Construction Intelligence Report: KSA Update

David Clifton
As oil prices begin a level of recovery to over $45/barrel and following the Organization of the Petroleum Exporting Countries (OPEC) recent agreement to slow production output, the outlook for the Kingdom of Saudi Arabia's (KSA) finances is improving.

Although still running a significant deficit in 2016 of 326Bn Saudi Arabian Riyal (SAR), upward pressure on oil prices will start easing some of the fiscal pain.

The government's move to modernisation and cost cutting has commenced. We've seen cuts in public sector salaries, lifting of subsidies on fuel and a forecast to lift subsidies on power and water. Continued streamlining may lead to amalgamation of some ministries and governmental departments.

In line with the National Transformation Programme (NTP) and Vision 2030, a National Project Management Office (NPMO) is being created for government and related entities to provide guidelines and governance for future project delivery. Due to the complexities of designing and implementing these initiatives, the NPMO is unlikely to be properly operational before the end of 2017, effectively slowing government approval of new projects. 

Up to Q3 there has only been $18Bn of construction awards out of our forecasted $29.9Bn for 2016. To meet our upper estimate a Makkah Metro contract award would be required (this is subject to a Royal Decree and therefore sits outside of the NPMO). The private sector has delivered over 70% of awards, bucking the trend of all previous years on record.

We anticipate the market contracting further in 2017 with awards down 9% to around $27Bn. This is a consequence of the NPMO implementation and the subsequent lack of government work. The market will again be reliant on private developers and Saudi Aramco. The situation is only forecast to ease in 2018, although there is a strong case for one off major infrastructure awards such as Makkah Metro.

The main question around KSA's project pipeline is not around cut backs per se, but around reprioritisation and timelines. The Government's $700Bn programme was on a ten year timeline. Extending this to twenty will have a dramatic effect on the industry as essentially the government sector halves the awards in Kingdom.

The Saudi Arabian Monetary Authority (SAMA) has released short term loans of $4Bn on July and $5Bn in September this year as well as raising book to loan ratios from 85 to 90% in 2016. With international liquidity tightening, down 8% from Q1 2015 to Q2 2016, the introduction of transparent, competitive alternative financing models in KSA is paramount in order to access funding that is available and deliver on the social infrastructure, power and water requirements for the young and growing population whilst supporting the diversification of the economy. Initial IPO's of Government companies are under development but require more urgency to streamline the economy, drive commercial efficiency and release capital from these businesses. Inflation is expected to slow, although a spike will occur as and if power & water subsidies are lifted.

Inflation is expected to slow, although a spike will occur as and if power & water subsidies are lifted.

Construction inflation will go negative in the last quarter of 2016 as awards struggle to meet forecasts and the worsening of the short term outlook over the previous quarter. 2017 now looks likely to be slow given our view on Vision 2030 although VAT will start becoming a major pricing factor, while 2018 forecasts start to reflect the impact of regional event driven spending and also the re-entry of the government to the construction awards market.