A housing project in the Saudi capital. The drop in oil revenues has promted some private real estate projects to be put on hold.

Gulf states are beginning to feel the pinch from the slump in crude prices.

The region’s governments, cushioned by large financial buffers, have been telling financial markets for months that there will be little change in their investment behaviour despite crude prices almost halving since the summer.

Gulf officials have also sought to reassure citizens that this period of low oil prices will be temporary, and reaffirmed their commitments to maintain core spending directed towards improving social conditions.

But in reality, governments across the region have begun to trim spending and reschedule capital expenditure plans.

Private sector companies are also grappling the same issue, which has had a marked impact on corporate valuations and hit the regional mergers and acquisitions market in particular.

While most executives hope the fiscal slowdown will be temporary, many are also planning for a more prolonged period of structurally lower prices. David Staples, a managing director at credit ratings agency Moody’s in Dubai, said: “We’re hearing from companies that they are far more cautious about investment plans.”

The problems facing the region were highlighted in a recent International Monetary Fund report that warned the six members of the Gulf Co-operation Council that they faced fiscal shortfalls this year as the oil price slump translated into $380bn of lost revenue.

Masood Ahmed, the IMF’s regional director, advised the Gulf six to “moderate the pace of spending in the medium term” to create a sustainable fiscal position and conserve resources.

Analysis from Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), shows that most have already rationalised spending on capital projects for this year.

$380bn

Amount Gulf states have lost in revenue since oil price fall over the past year

Although the overall value of GCC project awards in the first quarter was 10 per cent up on the same period of 2014, much of it was concentrated in Qatar, which is racing to build infrastructure ahead of its planned hosting of the 2022 Fifa world cup.

“Data are thus far in line with our expectation of a deceleration in investment growth in 2015 on the back of lower oil prices,” Ms Malik said.

The value of project awards in Oman and Bahrain, the Gulf states whose fiscal balances are most affected by lower oil prices, were in the first three months 43 per cent and 20 per cent lower respectively than the previous quarter. The figure for the UAE was 36 per cent, mainly concentrated on a real estate sector that has seen steady valuation declines over the past year.

“Governments are going ahead with key projects and completing existing contracts,” said one senior regional banker. “But other stuff is being pushed back — basically put on hold until the oil price recovers.”

In Saudi Arabia, the value of contract awards was 10 per cent down on the previous quarter, although this was still above the average over the past two years.

ADCB noted that contracts from Saudi were focused on healthcare and housing, two areas vital to the kingdom’s social sphere as it faces up to rising threats from Islamist extremism.

While Saudi Arabia has ringfenced as much as $150bn for use in strategic infrastructure projects, Riyadh’s central bank reserves dropped by $20bn in February alone, the largest ever month-on-month decline — forcing it to dip into its $700bn-plus financial cushion to oil the wheels of government.

Projects cancelled in Saudi have so far been limited largely to hydrocarbon-related projects, Ms Malik noted. But the impact of lower oil price looks likely to increase, with some private real estate and industrial projects — such as a smelter and chemicals project — also placed on hold.

“Saudi is completing what was promised, but is not coming up with additional megaprojects,” said John Sfakiankis, regional director of Ashmore Group, an investment manager.

He said that payments for work completed are increasingly being delayed, with invoices that used to be settled quickly now taking four months or more. “We hear, anecdotally, that private contractors have been receiving money on a more delayed basis,” said Mr Sfakiankis, adding this “is expected when the government goes into shortfall.”

The more cautious government view has also filtered into corporate planning and deals. Bankers say the market for oil and infrastructure-related assets in the Gulf has hit an impasse as sellers and buyers clash over valuations. “There is a 40 per cent mismatch between buyers who want to see lower prices and sellers who are wedded to 2014 valuations,” said a Dubai corporate financier.

The friction comes as regional mergers and acquisitions activity has dropped to its lowest level since 2011. Mergermarket, a data provider, recorded nine regional M&A deals, worth a total of $1.8bn, in the first quarter, a 72 per cent slump on the $6.4bn worth of M&A deal in the fourth quarter of last year.

Havenvest Private Equity Middle East, a leading Gulf private equity group, has also decided to rethink plans to sell Specialist Services Group, a Dubai-based supplier to the oil and gas industry. David Knights, a Havenvest partner, cited “the increasingly negative sentiment in the market, which was impacting expected valuation multiples”.

Troubled Aljaber, an Abu Dhabi-based construction group, has put on hold plans to sell its heavy lifting unit, according to people close to the company. Aljaber declined to comment.

“There are loads of deals that are stuck,” said the chief executive of one private equity firm. “We are looking at other areas now until clarity comes to the Gulf.”

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