Contractor woes are bad for Dubai's economy

17 November 2015

There is a strong link between construction activity and consumption

The third quarter results for Dubai’s two largest listed construction companies made grim reading. Both Arabtec Holding and Drake & Scull International posted substantial losses, and the growing concern within the construction industry is that other privately-held firms are faring just as badly.

Although individual companies have their own specific issues, cash flow is the main problem as clients tighten their purse strings due to increasing uncertainty in the market brought on by lower oil prices and an oversupply of property in Dubai.

As cash flow slows, contractors are scaling back their operations and job cuts are looking increasingly inevitable. Commenting on its results, Arabtec said that it plans to “further reduce the group’s cost base in 2016”.

This is a major problem for the broader economy. Investment in projects is a key driver of consumption across the region as people working on projects spend money in shopping malls, buy cars, have children at schools, and invest in property. Experience from Dubai in late 2008 and early 2009 demonstrated how strong the link between construction activity and economic growth is.

Mindful of the potential slowdown in 2016, Dubai is moving to pump prime its economy with a raft of high profile construction projects. Government agencies have begun tendering major infrastructure projects, and government controlled developers have been instructed to press ahead with a crop of new high rise schemes for the emirate. Still in their early stages, the intention is for these projects to be tendered and awarded in 2016.

Progress is not guaranteed. Most clients still need to secure funding and as the market shows signs of slowing down, finance will be increasingly difficult to secure.

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