rlb gulf states_report_october_2011
DESCRIPTION
Gulf States Construction Report October2011TRANSCRIPT
CONSTRUCTION MARKET INTELLIGENCE
FEATURING
THE ECONOMIST INTELLIGENCE UNIT
WHERE TO NOW FOR THE GULF?
FOURTH QUARTER 2011
GULF STATES REPORT
Cover: City skyline, Dubai
Disclaimer: While the information in this publication is believed to be correct at the time of publishing, no responsibility is accepted for its accuracy. Persons desiring to utilise any information appearing in the publication should verify its applicability to their specific circumstances. Cost information in this publication is indicative and for general guidance only and is based on rates as at Fourth Quarter 2011.
OFFICES AROUND THE WORLD
CANADACalgary
CARIBBEANBarbados
Grand Cayman
USABoise, ID
Boston, MA
Denver, CO
Hagåtña, GU
Hilo, HI
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Kennewick, WA
Las Vegas, NV
Los Angeles, CA
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New York, NY
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Portland, OR
San Francisco, CA
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AMERICAS
CHINABeijing
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Dalian
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INDIA Mumbai
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SINGAPORESingapore
SOUTH KOREASeoul
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VIETNAM
ASIA
MIDDLE EASTAbu Dhabi
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Dubai
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Riyadh
UKBirchwood/Warrington
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Northern NSW
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Sunshine Coast
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NEW ZEALANDAuckland
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Palmerston North
Tauranga
Wellington
OCEANIA
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1
BAHRAINBahrain's economy continues to reel under socio-political unrest dating back to mid-February. Effects include a drop in economic activity, apart from a higher budget deficit.
Bahrain’s Chamber of Commerce and Industry estimates that the unrest caused economic damage of up to $2 billion (approximately 750m BHD). This is a sizable amount, by virtue of equalling 9.5 per cent of gross domestic product (GDP). Bahrain has a nominal GDP of $21 billion.
Ostensibly, the economic costs relate to damage occurring to several economic sectors, notably retail, hospitality and events. Reflecting the uncertainty, some locals have chosen to limit their spending to essentials, and where possible delay purchases of durable goods.
Also, the hospitality sector is suffering from an overall drop in the number of visitors, in particular from neighbouring Saudi Arabia, simply to avoid being caught up in street violence. Thousands of Saudi nationals tend to cross the causeway during the weekend, partly to enjoy the liberal lifestyle in Bahrain.
Additional losses concern the cancellation of events, such as the hosting of Formula One. The ruling body of F1 has dropped Bahrain from the 2011 calendar due to the political unrest. The next time Bahrain hosts F1 is in a distant November 2012. F1 is a contributor to Bahrain's economy through spending on ticket sales, TV coverage, transport, accommodation, food and beverage, merchandise and souvenirs and other leisure activities.
Another casualty relates to the widening fiscal shortfall. Recently, the authorities added $860 million to the 2011 budget to help cover a hike in salaries and pensions. This will raise total spending to a record $9.1 billion in 2011.
Nevertheless, stronger spending increases the deficit to $3.1 billion, or one third of total spending. This level of shortfall contradicts a condition of the Gulf Monetary Union project, which restricts the deficit to three
per cent of GDP.
However, the actual deficit will most likely end up being less, as authorities have prepared the budget using $80 per barrel of oil. It is widely expected that oil prices will average just above $100 per barrel this year.
One additional source of income is the promised economic assistance of $10 billion by the Gulf Cooperation Council (GCC) countries. They have promised $10 billion to Bahrain and Oman over ten years to help the countries cope with the unrest. On a positive note, stronger spending should help Bahrain maintain an economic growth rate of around four per cent. Stronger spending and hence GDP growth helped convince Standard & Poor to remove the negative outlook from Bahrain's long- and short-term sovereign ratings one notch to A-/A-2 with a negative outlook.
Another victim of the socio-political unrest relates to raising fresh doubts on the planned causeway link with Qatar. This issue came to light recently following the virtual cancellation of a joint Qatar/Bahrain insurance firm. Key investors in the firm attributed the decision to a lack of progress on the planned causeway linking Qatar and Bahrain.
The 40km causeway is to cost more than $3 billion. Yet political differences rather than funding seem to be the primary cause for the lack of real progress. Looking back, the two countries settled a decade-long oil border dispute in 2001 thanks only to a ruling by the International Court of Justice. And only recently, Qatar-based Al Jazeera added to the unease by airing a programme on the problems in Bahrain.
All told, economic costs related to political unrest stand to rise further, which is not good for Bahrain.
MARKET INTELLIGENCE
GULF STATES REPORT
2
MARKET INTELLIGENCE
GULF STATES REPORT
KUWAITThe IMF forecasts that Kuwait's
economy will grow steadily
throughout 2011 as a result of the
government implementing its
development plan and the global
recovery supporting demand for oil,
together with the higher oil prices.
Real GDP of the world's 4th largest
oil exporter is projected to grow by
5.2% this year, slightly down on the
IMF's April projection of 5.3%.
Analysts polled by Reuters earlier this
year expected economic output to
grow by up to 4% this year in Kuwait,
which has seen only limited public
protests in the political unrest that
has swept other parts of the Middle
East.
Government expenditure, excluding
energy subsidies and social security
recapitalisation, is estimated to have
increased by 21.5%. Expenditure
increased in the second half of the
fiscal year 2010/2011, with a cash-
for-food social grant accounting for
half of the increase. Moderate fiscal
stimulus is still appropriate at this
time.
