Economic Research - ADCB · Dhabi. In the case of Dubai, projects linked to Expo 2020, real estate and retail continued to dominate awards in 1Q. The outlook for UAE project awards

Economic Research

GCC Economic Update 26 April 2017

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GCC 1Q Projects Update: Most countries see a quarterly pick-up in project awards

GCC: Value of 1Q2017 projects up 22.6% q-o-q All GCC countries saw a quarterly rise in project awards in 1Q2017 with the exception of Saudi Arabia. There was likely some support from the relatively higher oil price from end-2016. Moreover, GCC budgets for 2017 point to a rise in investment spending to meet medium-term economic objectives after sharp cutbacks in 2016. The UAE continues to dominate awards in the region, though Kuwait recorded the strongest quarterly increase in 1Q, with the value of awards almost tripling. Consequently, Kuwait overtook Qatar as being the third-largest country for awards in 1Q. Nevertheless, the data still shows a cautious stance, with only the most critical projects progressing. Total GCC project awards are still down 16.1% y-o-y and below the two-year trend level. Only the UAE and Qatar saw a yearly rise in 1Q, from a low base in the case of Qatar. We still need to see further evidence of projects being awarded before we can confidently call a pick-up in the investment outlook. We still have the greatest confidence in the investment outlook for UAE and continue to see capital expenditure driving non-oil activity in Qatar. In Kuwait, investment momentum is continuing to build.

UAE: Abu Dhabi and Dubai see yearly and quarterly rise in projects The value of UAE projects awarded rose by a solid 42.6% q-o-q in 1Q2017, with both Dubai and Abu Dhabi seeing an increase. Moreover, the value of projects awarded was above the two-year trend level and up a moderate 2.1% y-o-y. Constructions projects continued to dominate total UAE awards (up 25.6% y-o-y), and there was also a yearly increase in oil and power projects in 1Q2017 (led by Abu Dhabi). The oil projects saw their highest level of awards since 4Q2014, linked to the restoration of the Ruwais refinery, which was recently affected by a fire. Nevertheless, the data still points to a continued careful approach from Abu Dhabi. In the case of Dubai, projects linked to Expo 2020, real estate and retail continued to dominate awards in 1Q. The outlook for UAE project awards for the remainder of 2017 looks robust given the number of projects close to being awarded. Notably, USD3 billion of projects have already been awarded in 2Q at the time of publishing. A strengthening in investment activity is largely behind our stronger real non-oil GDP growth outlook for 2017.

Saudi Arabia: Investment activity remains weak Saudi Arabia was the only country to see a quarterly fall in project awards in 1Q (29.3% q-o-q), although this was partly due to the relatively stronger project awards in 4Q2016. Overall, project awards in Saudi Arabia have been weak since 1Q2016 as the government’s focus has shifted to fiscal consolidation. We believe that government-sponsored projects, with a strong private component, will be vital in reviving the investment cycle and meeting key components of Saudi Arabia’s development projects. Moreover, without such a move, we expect domestic demand to remain weak. There have been some signs of a tentative increase in PPP-related awards in 2Q (linked to airports), though the build-up in momentum will be critical.

Economics Team

Monica Malik, Ph.D. Chief Economist +971 (0)2 696 8458 [email protected]

Shailesh Jha Economist +971 (0)2 696 2704 [email protected]

Contents

I. GCC: 1Q2017 Developments 2 II. Country Sections 5

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I. GCC: 1Q2017 Developments

A. Project awards rise from 2H2016 levels Total GCC project awards increased in 1Q2017 on a quarterly basis, likely supported by the stronger oil price and an easing in the pace of fiscal consolidation. As noted in our earlier research, most GCC budgets for 2017 point to an acceleration in investment spending, though we believe that the pace of growth will be contained (please see our note – Higher oil prices to provide some relief, though growth recovery to be weak, published 16 February 2017). GCC-wide awards rose by 22.6% q-o-q in terms of value, though were still down 16.1% y-o-y. Only key projects are progressing, as GCC countries are still forecast to realise fiscal deficits in 2017, resulting in awards still remaining weak on an historical basis.

1Q2017 awards were largely driven by the construction sector, which accounted for 41.1% of the total. The UAE comprised 66.5% of total GCC construction awards in the quarter, including Expo 2020, real estate and retail projects in Dubai. Hydrocarbon awards (oil and gas combined) remained strong, accounting for 18.5% of all GCC awards. Oil awards were driven by Kuwait and the UAE, and gas by Oman. A number of GCC countries are looking to increase their hydrocarbon output to strengthen their global standing. Gas projects are also aimed at meeting domestic energy shortages and will help to free oil output for exports. Investments in transport and the power sector (to meet electricity demand) are also being prioritised.

