“In Saudi Arabia and Qatar, infrastructure spending continues to be strong but with lower margins,” 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.

His remarks came as Kingdom-based researchers said the Saudi construction sector showed no signs of slowing down in 2011 with mega-projects being awarded in record numbers.

In its latest commentary, Fitch Ratings added that it expects that the construction sector in Middle East and North Africa 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 (below or above trend). 

“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,” Al-Natoor said.

“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 notes 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 canceled, as the Abu Dhabi government has prioritized 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 recent from the National Commercial Bank (NCB) said the value of awarded contracts during the third quarter of 2011 reached SR95.1 billion, demonstrating that the expansion of construction activities continues to be a focal point to the Kingdom’s economy.

The high value of awarded contracts thus far has reached SR179.5 billion through the first three quarters of 2011.

The value at which contracts have been awarded far exceeded the figure of 2010 and has the potential to exceed 2009s, said the NCB report.

Numerous mega-projects were signed during the third quarter that were balanced across several sectors signifying the strong health of the construction industry.

The mixed-use real estate sector accounted for 26 percent of the third quarter’s value of awarded contracts while the transportation and industrial sectors accounted for 16 percent and 15 percent, respectively.

As forecasted, the value of awarded contracts during H2, 2011 were valued greater than in H1.

The SR95.1 billion in contract awards during Q3, 2011 alone is an indication that the government continues to place an overwhelming emphasis on capital expenditures to meet its commitment to improve the Kingdom’s physical and social infrastructure capabilities.

"We expect the value of awarded contracts to continue its strong push into Q4. The power sector is expected to continue its significant participation in the construction sector as several contracts are anticipated to be awarded during Q4 by SEC in excess of SR10 billion," the NCB report said.

Additionally, it said the recent approval by the Council of Ministers to build a land-bridge to connect Jeddah Islamic Port to Dammam and Jubail seaports though the existing railway network between Riyadh and Dammam, will allow for numerous contract awards beyond 2011 and into 2012.

The distribution of awarded contracts by region confirms that the Eastern Province continues to receive the largest share of mega-projects, said the NCB report.

Around 44 percent of the value of awarded contracts was in the Eastern Province due to heavy investments in the petrochemical, industrial and power sectors, according to the report.

The Makkah region followed with 20 percent share of awarded contracts largely due to the Haramain High-speed Railway Network’s phase two package.

The Riyadh region contributed 12 percent to the overall value of contract awards after the majority of a mixed-use real estate contract that was awarded by the Ministry of Interior is set to take place.

Fitch Ratings added that 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 programs 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 British 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 capitalized banking sector.