JEDDAH — The latest RICS Middle East Construction and Infrastructure Survey Q2 2019 report showed a mixed sentiment in the construction sector amid subdued private sector activity, with contributors noting headline workloads to be subdued in most of the region.
However, this was not the case for respondents in Saudi Arabia who noted workloads had expanded at a robust pace (in net balance terms) over the second quarter.
Most markets in the Middle East saw work on infrastructure booming, which can in part be due to government spending. In the past, governments globally have been known to increase their fiscal outlays by using investment infrastructure and other public works projects to cover for weaker economic conditions. Regionally, economies are suffering from both, a slowdown in global trade but also soft oil prices and OPEC imposed limitations on productions.
Macro environments of individual countries are known to play a big part in the economic activity.
Respondents to the Q2 2019 Construction and Infrastructure Survey from the Kingdom of Saudi Arabia indicated an improvement in market activity.
Workloads were said to have increased across the board during the second quarter. This comes after respondents painted a less optimistic picture of conditions during Q1.
Infrastructure construction was similarly buoyant with the exception of work on ports, workloads across a spectrum of infrastructure market segments increased during Q2.
Against this backdrop, survey participants noted an increase in new workloads, new business enquiries, and repair and maintenance workloads in Q2.
However, the cost of materials was seen to have risen sharply (in net balance terms), as did headcounts and payment delays. This may be why profit margins were seen as being little changed in Q2 despite the increase in activity.
The Saudi Vision 2030 was cited as a catalyst for the increase in activity. However, others were more cautious, flagging security concerns as well as supply chain constraints as potential headwinds.
Such constraints may have contributed to a majority of respondents flagging labor and skills shortages as factors holding back activity. Quantity
Surveyors and skilled tradespeople appear to be the two skills most in demand. More than half (58%) of respondents also said that regulation was a constraint - this may be related to the introduction of a VAT in 2018. Although 70% of respondents cited finances as an obstacle, there may be some relief coming as Chart 5 shows that credit conditions are expected to improve over the next twelve months.
• Overall workloads said to have rebounded during Q2, led by infrastructure
• Contributors worried over capacity constraints potentially driving up costs
• Lack of skills and labor, excessive regulation and finances all seen as constraints
Respondents in Oman indicate that the Omanisation policy has introduced bottlenecks into the market, and contributors in Bahrain state the imposition of a 5% value-added tax has dampened their economic activity. In contrast, Saudi Arabia has a more optimistic outlook which respondents feel is partly due to Saudi Vision 2030 acting as a catalyst for activity in the country, with workloads increasing across the board in the second quarter.
In the UAE, the increase in infrastructure activity, particularly on road and rail projects, is supporting a broader growth in work, with contributors expecting the outlook for the next year to remain upbeat and workloads also increasing over this period, for both infrastructure and non-infrastructure activity. Workloads in Oman are also expected to rise, driven by work on infrastructure projects; however, firms are likely to continue to cut headcounts in the Sultanate.
Despite expectations for an increase in workloads over the next twelve months, profit margins are still expected to remain under pressure, with material costs seeing a larger increase than the cost of skilled labor. Nevertheless, survey respondents expect the cost of unskilled labor to grow by 1% in the UAE and Qatar, and 1.6% in Oman. In each regional market, there is little difference in the outlook for the cost of skilled and unskilled labor, whereas in regions like Asia-Pacific this is vastly different, with companies expected to pay a significant premium on skilled labor.
Contributors in KSA, Kuwait, the UAE and Qatar remain generally more optimistic with an expectation for overall workloads increasing over the next year.