Most GCC countries seeing quarterly rise in project awards

Most GCC countries saw a quarterly strengthening in their project awards in value terms in 1Q2017, with Saudi Arabia the only exception. The UAE continues to dominate awards in the region, though Kuwait recorded the strongest increase in 1Q, with the value of its awards almost tripling. As a result, Kuwait overtook Qatar as the third-largest country for awards in 1Q. However, we still see stronger actual investment activity in Qatar in 2017 given the cumulative impact of awards and generally stronger project implementations. Kuwait continues to see a longer period for projects to start from the award period. Moreover, a number of large-ticket projects have been re-tendered, delaying progress

GCC projects rise by 22.6% q-o-q, though remain down 16.1% y-o-y

Fig. 1. GCC: Project awards rise in 1Q2017, albeit from weak levels in 2H2016

USD billion

Source: MEED Projects, ADCB research

Fig. 2. GCC: Construction projects continue to dominate awards in value terms in 1Q2017

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Source: MEED Projects, ADCB estimates

UAE accounted for 66.5% of all GCC construction awards in 1Q

All GCC countries see quarterly increase in project awards except Saudi Arabia

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toward increasing capacity, especially in areas such as utilities. Indeed, in April, the Al-Abdaliyah solar plant was re-tendered after originally being tendered in 2015, and the award of the Al-Zour North 2 IWPP has been long awaited. Rising political tension between the government and the opposition-dominated parliament in Kuwait remains a risk. Meanwhile, Bahrain (73.1% q-o-q) and Oman (25.7% q-o-q) also saw solid growth in quarterly awards despite their weaker fiscal and external positions. Foreign funding and wider support for Bahrain and Oman’s investment programmes remain critical.

As noted, Saudi Arabia was the only country that saw a quarterly fall in its project awards, of 29.3% q-o-q. This was partly due to its relatively stronger project awards in 4Q2016, boosted by refining projects. On a yearly basis, Saudi Arabia continued to see a moderate fall of 0.5% y-o-y. Overall, project awards in Saudi Arabia have been weak since 1Q2016 as the government’s focus has shifted towards fiscal consolidation. Only Qatar and the UAE saw a yearly rise in their project awards in 1Q2017, of 44.3% y-o-y and 2.1% y-o-y, respectively.

Further signs of pick-up in investment activity required

It is too early to confirm any build-up in investment momentum for 2017, even gradual, from the award levels seen in 1Q. Only the UAE and Qatar saw a y-o-y increase in project awards in 1Q2017. In the case of Qatar, the yearly rise in 1Q2017 awards was from a low base. The pace of awards for the upcoming quarters will be critical to show a sustainable increase in investment spending. We still have great confidence in the investment outlook for Dubai, which saw an increase in the value of project awards in 2016 of 14.4%. As a result, total UAE awards fell by only 2.3% in 2016, down from a contraction of 15.7% in 2015. We expect to see another year of solid awards in Dubai in 2017, particularly in the build-up to Expo 2020. Bahrain was the only GCC country to see an increase in awards in 2016, with the value rising by 54.7%, and is expected to see further increases.

In Qatar, investments will remain the primary driver of non-oil activity. The weaker project activity in 2016 (down 58.2%) was already reflected in the further deceleration of real non-oil GDP growth to 5.6% from 8.2% in 2015. We believe that the value of project awards will likely rise in 2017, though many of the awards scheduled for 2H2017. We, therefore, only expect a moderate increase in capital expenditure and GDP growth

Fig. 3. GCC: Kuwait saw largest quarterly percentage rise in value of project awards in 1Q2017

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Fig. 4. GCC: Only Bahrain and Dubai saw increase in value of project awards in 2016

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Qatar the only country to see a y-o-y rise in project awards

Dubai saw 14.4% increase in project awards in 2016

Qatar and Kuwait project awards likely to rise in 2017

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in 2017, with real non-oil GDP growth rising gradually to 5.8%. The forecast strengthening in 2017 real GDP growth is also partly due to an improved performance from the manufacturing sector. In Kuwait, we see the impact of the cumulative build-up of strong project awards from 2014. The lower level of awards in 2016 was partly due to weaker oil-related projects; awards in other areas remained solid, particularly in transportation.



