The higher than expected US shale output competes with the Organization of the Petroleum Exporting Countries (OPEC) production, with Saudi Arabian output reaching a new high as recently as May.
Oil prices were behind the International Monetary Fund (IMF) forecast of $52 a barrel (/b) by year end and well short of KSA's break even rate of $103/b. They finished at around $35/b. The next OPEC meeting is due in February 2016 when the lifting of restrictions on Iran raises the prospect of suppressed oil prices continuing.
The immediate impact of this has seen public sector pay freezes and the government decree in September that there would be no further contracts in the construction development sector in the last Quarter of 2015.
When government accounts were closed a full month early on 30th November 2015 they showed a 13.3% overspend on budget and a revenue shortfall of 9.2%. The recently announced 2016 budget was widely expected to show significant spending cuts, but only showed a 2.3% reduction in expenditure. However, after removing the provision for fluctuations in oil price, spending forecast is down 23.6% - much more aligned to analysts' and Faithful+Gould's forecasts.
In addition to not awarding new construction contracts, decisions have already deferred on major infrastructure projects in Mecca, Medina, Jeddah and Dammam. The massive rail projects for the Saudi Rail Organisation (SRO) must also be at risk. Station redesigns are being implemented on the Riyadh Metro project in an effort to reduce expenditure
The Ministry of Commerce and Industry (MOCI) has 46 building programmes awaiting decisions or funding. Social infrastructure projects such as the Ministry of Housing's $70bn programme (330,000 units/year) and power projects may escape the brunt of the cut-backs.
With consumer spending remaining unchanged, the retail sector represents one of the only short term opportunities with multiple regional and super regional mall developments planned in Riyadh and Jeddah over the next 12 months.
The spending cuts and the ongoing concerns with payment delays will make it a challenging market for contractors in the next 18 months. Conversely, it represents an opportune time for private developers to procure major developments, with further incentive to develop provided by the imminent introduction of a 2.5% land tax for unused land.
We expect construction inflation to remain flat in 2016, possibly even moving slightly negative, depending on the level of government cut backs to be announced. 2017 forecasts show a modest increase as spending restrictions ease, while 2018 forecasts start to reflect the impact of regional event driven spending such as Expo 2020 in UAE and Q22 in Qatar.