The sharp decrease in oil prices has a negative impact on construction activities.
- The sharp decrease in oil prices has a negative impact on construction activities in the UAE. The government as the largest sponsor of construction (especially infrastructure) is facing a deterioration of its fiscal position due to decreasing oil revenues. Commercial and residential construction are facing headwind due to reduced demand and a cooling down of the real estate market.
- Decreasing demand, payment delays and strong competition have led to an erosion of businesses´ profitability - both in terms of reduced margins as well as increased provisions towards bad debts.
- Construction businesses are largely dependent on banks to fund their working capital requirements. However, banks have become very restrictive on lending due to the low demand situation and the fact that many construction businesses are already highly geared.
- Payments in the construction sector now take between 90-180 days on average (after 90-120 days in early 2015). Due to the current liquidity squeeze, many players are delaying payments. This has a knock-on effect on the trade cycle, with many smaller players struggling to meet their payment commitments. Non-payments are expected to increase by more than 30% in the coming six months, and business closures are also on the rise.
- Due to the current challenging business environment, we have decreased our risk appetite in all construction subsectors. We are especially cautious on large buyers with sizeable exposure to government projects, buyers operating in the infrastructure segment, and businesses operating in oil field support services.
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Market Monitor February 2016
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