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II. Country Sections

A. UAE: Solid quarter for project awards The value of UAE projects awarded rose by a solid 42.6% q-o-q in 1Q2017, with both Dubai (33.1% q-o-q) and Abu Dhabi (118.4% q-o-q) seeing increases. The level of awards in Dubai continues to show steady progress, leading to an acceleration in investment activity. The construction sector continued to dominate awards in Dubai, including projects linked to Expo 2020 (Thematic District), real estate (various) and retail (Meydan One Mall). In Abu Dhabi, 1Q project activity continued to show a cautious approach despite the value of awards more than doubling from 4Q2016.

Total UAE awards were also up 2.1% y-o-y in 1Q2017. Abu Dhabi saw an 18.9% y-o-y rise in project awards in 1Q2017, with Dubai seeing a more moderate rise of 1.5% y-o-y. The oil, gas and power sectors saw a yearly rise in project awards in 1Q, largely due to projects in Abu Dhabi. Awards in the oil sector rose due to a project for the restoration of the Ruwais refinery, which was recently affected by a fire. Thus, the oil sector saw its highest level of project awards (in value terms) in 1Q2017 since 4Q2014. Power awards were linked to solar projects in Abu Dhabi.

Both Abu Dhabi and Dubai saw quarterly rise in awards in 1Q

Fig. 5. UAE: Value of total awards up 42.6% q-o-q, and moderately up 2.1% y-o-y

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Fig. 6. UAE: Despite q-o-q rise in Abu Dhabi awards in 1Q2017, they were still in line with recent trend levels

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Oil, gas and power sectors all saw y-o-y rise in awards in 1Q – largely led by Abu Dhabi

Fig. 7. UAE: Construction sector saw greatest implementation in 1Q2017

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Source: Meed Projects, ADCB estimates

Fig. 8. UAE: Award outlook for remainder of 2017 remains strong

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Overall, projects in the UAE are continuing to face delays and are being cancelled across various sectors. In 1Q2017, only 46.1% of planned projects were actually awarded. The construction sector saw the greatest progress in terms of planned projects being awarded. A number of hydrocarbon projects remain on hold, though there could be some increase in oil projects later in the year with the possible award linked to the Bab Integrated Facility Project. This project aims to achieve a total sustainable oil production rate of 450K b/d. Meanwhile, the transportation projects placed on hold are largely linked to Etihad Rail.

The outlook for UAE project awards for the remainder of 2017 is robust given the number of projects close to the award stage. Notably, USD3 billion of projects have already been awarded in 2Q at the time of publishing. We see a risk of delays and/or cancellations. Moreover, the strong project pipeline in 2Q could well be spread throughout 2017. Nevertheless, we expect project momentum to build further in 2017. Real estate-related projects are expected to dominate the planned construction awards for 2017. We also expect to see further support from Expo 2020-related projects. Dubai is looking to issue c.USD3 billion worth of projects directly linked to Expo 2020 in 2017. The projects planned for 2Q also indicate a pick-up in project awards in Abu Dhabi related to housing (Yas Island) and oil.

Only 46.1% of total planned projects were actually awarded in 1Q

Investment activity expected to strengthen in 2017

Fig. 9. UAE: Project awards have mostly outpaced projects completed since 3Q2014 USD billion


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B. Saudi Arabia: Project awards remain weak Project awards in Saudi Arabia remained weak in 1Q2017, falling by 29.3% q-o-q and 0.5% y-o-y. Awards have been consistently soft since end-2015, with a focus on fiscal consolidation. Most 1Q project awards were in the construction (largely housing-related) and water (desalinisation plants) sectors. There was also some limited progress with oil and power sector awards as well. The 2017 fiscal budget points to a change in stance with an increase in capital expenditure to meet economic requirements and to boost activity. Moreover, a SAR200 billion stimulus package has been announced to support GDP growth until 2020, SAR42 billion of which is earmarked for 2017. More details about this package are expected to be announced shortly.

Government-sponsored projects will be vital in reviving the investment cycle. These will likely require a strong private component, such as PPP structures, given the government’s tight fiscal position. There are some signs that PPP-related project awards increased in 2Q. These were related to the development and operation of three airports – Taif, Al-Qassim and Hail. Moreover, the data shows that 75% of planned projects were awarded, implying a solid implementation rate. The data suggests that the government’s key investment objectives are seeing slow progress.

