Dubai: A prolonged oil price slide is likely to result in downsizing of capital expenditure and consolidation of some of the planned expenditure, according to Bank of America Merrill Lynch.
“A prolonged oil price downturn would likely precipitate material GCC capex downsizing and consolidation, in our view. In the near-term, we expect softening in the cycle as government spending slows and priority is given to ongoing and strategic projects. Qatar’s infrastructure pipeline appears most robust, we think,” said Jean-Michel Saliba, MENA economist at Bank of America Merrill Lynch.
According to available data sources such as Monitoring MEED contract awards data, the region has a potential pipeline of $690 billion (Dh2.5 trillion) in projects to be awarded over the period 2015-2018 in the UAE, Qatar, Egypt and Saudi Arabia (equivalent to 47 per cent of regional GDP).
Saudi Arabia has the largest projects market with 45 per cent of awards totalling about $310 billion or 7.3 per cent of GDP. Qatar’s pipeline is largest with respect to size of its economy, accounting for 9.5 per cent of its GDP.
In the UAE majority of the projects pipeline (about 64 per cent) worth $95 billion is heavily skewed towards construction projects, which raises risks given oversupply overhang and a softening real estate market.
In Saudi Arabia, the pipeline of construction and infrastructure project awards stands at $66 billion and $99 billion 21 per cent and 32 per cent respectively of the of total. Construction and infrastructure project in Qatar stands at $37 billion and $40 billion, respectively.
“Low oil prices present headwinds. Although not fully representative, the 2009 bust episode suggests likely government re-prioritisation of projects, mostly away from real estate, while cancellation or putting on hold of uneconomical projects is to pick up with a delay,” said Saliba.
Analysts said historical experience suggests capital expenditures bear the brunt of the eventual fiscal curtailment in a prolonged oil price slump. “Qatar’s infrastructure pipeline appears most robust, we think. A third of total investment is carried directly by the central government, and there is also a sizeable public sector involvement,” said Saliba.
According to BoA Merrill Lynch, in the GCC, Oman’s government capex spending faces the highest risk, due to an elevated fiscal break even oil price, low savings, and large share of on-budget capex in total government spending and total investments. Bahrain and Kuwait remain laggards in terms of real investment share in real GDP.
In the UAE, capex financing involves greater leverage than other GCC peers, such that market access remains paramount. If low oil prices are sustained for a prolonged period, the impact of central government fiscal consolidation would be acutely felt in Saudi Arabia.
“We have pencilled in 2015 government capex spending equal to the budgetary target, which would lead realised capex to be down 50 per cent from the 2014 likely out-turn. The emphasis in the budget statement on funding of already ongoing projects suggests new or non-essential ones could instead be delayed,” said Saliba.
