regional markets.
The graph on the adjacent page shows the MENA GDP growth rate in comparison to emerging markets and developing economies. This is also tracked against the overall world economy from 2015 and forecasted to 2025. According to the IMF, the MENA region’s GDP is expected to maintain its growth levels between 2022 and 2025.
Source: IMF World Economic Outlook Database, October 2021
Source: IMF, World Economic Outlook Database, October 2021
Source: Haver Analytics, National Sources, Emirates NBD Research July 2021
MENA Economic Challenges and Risks
The MENA region will continue to face specific challenges in 2022, especially as governments continue to manage the impact of the pandemic. Factors such as political instability, extreme unemployment, economic uncertainty (or economic collapse in the case of Lebanon), pandemic relief disparity and the ongoing conflicts in countries such as Syria and Yemen, all remain challenges to the stability and recovery of the region. The MENA region is noted as being especially vulnerable and requires swift and effective reforms to prevent further financial economic impacts and expedite recovery into 2022.
The key risks associated with the MENA region include:
New viruses/ variants
Institutional/ social fragility and corruption
Extreme weather/rising sea levels/floods/droughts
And under-employment, especially for youths and females
Exporting and importing reliance
Violence, protests and social unrest
Education/skills/gaps
Disruption of operations or theft of data/ money
MENA Construction Market Review
The MENA region has around $4.1 trillion worth of construction projects planned or in the execution phase, according to MEED. In addition, the region remains abundant with prospects for construction-related businesses, despite the global economic downturn.
The ongoing driving force behind the MENA region’s construction resilience is the need to diversify and develop their economies to meet the demands of its rapidly growing population, and overall, lessen its economic reliance on finite and economically volatile fossil fuels.
The pipeline of projects regionally are estimated at around $3.3 trillion, with the GCC equating to over two thirds of this market value. The largest segment of construction projects remain in building and real estate, investments in private property, including the development of schools, hospitals and social infrastructure to advance existing and growing populations.
Oil and gas segments continue to invest heavily in upstream investigation and construction to increase capacity, and likewise, in downstream activities to produce higher value outputs. Increased demand for power and water are additionally increasing investments with the added incentive to diversify to clean energy and increase energy security.
Cities are set to continue investment in infrastructure upgrades to increase connectivity, increase transportation capacity and meet smart city demands.
The overall outlook for the MENA region’s construction market is set to be optimistic over the next two years, bolstered by the GCC’s improving fiscal situation as oil prices remain buoyant and output caps are eased.
According to MEED, awarded projects for the MENA region up to the end of Q3 2021 remained subdued and at similar level to 2020. However, early indicators in Q4 2021 showed strong signs of recovery in the region, with $8.4bn of contracts awarded in October and $9.8bn awarded in November, taking the logged value of awarded contracts to $73.2bn as of end- November 2021.
Considering the full year, contract awards for 2020 was $74.8bn, 2021 was set to exceed and continue to grow into 2022. This expected growth is bolstered by Saudi Arabia’s commitment to Vision 2030 and its giga projects, Egypt’s continued commitment to its infrastructure ambitions, increased business sentiment following UAE’s Expo 2020, continued buoyant oil prices, and the overall effect of the global economic recovery.
Source: Meed 2020 Q1-Q3
In focus - the Kingdom of Saudi Arabia
The Kingdom of Saudi Arabia’s spending budget for 2022 has been approved at USD 255 billion and is expected to post its first budget surplus in nearly a decade, and it looks to stabilize public spending despite this year’s surge in oil prices.
After an expected fiscal deficit of 2.7 per cent of GDP in 2021, the Kingdom estimates that it will achieve a surplus of USD 23.98 billion or 2.5 per cent of GDP in 2022 - its first surplus since it went into a deficit after oil prices crashed in 2014.
KSA is set to contribute to the largest volume of new construction project opportunities in the MENA region in 2022. It is estimated that over USD one trillion of construction and transport projects are currently planned in the kingdom, and around USD 58 billion of construction contracts are currently in tender.
The major catalyst for this investment is KSA’s Vision 2030. This strategy outlines economic and financial reforms and looks to utilise the country’s investment power to create a thriving, diverse and sustainable economy for its population. Leading this drive is the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, which has disclosed plans to invest up to USD 266 billion into new projects by 2025.
Some of the key projects paving the way for the Kingdom’s future and Vision 2030 are:
NEOM: At the center of Saudi Arabia’s Vision 2030 program, NEOM is a new futuristic mega city located in northwest Saudi Arabia, on the Red Sea coast, with a total estimated value of USD 500 billion. NEOM is expected to host a population of more than one million and is set to be a hub for innovation and a sustainable ecosystem for working and living.
The Red Sea Project: Set across 28,000km2 and nine islands, this giga-project is underway. Consisting of 50 hotels (circa 8,000 keys), a new airport and leisure and lifestyle facilities served by 75km of new roads.