1Q2017 was second-weakest quarter for awards since 4Q 2014

Fig. 10. Saudi Arabia: Project awards remained weak in 1Q2017, indicating no meaningful build-up in pace

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Fig. 11. Saudi Arabia: 75% of planned projects actually awarded, reflecting solid progress rate

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Source: Meed Project, ADCB estimates

Signs of slow momentum with government’s investment programme

Fig. 12. Saudi Arabia: Pace of project cancellations could increase in upcoming quarters, from the 1Q level

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Fig. 13. Saudi Arabia: Planned transport projects linked to metro systems of various cities, risks of delays

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C. Qatar: Awards remain below trend levels Qatar’s project awards have remained below the trend level (-11.6%) since 2Q2015, highlighting a continued cautious approach. This includes projects related to the 2022 World Cup. Project awards were up a moderate 3.3% q-o-q and 44.5% y-o-y in 1Q, albeit from a low base in 2016. The power sector dominated project awards in 1Q, accounting for 51.4% of the total. These were related to efforts to develop Qatar’s electricity transmission infrastructure to meet rising demand (population and industrial). Transportation awards were linked to road projects.

Qatar saw a number of high-ticket projects cancelled in 1Q2017. These were related to various areas, including medical, real estate and leisure (golf course) projects. The weak pace of awards also partly demonstrates that a number of key projects (related to the metro and World Cup) have already been awarded. These should continue to support the investment outlook for Qatar. Recent official statements highlight that work has begun on the Lusail Stadium, which will host the Qatar 2022 World Cup final; the stadium is expected to be completed by 2020.

Power sector accounted for 51.4% of total awards in 1Q 2017

Fig. 14. Qatar project awards in 1Q dominate by the power sector, linked with electricity transmission

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Fig. 15. Qatar: Substantial construction project cancellations in 1Q2017

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Number of core projects already awarded

Fig. 16. Qatar continuing to scrutinise projects with only most critical works progressing

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Fig. 17. Qatar: Award outlook continues to be dominated by transportation projects (roads)

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Source: MEED Project, ADCB estimates

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D. Kuwait: Oil sector supports 1Q awards Kuwait saw another solid quarter of awards in 1Q, with the value of projects more than doubling from the previous quarter. However, project awards were down -18.9% y-o-y in the quarter. Kuwait’s project awards have been quite volatile from 2014, with capital-heavy projects (oil, gas, refining) often pushing up the value of awards. Nevertheless, the project data continues to point to a build-up in investment momentum in various sectors. Project awards in 1Q were dominated by the oil sector (48.1%), related to the Burgan field. This project aims to produce 120K b/d, alongside associated gas and condensates.

The transportation projects awarded were linked to infrastructure related to new cities (South Al-Mutlaa City) and to upgrade the Kuwait Airport (runway). Stronger investment activity is largely behind our expectation of an acceleration in real non-oil GDP growth in Kuwait in 2017. However, our forecasts continue to reflect delays in project implementation from the time of projects being award. Moreover, a number of petrochemical and refining projects are likely to have a weaker multiplier impact on the economy due to international contractors carrying out the work and the limited need to raise domestic funding.

Kuwait investment objectives are broad-based, with various sectors requiring upgrades in infrastructure

Fig. 18. Kuwait: Oil and transport projects accounted for 76.6% of total awards in 1Q

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Fig. 19. Kuwait: 95% of planned projects were actually awarded in 1Q

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Hydrocarbon and refining projects to have more limited multiplier effect on non-oil economy

Fig. 20. Kuwait: Pace of projects being placed on hold or cancelled is limited for 2017

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Fig. 21. Kuwait: Transport and utility projects continue to dominate planned projects for 2017

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Source: Meed Projects, ADCB estimates

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E. Oman: Progressing with industrial projects The value of project awards in Oman rose by 25.8% q-o-q in 1Q2017 but was still down 4.5% y-o-y. The value of the awards was marginally higher than the quarterly average seen since 1Q2015. Nevertheless, the nature of the project awards continued to focus on areas linked to the country’s industrial objectives to provide value-add to the hydrocarbon sector. This included projects linked to the gas and chemical sectors, with the latter linked to a major ammonia plant with a capacity of 1,000 metric tonnes per day. Moreover, construction awards were dominated by two main projects: i) a liquid terminal in Duqm and ii) the Mall of Oman. The terminal will be for berthing ships carrying crude and various refined products and liquids. Earlier in April, Oman and Kuwait signed a partnership agreement to build a 230,000 b/d export refinery in Duqm.

Projects being placed on hold in 1Q were dominated by one industrial project – a USD3 billion steel plant. The ongoing trend of projects being placed on hold highlights Oman’s tighter fiscal position and continued prioritisation of critical schemes. Meanwhile, projects related to the Duqm refinery should boost awards for the remainder of 2017 (oil sector), though we see some potential for delay from 2Q2017.

