Contractors go for lower margins

Fitch Ratings expects that the construction sector in Mena will continue to be supported by government spending in Saudi Arabia, Qatar and Abu Dhabi in 2012 as these markets have undertaken massive infrastructure spending plans backed by government and government-related entities.

The Dubai construction market will remain fragile in the medium term. The key factors in assessing the construction outlook at the country level are government fiscal flexibility and the extent of historical infrastructure spending.

"In Saudi Arabia and Qatar, infrastructure spending continues to be strong but with lower margins. During the construction boom, Mena region contractor margins have remained higher than international peers," said Bashar Al Natoor, Director in Fitch's EMEA Corporates team in Dubai.

"However, with the recently increasing competition, contractors have started to go for lower margins and Fitch expects this to remain the case over the next few years," Al Natoor added.

Fitch also noted that Abu Dhabi has been cutting its spending on construction-related projects, due to concerns about oversupply in the real estate market, an increase in the Emirate's financial commitments, and the slowdown in the global economy. Nevertheless, key projects remain in the pipeline; some contracts have been delayed or possibly cancelled, as the Abu Dhabi government has prioritised major infrastructure projects. However, a sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for contractors operating in the UAE.

A decline in project tenders across EMEA will increase competitive pressures. Contracting is inherently about managing project risk and completing on budget. Balancing this risk/reward conundrum in an increasingly thin margin business will be a key challenge for management in 2012. Companies that operate in oil and gas producing countries with budget surpluses and clear investment programmes have historically benefited and are well positioned to benefit from the expected growth. Nevertheless, contractors with exposure to Libyan operations have been affected, with loss of the order book and future cash flow as well as increased risk of machinery loss.

By contrast, countries with an extreme negative outlook are Spain, Portugal and Ireland - all severe fiscal consolidators with structurally well-developed infrastructure. The UK market will also contract over 2012 and 2013, although not as much as other fiscally restrained countries given the historical underinvestment in infrastructure, more active private sector involvement and better capitalised banking sector.

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