The global economic slowdown that followed the collapse of the US’ Lehman Brothers in September 2008, will have a lingering impact on the region’s economy and inhibit growth in the years leading up to 2020.
The fallout of the credit crunch may not have triggered the decade-long great depression that many feared would develop at the time, but it has forced governments and businesses around the world to reassess their current operations and plans for the future. The Middle East is no exception.
In total, across all sectors in the region, there are now nearly $1.5 trillion-worth of projects on hold …
Two years on, the focus has been on the immediate physical impact of the slowdown, such as project cancellations and job losses. The longer-term legacy will be more psychological, denting confidence, stemming funding and preventing the bold decisions being made that were the hallmark of the region’s economies until 2008.
Weak market in the Gulf
The impact of project cancellations is most apparent in Dubai. By 2020, the emirate was to have completed three palm islands, an 80-kilometre inland canal, and thousands of high-rise buildings, including a new 1.2 kilometre-tall tower. In the post credit crunch economy, those lofty ambitions now seem unlikely to be achieved. According to regional projects tracker MEED Projects, some $467bn of schemes have either been put on hold or cancelled in Dubai.
And the emirate is not alone in this. Every market in the region is now home to projects that have been shelved, stalled or slowed down. In Abu Dhabi, there is the new football stadium, Tawam hospital, and the MGM development; the City of Silk in Kuwait; Jeddah Kingdom City in Saudi Arabia; and the Qatar Bahrain Causeway. In total, across all sectors in the region, there are now nearly $1.5 trillion-worth of projects on hold or cancelled.
|Projects on hold and cancelled in the GCC|
|(Percentage of $1,288.5bn)|
|Saudi Arabia 18||237.9|
|Source: MEED Projects|
Some of these schemes will be reinvigorated. After restructuring its debts, Dubai-based developer Nakheel said in November that it would restart work on parts of its Jumeirah Park and International City projects. While restarted projects will create pockets of work for some companies, the reality is that the big multi-billion dollar projects that companies were gearing up to work on will not materialise.
This is a problem because, in the Gulf, major projects have been the lifeblood of the region’s economy for decades. They create thousands of direct and indirect jobs for expatriates and, without them, there is strong downward pressure on population numbers.
The phenomenon is most noticeable in the smaller Gulf states where there are less locals to absorb the influx of foreign workers. In Qatar for example, almost half of the 1.6 million people that now live there are expatriate construction workers. The danger is without new projects they will return to their home countries, undermining the economies they worked in by taking their consumer spending with them.
So far a dramatic fall in population has not happened. Since early 2009, governments have been busy tendering infrastructure projects to fill the gap left by the real-estate projects that are now on hold. The contract awards cover a variety of project types, including airports, railways, roads, ports, nuclear power stations, hospitals, universities, schools and public housing.
But financiers remain nervous about the frailty of the region’s economies and their dependence on the projects sector to provide jobs for their populations.
This is in stark contrast to the years leading up to 2008, when banks were happy to lend freely, no matter how speculative the business plan was. Today that blind confidence has been dented and the opposite is true as banks try to avoid the mistakes of the past.
Since November 2009, when Dubai World said it would need to restructure its debts, only companies or projects with explicit backing from an energy-rich state have been able to secure funds from banks.
Funding support for state-firms from governments
In March this year, the US’ Moody’s Investor Service downgraded all seven government-backed firms it rates in Abu Dhabi because it was unclear what level of state support the companies might receive if they become unable to honour their debts.
Since then, Abu Dhabi has moved to allay investors concerns and has clarified which companies will receive state support to comfort banks. International Petroleum Investment Company (Ipic) has subsequently raised $2.5bn, and by the end of the year, energy firm Taqa will have secured a $3bn loan.
Qatar has been more explicit with its support and continues to tap into the debt markets. Qatar Aviation, Qatar Telecommunications Company (Qtel) and Qatari Diar have all secured funding.
As state companies continue to receive financial support, the difficult question is when will banks restart lending to private investors again? If they continue to choose not to, then growth over the next 10 years will be stunted.