Kuwait’s economic outlook remains
robust, with a strong energy sector
combined with a government willing
to spend massively on infrastructure
projects, underpinning our positive
view on growth potential in 2011.
This research believes that Kuwait's
economy will be only minimally
affected by the political tensions
that erupted in the start of 2011 and
forecasts growth to remain robust
at 3.4%, averaging 4.0% through to
2015.
The outlook for Kuwait's property
sector remains reasonable, with
the strength of the wider economy
underpinning the sector. The total
volume of real estate transactions
in the country rose by 5.3% quarter-
on-quarter in Q2. This result follows
steady growth in the sector since
mid-2009, where the greatest growth
has been in residential property, due
to government housing distribution.
Overall transaction volume is forecast
to continue to rise throughout 2011.
The government is attempting
to direct investment in the non-
hydrocarbon sector, targeting a host
of new infrastructure projects, along
with investment in healthcare and
education. Plans also include the
construction of the business hub,
Silk City, at an estimated cost of
US$77bn, as well as a new railway
and metro system. In addition to
this, the government has already
begun the construction of three more
hospitals and 15 new clinics.
3
MARKET INTELLIGENCE
GULF STATES REPORT
OMANGDP growth is forecast to slow to
4.6% this year, from an estimated
5.5% in 2010, with a further slowdown
to 4.2% in 2012. Strong growth in
oil and gas production will lift oil
GDP by 4.8% this year, while non-
oil GDP is forecast to increase by a
respectable 4.5%. Despite the impact
of continued protests on business
confidence and tourism, non-oil GDP
will benefit from surging oil prices
(up 42%) and a boost from public
spending, including GCC aid. Despite
an additional spending package of
US$2.6bn, the budget is forecast
to move into a surplus of some
6.7% of GDP in 2011 from a deficit
of 2% of GDP last year. This reflects
an oil price forecast of US$113 per
barrel compared with the oil price
assumption in the budget of US$58
per barrel. Inflation is forecast at just
below 4% both this year and next.
With Brent crude prices having
hovered between $92 and $127 per
barrel since the beginning of the
year, Oman’s government spending
should rise to 9.2 billion rials ($23.9
billion) this year, slightly higher
than the expected 8.1 billion rials.
The Sultanate plans to increase
government spending by a further
9 percent in 2012 to finance
construction projects and create
more jobs for nationals.
The government’s plan to spend
a massive RO 42.71bn during the
Eighth Five-Year Plan period (2011-
2015) will see 37.7 percent of the total
budget funnelled into infrastructure
development.
The continued weakness of the US
dollar, to which the Omani Rial is
pegged, has had an inflationary
effect on materials, which are mostly
imported. This has further reduced
the margins of developers, who
continue to absorb the impacts of
wage increases and transportation
costs.
International uncertainty and
market volatility are still affecting
the property market in Oman but
growth prospects are improving for
the longer term and the sector is
expected to rebound slowly over the
coming years. Integrated Tourism
Complex projects such as The Wave
and Muscat Hills remain in demand
due to the quality of housing and
modern design.
Analysts report that there are some
signs of increasing stability in the
residential leasing market, but further
softening of rental values can be
expected in the short to medium
term, particularly as the supply of
new apartments comes into the
market. The long term outlook is
that the market should start to show
signs of recovery as the economy
continues to expand.
The population of Oman has grown,
with approximately 73 per cent of the
population now living in urban areas.
The result has been an increasing
need for housing designed for, and
affordable to, the local population in
western areas of the city, such as Al
Khoud and Seeb.
Several developers have picked up on
these trends and there is increasing
development of affordable housing in
these areas.
The pace of development in the
retail sector had slowed significantly,
and according to reports, it would
appear that the appetite for further
large-scale retail space has been
satiated to a large degree in the
short to medium term. Reasons for
this include the fact that levels of
per capita disposable income are
relatively low in comparison to other
GCC countries, and that Muscat is
not seen as a shopping destination,
unlike Dubai.
5
MARKET INTELLIGENCE
GULF STATES REPORT
QATARQatar’s economy is predicted
to continue its rapid growth
trend through the rest of 2011,
with increases in GDP per capita
expected at around 20%. The main
drivers for the recent rapid growth
come from the ongoing increase
in production and exports of LNG,
oil, petrochemicals and related
industries. LNG production targets
are on programme to be met at the
end of 2011 and the growth rate is
then expected to reduce to a more
modest, but steady, increase of 3 to
4% per annum from 2012 to 2015.
Although Qatar is currently riding on
a massive hydrocarbons expansion
boom, which is driving growth
rates, economic diversity is seen as
fundamental to securing long-term
stability in the local economy.
General market inflation peaked
in 2008 at 15.5%, subsequently
crashing to -5% in 2009 as a
result of the economic downturn.
Although returning to positive levels
in 2010 the percentage increase
remained low at around 1%. Inflation
is expected to rise and stabilise
between 3 and 4% per annum from
2011 to 2015.
Qatar benefited, in the first quarter
of 2011, from higher oil and gas prices
adding to the economy growth and
funding the diversification strategy.
Qatar allocated QAR 35.5 billion of
its 2010/2011 budget to infrastructure
projects, which constituted 30% of
the total budget expenditure. Less
than half way through the 2010/2011
financial year the Qatari budget hit
a surplus of over 19 billion Riyals,
predominantly due to increased gas
production and oil prices trading
significantly above that assumed by
the government. First quarter 2011 oil
prices broke the US$100 per barrel
mark as a result of the widespread
unrest in the Middle East.
