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Mon 30 May 2016 02:19 PM

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GCC gov'ts to make 'tough choices' on spending in new era of cheap oil

New Deloitte report says new economic reality will constrain the amount of funding for GCC capital and infrastructure projects

GCC gov'ts to make 'tough choices' on spending in new era of cheap oil
GCC construction, Middle East construction

The new economic reality of lower oil prices will constrain the amount of funding available to GCC governments to finance capital and infrastructure projects in the region, according to a new report by Deloitte. 

Governments will have to make tough choices such as cuts in public spending and introduction of structural reforms during the cheap oil era, the global advisory firm said.

"Spending in the region will need to be better prioritised in order to ensure it meets social and economic development. Governments will have to seek for the private sector involvement, innovate and find alternative funding sources to fund their project requirements," said Cynthia Corby, Middle East Infrastructure and Capital Projects leader at Deloitte.

She added: "There is a huge amount of project investment due to take place between now and the end of this decade. A growing population in the region will demand improved infrastructure for the cities to function and grow as planned.

"At a time where governments are facing budget deficits, their ability to adjust to the new environment, innovate and find alternative funding solutions to bridge the funding gaps required for ongoing investment will be key to the long term diversification success."

According to the Deloitte Middle East Powers of Construction report, the announced country budgets for 2016 outline cuts on spending imposed by low oil prices, but in a measured way, as well as the introduction of new income sources.

Saudi Arabia is planning to reduce spending by 11 percent this year to $227 billion. As part of its Vision 2030 plan, the country aims to increase overall non-oil government revenue from SR163 billion ($43.5 billion ) to SR600 billion by 2020, and to SR1 trillion by 2030.

Deloitte said the UAE, the most diversified economy among the GCC countries, is set to register the first current account deficit in decades, which is expected to widen to AED129 billion this year. The IMF has urged the UAE to pursue growth-enhancing reforms and advance economic diversification. In 2015, fuel subsidies were eliminated which has produced significant savings.

Qatar is also intending to reduce its spending, prioritise projects and has also implemented subsidy reforms while all GCC countries plan to introduce a value-added tax by 2018 to raise non-oil revenues.

Deloitte said the pressing need to adjust budgets might have a negative impact on the projects market resulting in slower tender processes, slower decisions and payment procedures.

It added that the forecast of contract awards for this year is at is at $140 billion, a 17 percent decline compared to 2015 with Saudi Arabia the most impacted market as contract awards are predicted to fall to $40 billion, down by a quarter although it continues to be the largest project market and the biggest spender among the GCC countries.

Deloitte said the forecast of contract awards in the UAE is set to be stable and mainly driven by the robust construction market in Dubai. 

The report added that there is a substantial amount of projects to deliver in Qatar such as stadiums, hotels, rail and roads for the 2022 World Cup and the forecasted value of contract awards stands at $22 billon.

Oman is expected to remain stable with values around $13 billion, while Kuwait has a strong amount of planned activity for this year in the construction and transport sectors, it said.

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