The construction industry in Qatar has been expanding at a rapid pace in recent years, but a regional diplomatic crisis could greatly undermine the industry’s growth prospects.
In early June, Saudi Arabia, the United Arab Emirates (UAE), Bahrain and Egypt announced the severing of diplomatic ties with Qatar and within hours imposed a quasi-air, land and sea blockade on the Emirate. These unprecedented steps were taken in an attempt to force Qatar to stop its alleged support of extremist groups, to abstain from meddling in the internal affairs of countries in the region, and to distance itself from Iran. Among the most notable developments:
• Saudi Arabia, the UAE, Bahrain gave Qatari citizens two weeks to leave their territories; they have also banned their citizens from visiting Qatar. Egypt, which has a large community of expats in Qatar did not impose any restrictions on citizens’ movement.
• Saudi Arabia, the UAE, Bahrain and Egypt have cut off all air and sea links with Qatar and closed their air space to Qatari flights.
• Saudi Arabia, the UAE, Bahrain and Egypt have closed their ports to all Qatari ships. The UAE has extended the ban to include all vessels arriving from, or destined to, Qatar.
• Qatar’s only land border which it shares with Saudi Arabia has also been closed, effectively blocking all movement of goods by land to Qatar.
The region experienced a similar crisis in 2014, when Saudi Arabia, the UAE and Bahrain withdrew their ambassadors from Qatar over its alleged support of the Arab Spring uprisings and the Muslim Brotherhood movement in Egypt, which represented a potential risk to the stability of the region. This crisis was resolved after around nine months, with the help of Kuwaiti mediation efforts.
Qatar has denied the new accusations levelled against it and described the measures taken by its neighbors as unjustified. It said that it will not surrender the independence of its foreign policy and that supports solving the crisis through dialogue, however it has put the end of the "blockade" as a precondition to taking part in any negotiations on ending the diplomatic crisis.
Ongoing efforts to find a diplomatic solution to the “second” Qatar Crisis with Kuwait, Turkey, and the US acting independently as mediators have been unsuccessful so far. It is likely that this new crisis will take a long time to be solved due to the severity of measures taken to isolate Qatar and the solid stance and unwillingness to compromise shown up until now by both parties of the dispute.
Challenges for the construction industry
Construction activity in Qatar slowed marginally in 2016, but it was still relatively high-value-added growth in real terms eased to 15.4% from 17.8% in 2015. However, there are growing concerns that this new crisis will result in a marked slowdown in the pace of growth in the Qatari construction industry, with major projects being affected if the crisis is not resolved quickly.
Qatar’s construction industry relies partly on the import of construction materials by land and sea from Saudi Arabia and the UAE; the closure of the land border and the shipping ban is a real blow to Qatar’s construction supply chain. Qatar will have to find new suppliers of construction materials quickly to avoid a shortage of materials which would cause a disruption to ongoing construction projects and an increase in construction materials’ prices.
There have been reports that Qatari companies have already started engaging in talks with construction material companies from Turkey. Qatar may also turn to other countries in the region such as Oman, Kuwait and Iran to help with this issue. Sourcing materials from these countries could help avoid the shortage of material but may still prove to be costly and thus affect construction material prices in the long run.
Qatar also relies heavily on foreign workforce; they represent 90% of Qatar’s population of 2.5 Million, with many working within the construction industry.
Concerns about the economic effects of the Qatar Crisis are rising among the foreign workers, who are worried about job security and the potential rise in living costs. If the crisis drags on, it could affect labor supply and Qatar may find itself struggling to attract foreign workers.
The closing of air links is also likely to affect the movement of senior-level industry executives, who travel frequently between countries in the region.
Risks to the outlook for construction growth
Qatar is one of the major and most active construction markets in the GCC region and so far there have not been any apparent immediate effects on construction projects. The industry has been expanded at a rapid pace – the latest quarterly data on construction value-add revealed that the industry expanded by 17.3% year on year in real terms in the fourth quarter of 2016. This followed average year-on-year growth of 19.3% in 2013 to 2016.
If a solution to the crisis cannot be reached soon and Qatar is unable to quickly restructure its supply chains and secure labor supply, construction projects that are underway are likely to suffer from time and budget overruns, this will in turn result in an increase in construction related claims and disputes. Construction companies working in Qatar are monitoring the development of the crisis closely and will need to develop contingency plans if the crisis is prolonged.
Due to the increased political and economic risks, it is expected that there may be more reluctance from financing bodies to fund new projects in Qatar. International construction companies may also be reluctant to bid for new work and tender prices are likely to rise.
Projects involving project owners and construction companies from countries imposing the “blockade” could be disrupted; these include some key infrastructure projects.
However, projects related to the holding of the FIFA World Cup in 2022 are proceeding as planned. The Supreme Committee for Delivery and Legacy has reported that it is moving ahead rapidly with construction across all the stadia and infrastructure sites for the tournament.