MENA Economic Review

As of Q3 2020, the IMF forecasted that the Middle East and North Africa GDP would be at -4.7 per cent for 2020. This is a result of the coronavirus outbreak, accompanied by the all-time low oil prices as reported by The World Bank. Oil prices are expected to regain momentum in 2021, supported by continued OPEC+ production cuts, but it is not expected to be at the same rate as 2019, pre-pandemic levels. The current expected cost of the 2020 crisis for the MENA region was estimated at 3.7 per cent of 2019 GDP ($116bn) according to The World Bank.

MENA Construction Market

Construction across the MENA region is expected to contract by -4.5 per cent for 2020, with slow growth in 2021, as forecasted by GlobalData. 2020 includes the lowest recorded value of awarded projects (Q1-Q3) since 2013. The MENA region will face challenges during the region’s recovery in 2021, as countries seek construction growth in a time of low oil prices and the ongoing uncertainty caused by the pandemic.

MENA Emerging Markets

Despite challenges imposed on major emerging markets such as Egypt, growth remains consistent with an anticipated rate of 3.5 per cent for 2020 (5.5 per cent 2019), despite a hard-hit tourism sector. Emirates NBD expects the economy to recover at a rate of 6.2 per cent in 2021.

Morocco, like many other economies, has been susceptible to the flagging tourism industry during 2020, which has impacted the GDP growth rate in parallel with limited domestic demand. Overall growth for 2020 is expected to fall -5.8 per cent according to Emirates NBD with a growth of 4.3 per cent in 2021. This follows an optimistic year in 2019, which positively contributed to MENA’s overall GDP growth.

With a delicate economy at the start of 2020, Lebanon met further pressure following the pandemic and the explosion in the port of Beirut. The Lebanese economy already anticipated a contraction in 2020, but Emirates NBD now forecast a decline of -25.0 per cent, with a minor growth rate of 1.9 per cent in 2021.

MENA Trends and Opportunities

• Green Environment & Technology: 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 environment conservation.

• Innovation & Modernisation: 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: 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 the coronavirus still present as we head into 2021, maintaining newly adopted safety protocols are essential in ensuring construction sites remain operational.

• Infrastructure: 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 2021.

• Living Materials: 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.

• Remote Technology: As a rising trend from 2020, 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.

• 3D Printing: This has already taken off within the construction industry and looks to grow at a record pace in 2021.

• Supply Chain Diversification: As a lesson learned from 2020, contractors had little choice but to pay premium prices for materials and alternative suppliers due to the disruption caused by the pandemic. 2021 will see stakeholders in the construction industry reevaluating and streamlining current procurement relationships. This may come with a risk in coordination, however, the industry envisages cost efficiencies through diversification.

MENA Strengths, Weaknesses, Opportunities and Threats

The growth of the construction market will depend on MENA Governments implementing stimulus packages for 2021 and beyond. A report by MEED and Mashreq outlined that the current opportunity to drive new efficiencies will help rebuild broken supply chains and look for a more collaborative approach on construction projects.

An important lesson learned from 2020, which saw reduced construction activity, advises contractual parties to diligently review and understand the relief provisions within the construction contracts. In MENA (particularly the Middle East) it is common to see standard contracts terms and conditions adapted and amended; this will be an important consideration with certain provisions like Force Majeure (though unamended will not explicitly list epidemics) to be amended to ensure a balance of risk between the parties.

There may be a revised mindset across construction markets as they expect to see falling prices which some MENA countries have already experienced over the past two years. This may encourage certain developers to renegotiate existing prices (as contracts allow) and focus on commercial considerations during contract renegotiation. The aim of this approach is to improve transparency, encourage healthier agreements between client and contractor in the future and enhance the procurement stance of projects in the region. However, the RICS emphasise 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.

Project Value Drivers

Reconsider the project from the perspective of the outcomes. Have these changed? What drives the project value?

Commercial Capacity in the Market

Is there unaccounted-for slack in the market pricing environment?

Use of Investment

Is the level of bonding necessary? Can an improvement in cash flow provide required advantages?

Allocation of Risk

Is the risk model out of balance with regards to reward?

Allocation of Risk

Is the risk model out of balance with regards to reward?

A new normal is expected in the region, with an opportunity for transparency, trust and a collaborative approach within the supply chain and other stakeholders. The change will see greater cashflow management and improvement with contractual terms and conditions. This in turn, will identify new strengths within the construction industry, promoting opportunities and reducing weaknesses and threats.

Strengths / Opportunities

• Capability of delivering complex and bespoke structures
• Creating and providing employment opportunities
• Supporting local talent and industries
• Economic value creation
• Government incentive to invest
• Sustainable construction processes
• New business markets
• Collaboration among industry stakeholders
• Digital transformation
• New materials/construction techniques
• Encouraging career opportunities for young graduates

Threats / Weaknesses

• 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
• Payment delays
• Procurement timescales and awarding contracts before design completion
• Carbon emission and environmental impact
• Missed opportunities for lessons learnt from project to project
• Transient population
• Safety issues
• Cyber security
• Talent gap

Mitigating Threats and Reducing Risk

• Incentivizing sustainability benchmarks
• Investment in research and development
• Establish long term relationship with suppliers/supply chain
• Value and risk management
• Improved payment cycles through open and transparent transaction platforms
• Considerations of construction and operations phase in project planning
• Alternative procurement approach: public-private partnerships
• Differentiated product offerings through consolidation and partnerships
• Health and safety laws/procedures
• Attracting young talent
• Balanced risk allocation

MENA Challenges and Risks

The MENA region faces specific challenges in 2021, including; extreme levels of unemployment amongst youth and females, economic uncertainty and ongoing conflicts in countries such as Syria and Yemen. The World Bank promotes stability across the MENA region, focusing on economic and social inclusion, with the hope of recovery and reconstruction in conflict-affected countries and improved resilience to climate change and refugee shocks. The Gulf Cooperation Council continually supports The World Bank with the financial efforts across the region.