Qatar’s construction market
continues to show favourable signs,
with clear evidence of new projects
underway in Doha. Below are some
of the major government funded
projects currently under design/
construction in Qatar:
• Qatar’s US$14 billion international
airport due to open in 2011 with
capacity for 24 million passengers.
• New city areas (Lusail), port and
road infrastructure with associated
utility services.
• Major urban regeneration projects,
such as the Musheireb project.
• Rail transport systems, linking
Qatar to neighbouring countries.
• Doha Metro system, a US$ 3
billion scheme with 85km of track
connecting Musheireb, West Bay
and Lusail.
• US$ 20 billion on road networks
including the new Qatar / Bahrain
causeway and multi lane road
tunnels linking existing areas of
Doha.
In addition to the government
funded projects, new retail centres,
healthcare facilities and residential
communities have also been released
to the market.
With the announcement of Qatar as
the host nation for the 2022 World
Cup, it is no surprise that there is a
certain optimism being felt within
the Qatar construction market. With
the associated spend in the sector
expected to be in the region of US$
50 billion there is a lot to be done in
a relatively short period of time.
In addition to the 12 stadia,
additional hotels and other World
Cup specific requirements, some
previously planned projects will
be accelerated to be ready for the
Event, including the new Doha port;
a US$7 billion project previously due
for completion in 2023. The new port
will allow cruise ships to be used to
accommodate fans during the games.
6
MARKET INTELLIGENCE
GULF STATES REPORT
UAEThe UAE's economy, which is the
second largest in the Middle East,
is in recovery mode, despite the
increasingly uncertain regional
environment. This is primarily due
to the high oil prices and strong
demand from traditional trading
partners, which is boosting growth
in non-hydrocarbon GDP from 2.1%
in 2010 to 3.3% in 2011. The UAE
economy is projected to pick up
sharply by around 5% over the next
five years, with real GDP rebounding
to almost 3.6% in 2011, from 2.1% in
2010 and 1.6% in 2009.
In March 2011, the International
Monetary Fund, projected UAE
growth for 2011 at around 3.3%, but
has revised this upwards to to 3.5%
citing Dubai's recovery, massive
spending by Abu Dhabi and high oil
prices.
New figures for the key UAE sectors
of transport, tourism and trade are
encouraging.
In May 2011, Emirates Airline, Dubai's
best known brand, announced a 52%
increase in profits to US$1.5 billion for
the year to 31 March 2011, compared
to US$964 million in 2010. It also
recently successfully marketed a
US$1 billion bond.
Tourism, which is one of the UAE's
prime economic sectors, is also
increasing strongly. The Emirate's
biggest hotel group, Jumeirah, states
that occupancy and room rates are
back to 2007 levels as a result of
a 9% growth in tourist numbers in
2011. This is mainly due to the unrest
in other part of the Middle East and
Northern Africa where tourists are
regarding the UAE as a safe haven,
free from any uprisings.
The Arab unrest has also boosted
the financial services sector, which
suffered badly in the credit crunch.
Many banking services have
relocated from Manama in Bahrain to
Dubai. Bahrain was Dubai's closest
rival in this sector. In addition, new
banks from the BRICSA countries
(Brazil, Russia, India, China and South
Africa) have begun to set up facilities
in UAE. Bank deposits have climbed
to their highest level in more than
two years.
7
MARKET INTELLIGENCE
GULF STATES REPORT
Economic growth has been so strong
recently that MSCI, the economic
index provider, is now examining
whether to re classify the UAE from
"frontier" to "emerging market" by
the end of 2011. An upgrade would
attract new liquidity to the UAE's
bourses and encourage investment.
Interestingly, Dubai has been named
"Middle East City of the Future
2010-2011" by fD Magazine, based
on its popularity as a foreign direct
investment destination. This is a
strong testament to its economic
fundamentals and growth potential.
The study looked at 46 cities under
six categories - economic potential,
human resources, cost effectiveness,
quality of life, infrastructure and
business friendliness.
The property real estate sector
remains under pressure in Dubai, with
the over supply situation continuing
in certain asset classes, especially
residential apartments and offices.
The prices have stabilised in certain
residential sectors and banks are now
starting to ease lending conditions,
which is contributing to an increase
in sales activities. Rentals continue to
fall in the lower to medium classes. In
Abu Dhabi, there is still a shortage of
residential and office space, but there
is a large amount of supply coming
onto the market over the next few
years.
Retail malls are still experiencing
some vacancies, but these are quickly
snapped up by other retailers.
Abu Dhabi has been set to
outperform Dubai over the coming
years, given the former's large
scale investment plans targeting
the infrastructure sector, as well as
the ongoing concerns surrounding
Dubai's lingering debt repayment
schedule. However, a number of
Dubai's debts are being resolved
at this time and Abu Dhabi has
shown signs of slowing down its
development so that it maintains
sustainable levels.
9
MARKET INTELLIGENCE
GULF STATES REPORT
SAUDI ARABIAThe construction sector in Saudi
Arabia is projected to achieve a 4%
growth by the end of the year and
the sector’s annual development
is expected to be maintained at a
similar rate until 2015. Presently,
Saudi’s investment in construction
accounts for 31 per cent of the MENA
region’s total. The top three sectors
receiving the most investment are
construction, infrastructure and
power.
Saudi Arabia’s construction sector
recorded a significant leap in
the first quarter of 2011, with the
value of contracts awarded by the
government increasing by more than
five times that of the same period of
last year. In recent years, record high
oil prices and large oil revenue have
made it possible for the construction
industry to employ extra liquidity for
its development.