Increased value-add of hydrocarbon output is key objective

Fig. 22. Oman: Project awards driven by various sectors linked to Oman’s industrial objectives

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Source: Meed Project, ADCB estimates

Fig. 23. Oman: 45.6% of planned projects were actually awarded in 1Q2017

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Only critical projects progressing

Fig. 24. Oman: Rail and power projects dominate projects put on hold for remainder of 2017

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Fig. 25. Oman: Projects linked to Duqm refinery should support award in 2017

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8

1Q

201

3

2Q

201

3

3Q

201

3

4Q

201

3

1Q

201

4

2Q

201

4

3Q

201

4

4Q

201

4

1Q

201

5

2Q

201

5

3Q

201

5

4Q

201

5

1Q

201

6

2Q

201

6

3Q

201

6

4Q

201

6

1Q

201

7

Tho

usa

nd

s


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Ind

ust

rial

Co

nst

ruct

ion

Gas

Ch

emic

al

Tran

spo

rt

Po

wer

Wat

er

Cancelled Execution On Hold

0

1

2

3

4

5

6

7

8

1Q

201

3

2Q

201

3

3Q

201

3

4Q

201

3

1Q

201

4

2Q

201

4

3Q

201

4

4Q

201

4

1Q

201

5

2Q

201

5

3Q

201

5

4Q

201

5

1Q

201

6

2Q

201

6

3Q

201

6

4Q

201

6

1Q

201

7

2Q

201

7

3Q

201

7

4Q

201

7

On Hold Cancelled

0

2

4

6

8

2Q

201

7

3Q

201

7

4Q

201

7

Th

ou

sa

nd

s

Chemical Construction Gas Industrial Oil Power Transport



11

F. Bahrain: 1Q awards remained weak Bahrain’s economic activity has remained solid thanks to the ongoing momentum in its investment programme. As noted earlier, Bahrain was the only country in 2016 to see an increase in the value of its project awards. Ongoing support from other GCC countries has been critical for this. However, the need for meaningful fiscal reform could be a headwind. We continue to see investment activity in 2017 being supported by projects awarded in 2016, including key projects linked to the expansion of the Alba Aluminium smelter (industrial and power) and the upgrade of Bahrain International Airport (transportation).

Despite the quarterly increase in project awards in 1Q2017 (+73% q-o-q), the level of project awards remained weak and below the trend level. This was despite 85.3% of all planned projects being awarded. Awards in 1Q were largely linked to housing projects, housing-related transportation and Bahrain International Airport. Projects to upgrade Bahrain Petroleum Company’s (Bapco) Sitra oil refinery and the airport’s aviation fuel systems should support the value of awards for the remainder of 2017.

Strong project awards in 2016 should boost investment activity in 2017

Fig. 26. Bahrain: Project awards in last two quarters have remained weak and below trend

USD billion


Fig. 27. Bahrain: High pace of awards – 85.3% of planned projects awarded

USD billion


Fig. 28. Bahrain: Some real estate and utility projects placed on hold for remainder of 2017

USD billion


Fig. 29. Bahrain: Oil-related projects (linked to refining and airport) dominating upcoming awards

USD billion


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

201

3

2Q

201

3

3Q

201

3

4Q

201

3

1Q

201

4

2Q

201

4

3Q

201

4

4Q

201

4

1Q

201

5

2Q

201

5

3Q

201

5

4Q

201

5

1Q

201

6

2Q

201

6

3Q

201

6

4Q

201

6

1Q

201

7

Tho

usa

nd

s

Construction Gas Industrial Oil Power Transport Water

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Co

nst

ruct

ion

Tran

spo

rt Oil

Th

ou

sa

nd

sExecution On Hold

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

201

3

2Q

201

3

3Q

201

3

4Q

201

3

1Q

201

4

2Q

201

4

3Q

201

4

4Q

201

4

1Q

201

5

2Q

201

3Q

201

5

4Q

201

5

1Q

201

6

2Q

201

6

3Q

201

6

4Q

201

6

1Q

201

7

2Q

201

7

3Q

201

7

4Q

201

7

On Hold Cancelled

0

1

2

3

4

5

6

7

2Q

201

7

3Q

201

7

4Q

201

7

Th

ou

sa

nd

s

Construction Industrial Oil Power Transport Water

DISCLAIMER 26 April 2017

adcb.com 12

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Documents

Economic Research - ADCB · Dhabi. In the case of Dubai, projects linked to Expo 2020, real estate and retail continued to dominate awards in 1Q. The outlook for UAE project awards