The 2017 breakeven of $51/barrel looks highly likely to be achieved. However, because KSA has weathered some of the most significant cuts in production meaning that revenues have been impacted significantly, even though the barrel price has been supported, the deficit target could be still be overshot. With the IMF recommending a tapering of spending and subsidy cuts, gradual increases in investment are expected.
With Q3 incorporating the quiet summer period, the contraction of the construction industry continued as the status quo continues to be one of struggle, as the troubled Saudi Oger, the country's second largest contractor, finally closed its doors. Supply chains are also shedding employees as backlogs shrink, and the market needs to move into growth to ensure it retains capacity to deliver future works.
As evidence of change in the government sector continues, green shots can be seen moving into 2018 onwards as privatisation and alternative financing models are being rolled out across the Kingdom. The early adopters will be joined by all sectors, including health, education and housing amongst others. Regionally and internationally, finance institutions are seemingly keen on engaging in these models, and we should expect to see a significant raft of deals through the coming 24 months as the Kingdom continues to reprioritise socially important schemes and those which enable economic diversification.
There has been significant fiscal movement at Government level with a further bond issuance of $12.5Bn. With high levels of global liquidity, more should be expected in the near term as funding diversification continues apace. However, the fact that the financial markets have capital isn't having an impact on the ground as projects struggle for funding and banks are averse to the current risk models. They prefer to focus on state and high grade corporate debt. This has been compounded in the short term by the (much needed) changes being implemented with Ministries and Government companies and the reprioritisation of the project pipeline - which has already seen nearly $200Bn move out of the pipeline over the last year.
2017 construction to date has been affected by a deflationary cycle which has been matched in the wider economy. The alternative funding should start to come through the system and with impending taxation, inflation is expected to return in 2018 as suppliers have to raise prices for tax and the long term nature of PPP requiring risk pricing. However, the underlying inflation is likely to be subdued during the course of 2018 and with the imminent amendment of the National Transformation Plan (NTP), there is some uncertainty of what NTP 2.0 will do and the outlook for the market.
With comparative underinvestment regionally across the oil and gas infrastructure sector we expect the coming 12-18 months to start seeing a pick up in investment as both government companies and their major international oil partners begin the process of overhauling current assets and redeploying capital to new developments. This combined with the PPP drive in the Kingdom should mean H2 2018 and onwards sees the end of the current slump in trading conditions. Currently there are few mega projects (by exception) making it to award to support the market and with one quarter to go in 2017, the industry needs the work to flow through to support the large supply chain.
Through the first three quarters of 2017 there had been some signs that awards in the Kingdom may start to recover. Q1 saw a significant start to the year which has tailed off during Q2 and Q3. Where we expected a relatively quiet summer, the total quantum of awards in 2017 has drifted away from expectations, with Q1 offering $11Bn but total year to date coming in at just under $18Bn. It is unlikely, unless major schemes move forward swiftly, that estimates for the year will be achieved. Looking forward to 2018 we've seen alternative financing arrangements engaged in the Kingdom and there is appetite for a variety of schemes that consortia are pricing now. The reprioritisation of schemes in the government pipeline has taken longer than expected although it seems this process (whilst continually ongoing) is starting to have an impact.