The impact of the recent Arab
Spring has been varied throughout
the gulf region. In the Kingdom this
has led the government to pledge
investment in infrastructure and
affordable housing, to which 50
per cent of Saudi Arabia’s stimulus
package of SAR 500billion will be
allocated, providing 500,000 new
homes. Saudi Arabia is likely to see
inflation slow in the medium – to
long term as government spending
provides more homes and increases
the limit on loans at the Mortgage
Development Fund.
The country has maintained a strong
sustainable demand for infrastructure
projects, as a direct result of the
growing Saudi national population's
demographics, 66 per cent of the
population being under 25 years old.
Hospitals and healthcare facilities
have received SR68.7 billion funding
from the Health Ministry to enhance
medical health facilities throughout
the Kingdom equating to a 12.3 per
cent increase over the previous
year. Infrastructure pertaining to
transportation and municipal services
for the provision of 23,000 miles
of additional roads, traffic easing
projects and expansion of aviation
networks, have received circa SAR 50
billion.
Private sector credit has continued
to track higher, albeit gradually, as
the Kingdom’s well-capitalised and
liquid banks respond to increasing
demand from an expanding private
sector. Official data shows that
bank lending to the private sector
grew by 6.9 per cent in the twelve
months to April leading a multitude
of private construction investment
opportunities.
The Construction Contracts Index
(CCI) reached 225.5 points, an
increase of 79.02 base points in the
first quarter, reflecting the high value
of awarded contracts resulting in a
strong start to the year.
Following on from strong
construction growth, consumption
of iron and steel in the Kingdom
reached 16 million tonnes in 2010. The
Saudi Arabian Steel Industry forecast
that, by 2013, steel consumption
will have significantly increased and
prices will soar. Presently, the steel
industry of Saudi Arabia is highly
import-oriented and steel imports
were estimated at 4 million metric
tons in 2010. Further, it is anticipated
that the share of imported steel
will witness an upward trend in the
coming years.
11
LOCATION HOUSES APARTMENTS OFFICES INDUSTRIAL RETAIL HOTEL CIVIL
ABU DHABI
BAHRAIN
DOHA
DUBAI
KUWAIT
OMAN
RIyADH
PEAK GROWTH ZONE
PEAK DECLINE ZONEPEAK ZONE
MID GROWTH ZONE
MID DECLINE ZONE
MID ZONE
TROUGH GROWTH ZONE
TROUGH DECLINE ZONETROUGH ZONE
CONSTRUCTION MARKET ACTIVITy
CyCLE MODEL
GULF STATES REPORT
0%
10%
50%
80%
100%
HOUSES APARTMENTS OFFICES INDUSTRIAL RETAIL HOTEL CIVIL
PEAK ZONE MID ZONE TROUGH ZONE
20%
30%
60%
40%
90%
70%
MARKET SECTOR MOVEMENT - GULF BAROMETER
0
20
25
5
15
10
NU
MB
ER
OF
IN
ST
AN
CE
S
PEAK ZONE MID ZONE TROUGH ZONE
NUMBER OF INSTANCES – GULF TALLy
12
LOCATION
OFFICES BUILDINGS (INCL FITOUT) RETAIL INDUSTRIAL
PREMIUM A GRADE MALL STRIP SHOPS WAREHOUSE
LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH
ABU DHABI AED 6,700 8,000 5,700 6,900 4,800 6,500 3,500 4,500 1,800 2,700
BAHRAIN BHD 525 650 425 550 375 475 225 300 125 200
DOHA QAR 7,000 8,500 6,000 7,200 5,000 6,000 3,500 4,500 2,000 3,200
DUBAI AED 6,500 7,800 5,500 6,700 4,600 6,300 3,500 4,500 1,800 2,600
JEDDAH SAR 4,650 6,550 3,550 5,375 2,800 4,650 2,650 4,850 1,750 2,400
KUWAIT KWD 375 475 325 425 275 375 175 225 100 150
OMAN OMR 605 725 510 625 430 585 325 420 165 240
RIyADH SAR 4,500 6,400 3,450 5,200 2,670 4,500 2,500 3,750 1,650 2,300
LOCATION
CAR PARKING HOTELS (INCL FITOUT) HOSPITAL RESIDENTIAL
MULTI-STOREy BASEMENT 5 STAR 3 STAR GENERAL MULTI-STOREy
LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH
ABU DHABI AED 1,500 3,500 2,750 4,500 9,000 12,000 7,500 9,000 7,500 10,100 4,700 6,500
BAHRAIN BHD 125 300 250 450 675 850 775 925 775 1,050 350 450
DOHA QAR 2,000 4,000 3,000 5,000 9,500 11,000 7,500 9,000 8,000 10,500 5,500 7,000
DUBAI AED 1,500 3,500 2,750 4,500 9,000 12,000 7,300 8,900 7,400 9,800 4,500 6,300
JEDDAH SAR 1,475 1,900 1,950 2,900 5,800 6,800 3,950 4,900 5,800 6,800 3,400 4,700
KUWAIT KWD 100 250 200 350 500 700 550 675 550 750 300 400
OMAN OMR 140 325 255 420 835 1,115 680 830 690 910 420 585
RIyADH SAR 1,350 1,750 1,875 2,800 5,625 6,750 3,950 4,800 5,625 6,750 3,200 4,500
CONSTRUCTION RATES The following data represents estimates of current building costs in the
respective market. Costs may vary as a consequence of factors such as site
conditions, climatic conditions, standards of specification, market conditions
etc. Costs are per square metre of gross floor area.