AMAALA: An ultra-luxury tourism project, spanning over 4,100km2 and will include 2,500 hotel rooms, estate homes and 800 villas. The target is for an operational zero-carbon footprint with the project tracking more than 15 sustainability criteria.
Diriyah Gate: A USD 50 billion mixed-use historic, culture and lifestyle destination west of Riyadh. The project’s intent is to showcase Saudi Arabia’s 300+ year history through a set of heritage, hospitality, education, retail and dining experiences for residents, tourists and frequent visitors.
Qiddiya: An entertainment, sports and arts hub, located in southwest Riyadh. Qiddiya is set to include a Six Flags theme parks, FIA grade one racetrack, a Jack Nicolas golf course and several arts and cultural centers.
ROSHN: Around USD 90 billion has been assigned to create large-scale modern and integrated communities for Saudi nationals in nine cities across four regions in KSA, with a goal to increase the rate of home ownership to 70 per cent. The first contract to be signed is a 3,000-home community, including associated infrastructure, in North Riyadh close to King Khalid International Airport.
Source: Haver Analytics, Emirates NBD Research July 2021
Source: Saudi Arabia MoF
MENA Construction Trends and Prospects
In parallel to other regions, carbon footprints and fighting climate change will present new opportunities on the horizon. Especially as the overall construction industry is a key benefactor in the matter of environmental conservation.
This is a rising trend focusing on the manufacturing of construction building equipment and materials, with a drive for greater quality of work and cost-effective solutions. New innovative IT delivery will look at evolving the construction industry; improving general service delivery and modernizing buildings, with a fresh safety viewpoint.
Safety is a focal point on all projects for both construction workers and the public. Revised safety regulations will soon be applied to construction equipment and machinery on future construction projects by contractors and developers alike. With the focus on reducing the spread of coronavirus still present as we head into 2022, maintaining newly adopted safety protocols are essential in ensuring construction sites remain operational.
As a rising trend through 2021, assisted by the issue of remote working, remote technologies help to mitigate problems with administrative and building construction works. An example of this is how the use of drones within the construction industry is on the rise, assisting in the quantification process and identifying and mitigating safety hazards.
There is a new trend around the development of living materials being applied to construction, such as when biological materials are used to support concrete construction, insulation and flooring such as ‘bacteria’ and ‘fungi’ in replacement for far less sustainable materials.
As a lesson learned from the start of the pandemic, contractors had little choice but to pay premium prices for materials and alternative suppliers due to the disruptions caused. 2022 will see stakeholders in the construction industry re-evaluating and streamlining current procurement relationships. This may come with a risk in coordination, however, the industry envisages cost efficiencies through diversification.
This has already taken off within the construction industry and looks to grow at a record pace in 2022.
This will remain in the spotlight across MENA, with countries highlighting the service market through stimulus packages, which will also aid the construction recovery in 2022.
MENA Construction - Strengths, Weaknesses, Opportunities and Threats
Post-pandemic, and leading into 2022, a new normal is expected in the region with an opportunity for transparency, trust and a collaborative approach within supply chains and between stakeholders.
The change is anticipated to see greater cashflow management and improvements to contractual terms and conditions.
Looking at the key strengths, weaknesses, opportunities and threats for construction in the region, it is clear there are many strengths and opportunities set to support the buoyancy and growth of the MENA construction market moving into 2022. However, this is expected to be disproportionate across countries.
- Capability of delivering complex and bespoke structures
- Diversification and government incentive to invest
- Creating and providing employment opportunities
- Supporting local talent and industries
- Economic value creation
- International input/supply/location/ability to import
- Construction speed
- Reduced bureaucracy
- Cheaper cost of labor
- Payment delays
- Procurement timescales and awarding contracts before design completion
- Carbon emission and environmental impact
- Missed opportunities for lessons learnt from project to project
- Resources, transient population/talent gap
- Safety issues
- Cyber security
- Quality issues
- Lack of skilled labor
- Sustainable construction processes
- New business markets
- Collaboration among industry stakeholders
- Digital transformation
- New materials/construction techniques
- Encouraging career opportunities for young graduates
- International investment
- ESG funding
- Public Private Partnership
- Modular construction
- Continued coronavirus restrictions
- Supply chain disruptions
- New pandemic variants
- Delay of adopting new technology and missed innovation opportunities
- Communication
- Precedence of contract awards to lowest price
- Misuse of value engineering with a risk to quality
- Inflation /escalation
MENA Construction Risk Mitigation
In terms of weaknesses and threats, significant challenges remain to the construction market and its successful delivery and recovery.
One of the key challenges to be faced in 2022, is the pandemic induced escalation of commodity prices. Notably, since the start of 2021, average prices for steel (structures and reinforcements), aluminum, copper and chemicals have risen over 25 per cent in the region.
