Although US shale production has picked up most of the low hanging felds of production it will subsequently require major investment into new, harder to develop and costlier locations, and therefore we are less likely to see the decline in crude prices this year (providing OPEC compliance holds). This gives the potential for a lesser budget deficit for the year than currently forecast.
The recent 2018 budget shows an overall increase of 9.9% to SAR 986 Billion which includes a 13.6% increase in capital spending to SAR 205 Billion. Although this incorporates some already committed monies to new projects, we expect to see a signifcant uplift in government project awards through the year. With 12% of the budget being funded by debt, we would anticipate a signifcant further bond issuances soon - both in USD and local denominated Riyals. Total government expenditure is significantly increased when including the Public Investment Fund's SAR 83 Billion and other funds committed to stimulus at SAR 50 Billion - a record SAR 1.11 Trillion total.
With change very much on the agenda, we’ve seen construction awards lower than we forecast due to a relatively poor end to the year at a level comparable to 2016 - $22 Billion. Market dynamics are leading awards away from buildings, roads and rail to a high level of activity on power and water and oil and gas (relative to the previous year). This is expected in the short term to continue as the lead times on Independent Power Projects (IPP) and Independent Water and Power Projects (IWPP) for delivery is significant and power and water capacity need to be in place early in the development curve. The funding models for these type of developments are well understood regionally and successful schemes are already in operation.
During the course of 2017 the pipeline of programmes and projects within the industry has experienced significant ﬂux. With the reprioritisation programme undertaken we saw the potential works under build or in pipeline decrease from $1.05 Trillion to $800 Billion in early 2017 before the wave of announcements later in the year, which lifted the market potential to $1.75 Trillion. As the construction industry looks to recovery over the coming years from 6 consecutive quarters of contraction the 2017 forecast contribution to GDP is
$41.5 Billion or 6%. The increase in the Kingdom’s budget and the raft of new announcements adds a level of tentative positivity for 2018-2020.
We still have a tight lending environment which is certainly constraining a significant proportion of the private sector who do wish to commence delivery of developments. An additional constraint has been the uncertainty associated with the supporting infrastructure developments that the private sector needs from the government sector. We expect the assigned budgets to actively encourage the private sector to move quite quickly - especially in the fields of housing, hospitality and manufacturing.
With the continued loss in backlog for the industry, we have seen another year of contraction in 2017 as the workforce has shrunk as it did in 2016. Given our expectations for 2018 it is expected that by late year, backlogs should come under less pressure. We also expect the significant roll out of project management offices (PMOs) across the government and semi government sector to gain traction during 2018 with prioritised projects and programmes being rolled out at a relatively fast pace. This is a positive outlook for the industry given the past two years of contraction and uncertainty.
Whilst we know that bonds and PPP Public Private Partnerships) are areas of focus and in certain sectors are already being rolled out, we anticipate seeing other potential forms of transaction come more into play. These could include reverse trade with the Kingdom’s largest customers. The potential to agree direct payment in oil for the delivery of large scale infrastructure programmes is a distinct option. The pipeline of opportunities in 2018 means our forecast for contracting awards has increased by quite a signifcant percentage to c,$35 Billion as the governments’ commitments start to come through. This is led by schemes announced in previous years that we believed would be awarded by end of 2017 - including Makkah Metro - and Saudi Aramco’s continued drive to invest $414 Billion over the 10 year horizon. This is based on the significant increase in government commitment to expenditure, a level of PPP type funding and regional liquidity still being quite tight but with the attraction of ECA’s to support certain schemes.