MARKET DATA
GULF STATES REPORT
13
GULF STATES REPORT
MARKET DATA CONSTRUCTION COST RELATIVITIES
ABU DHABI 110
DOHA 110
DUBAI 107
JEDDAH 106
RIyADH 100
BAHRAIN 97
OMAN 93
KUWAIT 82
CONSTRUCTION COST MOVEMENTS
NOTES
1. Indexation in this edition of the Gulf Report provides a direct relativity
comparison between Locations.
2. Index numbers have been re-based to align the Gulf Report with the index
base of the suite of Rider Levett Bucknall Reports. This process of re-basing
has not altered or affected the relativities shown in the current Report.
INDICES 2006 2007 2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
BAHRAIN 86.7 97.9 104.8 106.9 109.0 113.8 119.4 125.2
KUWAIT 75.0 81.9 88.0 90.2 92.0 96.1 101.4 106.3
OMAN 77.0 87.9 97.6 101.0 105.0 108.2 111.4 117.0
DOHA 73.2 96.6 115.9 121.1 122.4 128.9 138.8 147.3
RIyADH 93.0 101.1 108.6 111.3 113.6 116.4 119.9 125.9
UAE 84.9 101.8 117.1 119.5 120.6 126.1 132.8 139.7
% MOVEMENT 2006 2007 2008 2009 2010 2011 (F) 2012 (F) 2013 (F)
BAHRAIN 7.0% 13.0% 7.0% 2.0% 2.0% 4.4% 4.9% 4.9%
KUWAIT 6.5% 9.2% 7.5% 2.5% 2.0% 4.4% 5.5% 4.9%
OMAN 8.2% 14.1% 11.0% 3.5% 4.0% 3.0% 3.0% 5.0%
DOHA 21.4% 32.0% 20.0% 4.5% 1.0% 5.3% 7.7% 6.1%
RIyADH 4.2% 8.7% 7.5% 2.5% 2.0% 2.5% 3.0% 5.0%
UAE 15.0% 20.0% 15.0% 2.0% 1.0% 4.5% 5.3% 5.2%
(F) FORECAST
14
GULF OF ADEN
RED SEA
GULF OF OMAN
PERSIANGULF
ARABIAN SEA
YEMEN
SAUDI ARABIA
UNITED ARAB EMIRATES
QATAR
BAHRAIN
KUWAIT
IRAQ
IRAN
OMAN
GULF STATES REPORT
15
BAHRAIN
GDP (2010) : US$ 22.7 billion
GDP Growth (Year on Year) : +4.1%
Inflation (2010) : +2.0%
Oil Production (2011 Feb, NOGA) : 40,000 bpd
Population (2010) : 1.1 million
Population Growth (Year on Year) : +6.5%
IRAN
GDP (2010) : US$ 357.2 billion
GDP Growth (Year on Year) : +1.0%
Inflation (2010) : +12.5%
Oil Production (2011 2Q, IEA Oil Report) : 3.7 million bpd
Population (2010) : 75.4 million
Population Growth (Year on Year) : +1.7%
SAUDI ARABIA
GDP (2010) : US$ 443.7 billion
GDP Growth (Year on Year) : +3.7%
Inflation (2010) : +5.4%
Oil Production (2011 2Q, IEA Oil Report) : 8.9 million bpd
Population (2010) : 26.1 million
Population Growth (Year on Year) : +2.3%
IRAQ
GDP (2010) : US$ 82.2 billion
GDP Growth (Year on Year) : +0.8%
Inflation (2010) : +5.1%
Oil Production (2011 2Q, IEA Oil Report) : 2.7 million bpd
Population (2010) : 32.0 million
Population Growth (Year on Year) : +2.6%
UNITED ARAB EMIRATES
GDP (2010) : US$ 301.9 billion
GDP Growth (Year on Year) : +3.2%
Inflation (2010) : +0.9%
Oil Production (2011 2Q, IEA Oil Report) : 2.5 million bpd
Population (2010) : 5.1 million
Population Growth (Year on Year) : +3.0%
OMAN
GDP (2010) : US$ 55.6 billion
GDP Growth (Year on Year) : +4.2%
Inflation (2010) : +3.3%
Oil Production (2011 2Q, IEA Oil Report) : 0.9 million bpd
Population (2010) : 3.0 million
Population Growth (Year on Year) : +3.4%
KUWAIT
GDP (2010) : US$ 131.3 billion
GDP Growth (Year on Year) : +2.0%
Inflation (2010) : +4.1%
Oil Production (2011 2Q, IEA Oil Report) : 2.2 million bpd
Population (2010) : 3.6 million
Population Growth (Year on Year) : +2.0%
QATAR
GDP (2010) : US$ 129.5 billion
GDP Growth (Year on Year) : +16.3%
Inflation (2010) : -2.4%
Oil Production (2011 2Q, IEA Oil Report) : 0.8 million bpd
Population (2010) : 1.7 million
Population Growth (Year on Year) : +3.7%
yEMEN
GDP (2010) : US$ 31.3 billion
GDP Growth (Year on Year) : +8.0%
Inflation (2010) : +12.1%
Oil Production (2011 2Q, IEA Oil Report) : 0.1 million bpd
Population (2010) : 24.4 million
Population Growth (Year on Year) : +3.0%
GULF STATES REPORT
Sources: International Monetary Fund (IMF)
National Oil and Gas Authority (NOGA)
International Energy Agency (IEA)
- Oil Market Report
17
WHERE TO NOW FOR THE GULF?