According to a MEED report “As the construction industry grapples with higher costs, clear communication and consensual project adjustments are key to addressing stakeholder interests”.
Some of the key topics leading into 2022, in terms of recovery and mitigating risk in the MENA region, are:
At the time of writing this handbook, another factor that has the potential to impact the industry is the news that the UAE public sector is transitioning to a new working week. Currently the same as the rest of the region with a Sunday-Thursday working week, the UAE will move to a Monday-Friday working week (with a half day on Friday) from 1 January 2022.
This shift is reported to support economically improved payment cycles through open and transparent transaction platforms. This is set to incentivize sustainability benchmarks’ value and risk management investments through research and development recovery. In addition, it will align the country with international markets and in response to improving the social, family and overall wellbeing of the citizens and residents of the Emirates.
With many private companies set to make the same move, it remains to be seen how this will affect the whole private sector and its coordination with the GCC and wider region.
MENA Awarded Contracts
The country with the highest value of awarded projects in 2021 was Qatar, with an approximate total of USD 20 billion (tracked to Q3 end). This equates to a 38 per cent market share (recorded by MEED Business Intelligence). This was followed by Saudi Arabia with USD 13.5 billion - a 24 per cent market share. In third place was the United Arab Emirates with USD 6.7 billion, equating to a 12 per cent market share.
The busiest sector for awarded projects was gas which saw a 37 per cent share, followed by construction infrastructure at 22 per cent. Lastly, power projects came in third with 10 per cent.
Of Qatar’s awarded projects, circa USD 15 billion was recorded in liquefied natural gas (LNG) projects for the North Field East Project (NFE) which is regarded globally as the largest LNG project. Comprising the construction of four mega LNG trains, each with a capacity of 8 MMTPA, the project also included associated facilities for gas treatment, natural gas liquids recovery, as well as helium extraction and refining within Ras Laffan Industrial City.
Saudi Arabia saw USD 3.8 billion of investment in power projects with USD 1.6 billion recorded in Solar PV renewable energy projects, including a 1,500Mw powerplant for ACWA and two powerplants for REPDO (Renewable Energy Project Development Office) 600Mw in Alfaisalia and 300Mw in Jeddah. For building projects, Saudi Arabia saw USD 2.7 billion worth of projects awarded consisting several housing projects and early-stage infrastructure work for the PIF giga project developers.
The UAE saw USD 2.7 billion awarded in building and infrastructure works in Q3 2021. This mainly consisted of residential housing projects with key developers awarding the following values; Emaar USD 0.37 billion, Majid Al Futtaim USD 0.35 billion and Union Properties USD 0.28 billion.
Although Egypt recorded a lower overall value in comparison of awarded contracts up to Q3 2021, it remains a strong market in terms of the building and infrastructure sector as they recorded USD 3.2 billion worth of project awards. The most notable award was Egypt’s Ministry of Housing Utilities & Urban Communities Downtown Towers project - a USD 1.9 billion high-rise project comprising five residential towers overlooking an artificial lake in New Al Alamein City. This signifies the beginning of a strategically important city planned by the Egyptian government for 2030.
Source: MEED 2021 Q1-Q3
Source: MEED 2021 Q1-Q3
Source: MEED 2021 Q1-Q3
MENA Construction Considerations
The growth of the construction market will continue to depend on MENA governments implementing stimulus packages for 2022 and beyond.
The pandemic induced set back in construction activity has provided focus and opportunities as businesses are now realigning to drive new efficiencies and help rebuild broken supply chains and seek more collaborative approaches.
An important lesson learned from 2021 cautions that contractual parties need to diligently review and understand the relief provisions within construction contracts. In MENA (particularly the Middle East) it is common to see standard contract terms and conditions adapted and amended; this will be an important consideration with certain provisions, like Force Majeure (which typically does not explicitly list pandemics and epidemics), to be amended to ensure a balance of risk between the parties.
There are revised mindsets across construction markets, as clients and construction organizations battle with market price volatility and delays to project execution and delivery, specifically over the last two years. This is encouraging certain developers and contractors to renegotiate existing prices (as contracts allow) and focus on commercial considerations during contract renegotiation. Overall, there is a focus to improve transparency, encourage healthier agreements between client and contractors, and enhance the procurement stance of projects in the region. However, the RICS emphasizes that during negotiations certain considerations should be made, such as reviewing project value drivers, assessing capacity within the construction market and allocating risk. The allocation of risk and overall security should be key considerations during the review and decision-making process.
Key considerations:
Reconsider the project from the perspective of the outcomes. Have these changed? What drives the project value?
Is the level of bonding necessary? Can an improvement in cash flow provide required advantages?
Is there unaccounted-for slack in the market pricing environment?
Is the risk model out of balance with regards to reward?