Uncertainty Clouds GCC Projects
After the drop in oil prices, long-time leaders in energy sector like the GCC are seeing a sizeable decline in projects market. Collapsing revenues together with the regional political and social instability are preventing new projects moving forward.
While plans to overhaul economy in the six nation bloc are underway, hydrocarbons export is still its main source of earnings, contributing nearly three-quarters of the total revenues in past years.
According to IMF, the Middle East lost $390 billion in oil revenues in 2015 and is expected to have even deeper losses of more than $500 billion this year as compared with 2014 returns. This in turn resulted in huge budget deficits and slower economic growth. Saudi Arabia, the region's biggest economy, expected a budget deficit of nearly $90 billion this year.
The GCC projects market is set to decline to $140 billion this year as compared with $165 billion last year. Hydrocarbons contract awards hit 3-year low in second quarter as fall in revenues downsizes the government spending plans.
Saudi Arabia has seen a slump in project awards as a result of 14% budget cut this year. However, oil and gas sector was the least affected gaining 47% of total awards in the first three months of current year.
The UAE set to remain committed to proceed with projects despite the worsening financial situation. However, majority of it is happening in Dubai real estate and infrastructure. The Kuwaiti government has shown a similar interest to roll-out its ambitious infrastructure development plan, whereas some major oil and gas projects have suffered delays.
Qatar forecast for project awards is set to be 24% lower than that of the deals awarded in 2015. On the contrary, Oman and Bahrain are expected to maintain project spending although with little impact on the whole owing to their relatively small sphere.
The project outlook in the GCC seems to be uncertain. Saudi energy minister says to sustain investments in oil sector the price of oil needs to be over $50 a barrel. However, as is the case, besides existing supply/demand issues recently popped up Brexit news may add downward pressure to oil prices in near term. In any case, entirely oil-based budgets are not viable for long-term growth.
As part of economic reform plans and to mitigate pressure on government’s finances, public-private partnership is sited as the best model to provide much of the financing for projects in current environment. Syndicated loan volumes in ME rose by almost 50% in H1 2016; likewise more funding options are being prioritized. Privatization drive of state assets in Saudi Arabia and Kuwait is yet another milestone in economic overhaul of the region in order to improve its industry and source finances for development.
Strong fiscal reserves in the gulf have bore the burden of declining revenues so far but it would potentially slow down growth over time. There is no time to lose. Favourably, dwindling finances are only speeding up reform programmes already underway.