The MENA region is vulnerable to certain risks which will have a significant impact on the growth rate past 2020. These include:

• Coronavirus cases
• Policy rates
• Tourism
• Firm resilience from foreign input suppliers
• Health security index
• Violence in fragile zones

Mena Country Statistics 2020

Key data for MENA countries, presenting statistical growth and forecasts for 2020 and through some instances to the end of review period to 2025. The table identifies the country’s GDP value, import and exports against GDP, population growth and where possible construction market data.

The graph below presents the MENA GDP growth rate in comparison to emerging markets and developing economies, tracked against the overall world economy from 2012 and forecasted to 2024. According to the IMF the MENA region GDP is expected to sustain growth levels between 2021 and 2024.

MENA Awarded Contracts

The United Arab Emirates had the highest value of awarded projects in 2020. With an approximate total of $13.4 million (tracked to Q3 end). This equates to a 23 per cent market share (recorded by MEED Business Intelligence). This was followed by Egypt with $11.9 million, a 21 per cent market share, and Saudi Arabia with $11.7 million, equating to a 20 per cent market share.

The busiest sector for awarded projects was construction infrastructure with a 26 per cent share, followed by a 19 per cent share in transport, and lastly, water projects with 6 per cent.

The UAE announced that their country-wide federal budget at the end of 2020, was a confirmed planned expenditure of over $15bn for 2021. This budget will be split across various initiatives including; enhancing the education sector, improvements to the healthcare service and supporting residential housing programs. The federal budget is lower than that of 2020, and each individual Emirate across the country have their own budget in addition to this.

Egypt awarded several significant contracts in 2020. One of the largest awards was the Crude Oil Refining and Petrochemical Complex in Suez, valued at $5.3 million. The Egypt Ministry of Transport awarded $1.2 million against the Alexandria Metro transport project and $2 million was awarded for Assuit Oil Refinery Upgrade: Hydrocracking Complex.

A further 691 ‘green projects’ were approved by Egypt for the fiscal year 2020/2021. The Minister of Planning and Economic Development plans that 30 per cent of the country’s investment projects will be implemented according to environmental, sustainability and green economy concepts. The projects will input efforts to meet sustainable developments and preserving the country’s resources for future generations.

Saudi Arabia

Saudi Arabia’s 2021 spending budget was announced during Q3 2020 at $264bn; the ministry stated that the budget would include for economic and financial reforms in accordance with KSA’s Vision 2030. Opportunities will be presented in the private sector, with allocated funds to infrastructure development projects.At the start of 2020 the Kingdom had over 5,300 active construction projects with a value of $3.4bn of which infrastructure was the leading sector. Some of the highest value awarded projects were the Ministry of Defence King Faisal Air Academy construction project with a value of $2bn, and the $705 million contract for Saline Water Conversion Corporation, $2bn by Public Investment Fund for the Neom Residential Development and Mall of Saudi (phase 1) at $1bn (Meed Projects).

Some key projects that are paving the way for KSA’s future and Vision 2030 are:

• The Red Sea Project: The development of the 28,000km2 giga-project is underway and construction is progressing for the overall final masterplan, consisting of 8,000 hotel rooms, a new airport, yacht marina and other leisure and lifestyle facilities served by 75km of new roads.

• NEOM: At the center of Saudi Arabia’s Vision 2030 program, NEOM is a new futuristic city with a total value of $500bn.

• AMAALA: A 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.

• Riyadh Metro: This is an ongoing construction project, costing approximately $23bn and is set to provide further mobility and transportation.

-SPARK (King Salman Energy Park): Currently scheduled for completion by 2021, this project consists of infrastructure, roads, utilities and real estate assets, creating thousands of job opportunities. It is expected to contribute $5.8bn annually to the country’s GDP by 2035. The project has been awarded LEED (Leadership in Energy and Environmental Design) Silver, and is the first industrial city in the world to achieve such rating.

Data Centres

Knight Frank reports on a future trend in Data Center development within the GCC region. As technological advances are developed, the requirement for data storage increases. Middle East, Africa and South ASIA (MEASA) countries are under served when compared across the globe. The drive for data storage comes from sources such as artificial intelligence, automation, cloud-based services for business and the evolution of smart technologies in residential and commercial settings.

It is expected that the Middle East will exploit the presented opportunity and the Data Center market will grow at a fast pace in this region over the next 10 years. The landscape of real estate will see new prospects led by specific demand, including; build to suit industrial units, re-purposed industrial or office units, and even build to lease Data Center real estate modules. This a step away from the typical real estate assets seen within the region, and although the initial investment is greater, the financial return outweighs the risks. IT/digital infrastructure is growing in demand and unlike the alternative types of real estate assets, the Data Center market is not prone to economic contractions during market downturns.