The political turmoil across the Middle East has had a limited direct impact
on the Gulf Arab states, with the important exception of Bahrain. Overall,
the combination of a continuous political premium on crude oil prices and
business perceptions of the Gulf as a relatively safe haven has been beneficial
for the region's economic prospects. However, there has been no return to
the boom times of the 2005-08 period, as both business and government are
exercising a degree of caution.
ABU DHABI'S "HIBERNATION"In the wake of the Dubai debt crisis at the end of 2009 it was commonly assumed that Abu Dhabi would take advantage of the situation to press ahead with its own development plans, which had hitherto been overshadowed by the headline-grabbing exploits of its neighbouring emirate. In 2007 Abu Dhabi released its “Vision 2030” document, which envisaged rapid growth of the non-oil economy based on the promotion of manufacturing alongside high-end tourism and real estate and initiatives such as the carbon-free Masdar City.
Unlike Dubai, Abu Dhabi apparently faced no financial constraints in pursuing this vision, based on its abundant oil export revenue and hundreds of billions of dollars of external assets. However, over the past 18 months it has become clear that Abu Dhabi has been affected by several of the symptoms that caused the Dubai crisis, in particular the collapse in property prices and the excessive borrowing of government-related entities (GREs). Having bailed out Dubai to the tune of US$20bn, the Abu Dhabi government faced the prospect of having to perform a similar rescue mission for its own corporations.
Other worries for the Abu Dhabi government include the stalling of the recovery of the global economy, which will hit its worldwide investments, and the burden of supporting the UAE's poorer northern emirates, which have a relatively high proportion of nationals among their population.
Such is the opacity of government operations in Abu Dhabi (as in most countries in the Gulf) that it has been hard to detect any explicit change in policy in response to these pressures. However, there have been several signs pointing to a shift to a more conservative approach.
One of the more striking was a comment in the prospectus issued by the Tourism Development & Investment Company (TDIC), a 100% government-owned venture whose projects include the Louvre and Guggenheim museums on Saadiyat Island. The prospectus was part of its initial approach to the market in June for a US$3bn medium-term note borrowing.
In an apparent effort to reassure prospective investors in these notes, TDIC said that it had decided to rein in its capital spending plans through "selectively hibernating, delaying or scaling-back certain projects". This would have the effect of reducing its capital expenditure in 2011 by almost one-third to Dh13.4bn (US$3.65bn) from Dh18.6bn. TDIC emphasised that this "hibernation" would not affect projects that had already started.
TDIC's debt stood at just below US$3bn at end-2010, and the company has run up increasing net losses in the past three years, with the shortfall in 2010 doubling year on year to Dh1.15bn. The prospectus stated clearly that the new notes would not be guaranteed by the Abu Dhabi government, but at the same time it made clear that it would continue to receive substantial financial support from the government. As of September 1st, TDIC had not yet issued any of the new debt instruments.
CAUTION REIGNS IN THE
GULF'S FORMER HOTSPOTS
18
WHERE TO NOW FOR THE GULF?
The travails of TDIC pale into
insignificance compared with those
of Abu Dhabi's highest-profile real
estate developer, Aldar Properties,
which racked up losses of Dh12.5bn
in 2010, and has been kept afloat
thanks to a massive bailout package
from the Abu Dhabi government.
This included Dh19.4bn in cash
inflows through asset sales to
and reimbursements from the
government for infrastructure
spending on Yas Island (site of the
recently opened Ferrari World theme
park). The government has also
bought Dh5.5bn worth of houses and
land from Aldar, and put in a further
Dh2.8bn through a bond placement
with the 100% government-
owned Mubadala Development
Company, which is the largest single
shareholder in Aldar.
An IMF study found that Aldar's
financial performance in terms of
return on equity in 2010 was the
second-worst among regional real
estates companies (bottom of the
pile was another UAE developer,
Union Properties), and that the
aggregate performance of UAE real
estate GREs, excluding Dubai-based
Emaar Properties, showed a return
on equity of -5.9% compared with a
positive return of 3.3% on average
for regional peers from Saudi Arabia,
Qatar and Egypt.
Other straws in the wind suggesting
a more restrained approach to
development projects include
changes in the boards of these GREs.
Ahmed Ali al-Sayegh was replaced in
April as chairman of Aldar by Ali Eid
al-Muhairi; Sayegh also subsequently
lost his place on the Mubadala board.
Among the new appointments to
Mubadala's top table was Abdul-
Hamid Mohammed Saeed, the chief
executive of First Gulf Bank. Some
commentators have noted that the
bank is chaired by Sheikh Hazza
bin Zayed al-Nahyan, a member of
the ruling family whose influence
appears to be in the ascendant. It is
not clear whether this is in any way
to the detriment of the Crown Prince,
Mohammed bin Zayed al-Nahyan,
who has been the main driver of Abu
Dhabi's ambitious development plans
over the past few years, or whether
it is a matter of the ruling family
deciding collectively on a more
prudent approach.
At the other end of the food chain,
the tighter management of Abu
Dhabi's finances has been felt by
suppliers and contractors, who
have seen a marked slowdown in
new orders and a deterioration in
payment conditions. Abu Dhabi
clients—both governmental and
quasi-governmental—have a
reputation for being slow to honour
payments, but the situation is
said to have got worse in recent
months. The most common form
of payment guarantee in UAE
business is a post-dated cheque.
This is regarded as more secure
than a letter of guarantee because
of the stiff legal penalties imposed
for failing to honour a cheque.
