Construction Intelligence Report: KSA

David Clifton
Oil prices have recovered during Q1 2016 to c.$47 per barrel in May, although are significantly below the Kingdom's budget break-even per barrel of $61.50 average (a drop of 27% against 2015).

It should be noted that 22% (Saudi Arabian Riyal (SAR) 183bn) of the budget is provisioned either for buffering against low oil price or subjective expenditure. A fiscal deficit of SAR 326.2bn.

The Organization of the Petroleum Exporting Countries (OPEC) meeting in February yielded no consensus on oil production cuts as Saudi Arabia refuses to lead this unless coupled with an equal cut by Iran. In the short term, the constant production has been mitigated by global growth in consumption and release of further storage capacity.

Central Department for Statistics+Information

The Deputy Crown Prince has announced the Vision 2030 strategy, although the details to support the plan will be released in June. The short term effect is still very low contract awards in construction from the public sector in 2016 and an uncertain 2017.

GDP is expected to grow by 3.6%, although this requires the speedy implementation of the National Transformation Programme (NTP) which aims to increase private sector GDP contribution from 40-65% by 2030.

With the 2016 budget announced and over 50% of the SAR 840bn allocated to salary's and running the government, we expect significant short term project cut backs in the public sector with a major reprioritsation programme already underway and rephasing of schemes in line with the country’s priorities. We expect significant focus on alternative financing Public Private Partnerships (PPP), Build, Operate, Transfer (BOT), Build, Own, Operate, Transfer (BOOT) in the medium term to deliver major infrastructure and reduce the immediate funding issues.

Average Construction Materials Prices

Average material prices for the main construction materials show similar trends to the rest of the GCC

The 2016 forecast for major government contract awards centres around Makkah Metro, with the vast majority of other schemes deferred for alternative financing, rationialisation, redefinition, placed on hold or cancelled. Makkah Metro is expected to be scaled back by 30% in terms of budget, which will mean a likely deletion of stations or lines on the routes.

With successful completion of Independent Water & Power Project's (IWPP's), it is expected that Saudi Electricity Company and other providers will be able to - post project reprioritisation - move relatively swiftly to market. A growing population (3.2% PA) and the focus on nationals housing will drive speed as their design and build time is significant.

General Inflation

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

Government subsidy reductions on petrol - with cuts expected on electricity and water soon - is driving inflation although as the government has commmited to protect the vunrable and there is a high level of household disposable income, consumer spending is still expected to be reasonably resilient.

Project awards in the Kingdom in Q1 2016 were down to c.$7.5bn. This is in line with our expectations for 2016 of $29.9bn although some 15% down on the same period in 2015. The market has been almost exclusively private sector and Aramco driven. Contractors are resizing their organisations signficantly to realign to the market contraction.

We expect construction inflation to remain flat in 2016 with certain exceptions due to material spikes (recently rebar), depending on the time taken to reprioritise major government programmes - although VAT will start being priced in. 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.

Inflation Expectation

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