Fitch Ratings expects the construction sector in the Middle East and North Africa (MENA) region will continue to be supported by government spending in Saudi Arabia, Qatar and Abu Dhabi in 2012. These markets have undertaken massive infrastructure spending plans backed by government and government entities. The Dubai construction market will remain fragile in the medium-term.
The key factors in assessing the construction outlook at the country level are government fiscal flexibility and the extent of historical infrastructure spending. "In Saudi Arabia and Qatar, infrastructure spending continues to be strong but with lower margins," said Fitch EMEA corporates team director Bashar Al Natoor.
"During the construction boom, MENA region contractor margins have remained higher than international peers. However, with the recently increasing competition, contractors have started to go for lower margins and Fitch expects this to remain the case over the next few years," he added.
Fitch also notes that Abu Dhabi has been cutting its spending on construction-related projects, due to concerns about oversupply in the real estate market, an increase in the emirate's financial commitments and the slowdown in the global economy. Nevertheless, key projects remain in the pipeline. Some contracts have been delayed or possibly cancelled, as the Abu Dhabi government has prioritised major infrastructure projects. A sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for contractors in the UAE.
"A decline in project tenders across Europe, the Middle East and Africa will increase competitive pressures," according to Fitch. "Contracting is inherently about managing project risk and completing on budget. "Balancing this risk and reward conundrum in an increasingly thin margin business will be a key challenge for management in 2012.
"Companies that operate in oil and gas producing countries with budget surpluses and clear investment programmes have historically benefited and are well positioned to benefit from the expected growth. "Nevertheless, contractors with exposure to Libyan operations have been affected, with loss of the order book and future cash flow as well as increased risk of machinery loss," Fitch added.