However, contractors are becoming
increasingly reluctant to issue post-
dated cheques to their own sub-
contractors and suppliers because
of their concerns about the risk of
prolonged delays in getting paid by
their own clients.
19
WHERE TO NOW FOR THE GULF?
DEBTS IN PERSPECTIVEThe scale of Abu Dhabi's debt problems—and indeed of the slowdown in project and development work—should not be overstated. The nominal value of the debt of Abu Dhabi's GREs is US$92.4bn, according to the tally included by the IMF in its Article IV consultation report issued in May this year. This is bigger than the US$76.9bn owed by Dubai's GREs. However, Dubai's total debt of US$113bn is higher than the US$104bn owed by Abu Dhabi (and includes more than US$20bn owed by the government of Dubai to Abu Dhabi), and Abu Dhabi's debt as a proportion of 2010 GDP is 55%, compared with 103% for Dubai.
Abu Dhabi's fiscal position is also much more secure than that of its neighbour. Its total government revenue is expected to be about US$77bn in 2011, thanks to an oil price likely to average about US$110 per barrel of Brent, and the budget will be more or less balanced. The Dubai government, by contrast, is expected to get revenue of only US$12.3bn in 2011 and will run a deficit of 1.4% of GDP (effectively subsidised by Abu Dhabi's refinancing of a significant portion of its debt).
The change of pace in Abu Dhabi does not mean that development has ground to a halt. In a sign of the enduring commitment to the broad goals of "Vision 2030", the Abu Dhabi government is preparing for the official opening of the Sowwah Island scheme. Sowwah Island had been designed to provide a hub for financial-sector companies and other big businesses servicing them on a scale to match some of the world’s top financial centres.
The migration of companies to Sowwah from other premises started as soon as the first two buildings in Sowwah Square opened earlier this year. One of the downsides of the scheme is that the migration to the new office space on Sowwah will put more pressure on already subdued commercial rents in central Abu Dhabi City as well as on rival new locations such as Reem Island and Saadiyat Island.
MATURING IN
2011 2012 BEYOND TOTAL
ABU DHABI GOVERNMENT 0.4 1.3 9.9 11.6
ABU DHABI GREs 16.6 9.3 66.4 92.4
TOTAL ABU DHABI 17.1 10.6 76.4 104.0
% of Abu DhAbi 2010 GDP 8.9 5.5 54.8
DUBAI GOVERNMENT (A) 5.6 1.6 28.9 36.0
DUBAI GREs 10.4 13.6 52.9 76.9
TOTAL DUBAI 16.0 15.2 81.7 113.0
% of DubAi AnD n. EmirAtEs 2010 GDP 14.5 13.8 102.6
OTHER EMIRATES 0.9 0.3 4.0 5.2
FEDERAL GOVERNMENT 19.1
TOTAL UAE 33.1 25.8 158.1 236.0
% of uAE 2010 GDP 11.0 8.5 78.2
(A) INCLUDING GRE DEBT GUARANTEED BY DUBAI GOVERNMENT.
Source: IMF Article IV report, May 2011
UAE: GROSS PUBLIC AND PUBLICLY HELD DEBT (US$BN)
WHERE TO NOW FOR THE GULF?
20
Whether Sowwah Island can
realise its ambition to become
a new financial centre servicing
the region is also in question. The
Abu Dhabi Securities Exchange
(ADX) is the anchor tenant for the
development and will be housed
in a landmark building in Sowwah
Square. The construction of the
new ADX building has already
enticed several banks, including the
National Bank of Abu Dhabi and Al
Hilal Bank, into buying land on the
island and building offices there.
Several other investment banks, law
firms, private equity groups and
brokerage companies are also said
to be considering setting up their
headquarters on the island.
Apart from the new impressive
headquarters, ADX will also have
advanced information-transfer
technology in the new location,
offering greater speed and security
for investors. Servers transferring
data will be placed as close as
possible to the exchange to minimize
the time lag and allow almost
instantaneous trades. The new data
protection and transfer systems are
believed to provide an additional pull
for trading companies choosing to
settle on Sowwah.
The chief shortcoming of the new
business and financial district is
the lack of transparent rules on
jurisdiction and its own courts. It
is often pointed out that Sowwah
Island should model its legal set up
on imperfect, but working solutions
adopted by the Dubai International
Financial Centre (DIFC). While
the DIFC’s legal system had to be
adjusted since the centre opened in
2005, especially as the system came
under stress with debt-restructuring
procedures and the property crash, it
has provided an effective framework
within which to handle complex
issues.
21
WHERE TO NOW FOR THE GULF?
NO CLEAR WINNERS FROM THE ARAB SPRING FALL-OUT
The plans drawn up by Abu Dhabi
and Dubai prior to the global
financial crisis were based on
optimistic assumptions for the
growth in trade and investment flows
in the Middle East and in the wider
world economy. The trimming of
the two emirates' plans since then
has been an inevitable consequence
of the sharp change in sentiment
and the growing realisation that the
effects of the credit crunch and the
subsequent recession will be long-
lasting. The upheavals around the
Arab world have added a further
cause for concern.
The popular movements against Arab
dictators have struck a chord with
the younger generation in the Gulf,
although only in Bahrain and, to a
much lesser extent, Oman, have there
been any real efforts to emulate the
Tahrir Square protesters. Political
leaders in the Gulf have shown
ambivalence in their responses,
seemingly unsure whether to
welcome change and line up with
the winning side, or whether to try
to turn back a destructive tide that
could overwhelm the entire political
establishment across the Arab world.
