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The GCC Countries Construction Crisis
1 year ago by Frederic Paquay

The GCC Countries Construction Crisis

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News that the construction group Arabtec is likely to fall into liquidation has recently surfaced. The UAE-based company is the largest subsidiary of Arabtec Holding PJSC and specialises in the delivery of social and economic infrastructure projects. The company is best known for helping build Burj Khalifa, the world’s tallest building, and the Louvre Abu Dhabi.

The company was valued at about 30 billion AED (8 billion ~ USD) at its peak in 2014 and is now worth 795 million UAE (215 million ~ USD), with the stock down 60% this year alone. 

But What Has Caused This Construction Giant Established In 1975 To Fail?

Confronted with the financial consequences of Covid-19, local and regional government authorities have reduced spending. In addition construction companies in the Middle East and GCC countries have struggled for years with project delays and thin profit margins. 

With debt increasing at an alarming rate, Arabtec's shareholders had no choice but to dissolve the company, which will likely threaten thousands of jobs and negatively impact suppliers and sub-contractors in the country and the whole region.

“After considering a number of strategic options, the shareholders of Arabtec Holding have voted to discontinue with the group and dissolve it due to its untenable financial situation,” a spokesperson said. The company is also said to have about 5 billion AED in receivables, dues and advances and 1.8 billion AED in outstanding debt. Banks and creditors have been warned that it might be difficult to recover losses from the liquidation.

The GCC Construction Industry Has Been Struggling For Years

Although the Arabtec situation is one of the most high profile, this is only one example amongst others in the region’s construction industry. According to AMEinfo, several UAE companies have recently sought to extend debt maturities or agree to better terms in recent years to avoid defaults. 

Recently, creditors started to enforce claims against Abu Dhabi-based Al Jaber Group, which has struggled since building up debt in the wake of a UAE real estate downturn. Another Dubai-listed construction firm, Drake & Scull, is working under UAE bankruptcy law to reach an agreement with its creditors in an out-of-court process.

The construction sector is not the only one to be affected. In May 2020, a survey conducted by the Dubai Chamber of Commerce revealed that 70% of businesses in Dubai expected to close their doors within the next six months as the coronavirus pandemic and global lockdowns ravage demand. “The double-shock impact is pushing economic activity down to levels not seen even during the financial crisis,” the Dubai Chamber wrote in its report. 

GCC Countries Have Seen Declining Revenue For Years

In fact, despite numerous stimulus package projects aimed at supporting the local economy during the pandemic, the GCC countries have seen declining revenues for a number of years with some of the most important sectors, primarily oil & gas and real estate being affected.

For example, earlier this year, nine banks from Dubai and Abu Dhabi initiated legal action against a number of Indian corporations that borrowed funds from these banks and never repaid. Most of these bad debts involved corporate loans taken out by subsidiaries of Indian companies based in the UAE. The total amount is believed to be around 7 billion USD.

What is a Company Credit Report and Why does it Matter?

In these challenging and unprecedented times, no company is immune to economic and financial problems. So how can suppliers protect their position against insolvent customers and partners? 

While it is always advisable for suppliers, to include in the contract, a provision for insolvency, it is possible to anticipate future problems with due diligence which would include financial and operational information on request or at regular intervals.

Keeping a close eye on the customers past, current and future situation is critical to identify breaches and exercise termination rights. If the information is not transparently provided by the subject company, it's imperative to order a company credit report from risk management companies such as Cedar Rose.

A company credit report allows organisations to determine the creditworthiness of their customers, prospects and suppliers, and will give them a competitive edge to set realistic credit limits whilst identifying which customer relationships to grow and which to closely monitor. 

Indeed when it comes to protecting cash flow (which is key to surviving in the post Covid-19 pandemic), it is also important to choose the right customers and determine the creditworthiness of each, ensuring that they are aware of the implications to their reputation by not paying on time.

Cedar Rose’s Credit Report Capabilities

Cedar Rose are an award-winning international company and has been delivering credit and business risk management solutions since 1997. Specialists in the Middle East & North Africa, we now offer a global coverage for credit reporting and due diligence services.

Our clients turn to us for credit reporting services when striving to protect their businesses from bad debt and outstanding invoices but become frustrated from dealing with the lack of qualified and verified financial data in the MENA region and beyond.

For more information please contact our Dubai-based GCC representative Frederic Paquay on +971 58 589 2374 or email Frederic.paquay@cedar-rose.com.

  • MENA
  • Due Diligence
  • GCC
  • Construction
  • Liquidation