31/08/2015 08:06 AST
The growing importance of non-oil diversification for Middle East economies has been highlighted by a regional consultancy as the Indian economy continues to strengthen.
The tender cost update for the Middle East and Indian markets by Mace Cost Consultancy Mena has found that with oil prices remaining depressed in the first half of 2015, the importance of a diversified economy for Middle East countries has grown.
Oil prices have dropped back to below $50 per barrel and India cut interest rates three times in the first half to 7.5 per cent.
The stronger economies, like Saudi Arabia, have maintained spending programmes at the expense of running budget deficits using their large reserves, but these are finite and curbs in spending will become necessary if the price of oil remains weak, Mace said.
For non-oil producers, the drop in prices has been welcome and will help their economies to grow.
The potential end to the Iran nuclear dispute will reduce risks in the area and improve trade, but other risks relating to the Islamist insurgency, the Syria and Libyan conflicts, and the associated refugee crisis are making the northern parts of the region unattractive for investors and growth outlooks remain uncertain.
In the UAE, the economy is expected to show further growth this year after expanding by 4.6pc last year, with the non-oil sector now contributing over 68pc of GDP and government investment focusing on financial and tourism sectors, as well as industrial facilities and air and maritime transport.
With the construction industry back to near capacity in major cities, the expectation is for tender price inflation to edge higher in the short term, driven by robust demand and also rising cost pressures.
Mace’s forecast for this year and next has therefore been increased to 4pc, with the rate expected to edge up to 4.5pc in 2017 on the back of increased government revenues as oil prices return to growth.
In Saudi Arabia, the decline in growth seen last year was halted in the first quarter as activity in the oil sector strengthened and the non-oil sector continued its pace of growth.
However, with the return of growth in other countries, the availability of resources may become a factor for the largest construction market in the Middle East and Mace has therefore maintained its forecast for tender price inflation of 4pc this year and 5pc next year, but now expect a rise by around 6pc in 2017 due to growing resources constraints and increased input costs.
In India, the investment friendly policies introduced by the government have helped to keep the economy on a buoyant path over the last year, and this trend has continued in the latest growth figures for the first quarter with GDP increasing by 7.3pc year-on-year.
Mace’s expects prices in India to accelerate next year and in 2017 to 5pc and 6pc respectively as demand in the economy is expected to strengthen.
“The trend for Middle East economies to diversify beyond oil is continuing to strengthen and this is set to continue as governments invest greater resources into tourism, infrastructure projects and other sectors,” Mace Cost Consultancy Mena managing director Mark Taylor said.
“We’re now also seeing a stable growth in the construction sector in both the Middle East and India, which in turn is driving up tender cost prices, with 2016 and 2017 expected to see the biggest rises.”
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