The Qatari royal family has adapted
better than most to the new realities,
in particular through its decision to
become heavily involved in the NATO
operation against the Qadhafi regime
in Libya. The UAE also committed
forces to the Libya operation, but,
diplomatically, it was overshadowed
by its Gulf neighbour. This partly
reflects the strong emphasis that
Qatar had placed on being heavily
engaged in regional political issues
as part of its drive to outdo Dubai in
projecting its influence and turning
the name of the state into a global
brand.
In this respect, Qatar can be seen as
a net gainer from the Arab Spring.
However, with a national population
of only 240,000 and the highest
per-capita income in the world,
Qatar has the least cause among
its Gulf peers to worry about the
risk of revolutionary contagion.
The UAE has a more complicated
domestic political scene, with family
and tribal rivalries needing to be
kept under control in seven emirates
and solidarity between the emirates
having to be preserved.
The UAE’s rulers also have to take
into account the grievances of less
privileged Emiratis and resentment
among sections of the population at
the predominance of expatriates in
the population mix (only about one
in seven residents is a national). In
addition, there is a risk that searching
questions might be put by young
radicals about the management
of the UAE's resources and the
reasons for its accumulation of such
high amounts of debt. This array
of concerns provides part of the
explanation for Abu Dhabi's decision
to take the pedal off its development
accelerator, and for the efforts being
made to widen political debate
through expanding the electoral
college for the Federal National
Council.
Saudi Arabia's response to the
Arab revolutionary movements has
been primarily economic, with the
king approving two development
spending packages worth US$130bn
in total. A significant portion of this
has been allocated to beefing up
the internal security forces; much
of the remainder has been directed
towards addressing socio-economic
problems, in particular youth
unemployment among Saudis and
the chronic shortage of affordable
housing.
22
WHERE TO NOW FOR THE GULF?
This article was contributed by David Butter, Regional Director,
Middle East & North Africa and ViewsWire Editor, Middle East,
with the Economist Intelligence Unit
NATIONALS-VS-ExPATS IN GULF DEMOGRAPHICS 2010
SAUDI ARABIA UAE QATAR
M % M % M %
TOTAL POPULATION 27.1 100% 6.7 100% 1.7 100%
NATIONALS 18.7 69% 1.0 15% 0.24 14%
ExPATRIATES 8.4 31% 5.7 85% 1.46 86%
NOTE: THE UAE'S NATIONAL BUREAU OF STATISTICS HAS ESTIMATED THE TOTAL POPULATION TO HAVE BEEN 8.26M IN MID-2010, OF WHICH 11.4% WERE NATIONALS; THE EIU HAS A LOWER TOTAL, REFLECTING DOUBTS ABOUT THE ASSUMPTIONS UNDERLYING THE OFFICIAL ESTIMATES.
Source: Economist Intelligence Unit estimates derived from national census data.
The reaction of the Saudi royal family
clearly betrays their recognition
of the potential for popular unrest
in the kingdom. However, at the
same time, Saudi Arabia's relatively
large national population by Gulf
standards—about 19m out of a
total regional population of 27m in
2010—offers it a better opportunity
for nationally focused economic
diversification than in the other
Gulf Arab states. The ambitious
development plans of Qatar and
Abu Dhabi, for example, are aimed
ultimately at creating high-value
jobs for locals, but would inevitably
suck in more expatriate labour and
further distort the demographic
balance towards expatriates.
Similar considerations are bound
to apply in Saudi Arabia, but to
a less pronounced extent as the
kinds of jobs that Saudis are already
prepared to accept are much more
diversified—even menial—than is the
case for Qataris and Emiratis.
The Saudi government faces long-
term issues of fiscal sustainability,
with one recent projection by a Saudi
bank's research team showing that
on current trends Saudi Arabia would
need an oil price of over US$300/
barrel (in today's dollars) in 2030 to
balance its budget. In reality, Saudi
Arabia is likely to have developed
sufficient alternative revenue
streams by that time to make such
projections meaningless.
One of these will be the chemicals
and plastics industry. This will be built
on the platform of petrochemicals,
a sector in which Saudi Arabia
already has a commanding global
presence through Saudi Basic
Industries Corporation (Sabic),
newly established affiliates of Saudi
Aramco, the national oil company,
and a number of smaller, private,
ventures.
In July the industry took a major step
forward with the announcement by
Dow Chemical and Saudi Aramco
that they had taken their final
investment decision for a US$20bn
venture to produce petrochemicals
and a large range of chemicals and
plastics at a new plant in Jubail.
This venture, named Sadara, has
been under discussion for four years
and has gone through a number of
permutations. Its launch means that
Saudi Arabia now has the chance to
make a major shift to higher value-
added products and more labour-
intensive activities fed ultimately by
its huge resources of oil and gas.
Saudi Arabia is vulnerable to similar
political upheavals as those that
have occurred elsewhere in the
Arab world. However, its economic
position, bolstered by a large
windfall from higher oil prices and
production (as it has boosted output
to compensate for the loss of Libyan
crude) provides it with a solid buffer
to protect it from these political risks.
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SAN FRANCISCOTelephone: + 1 415 362 2613Email: [email protected]: Graham Roy
SEATTLETelephone: + 1 206 223 2055Email: [email protected]: Chris Burris
TUCSONTelephone: + 1 520 202 7378Email: [email protected]: Joel Brown
WAIKOLOATelephone: + 1 808 883 3379Email: [email protected]: Kevin Mitchell
WASHINGTON DCTelephone: + 1 202 434 8350Email: [email protected]: Grant Owen
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