Saudi construction spending to grow in 2010

Investment in Saudi Arabia’s construction sector increased by around 5.8 per cent in 2009 and is projected to swell further this year as the government is lavishing funds on the infrastructure and banks are gradually reopening their credit lines, the Gulf kingdom’s largest bank said on Sunday.

After a decline in 2008 and 2009 because of the global fiscal crisis, the country’s construction sector’s contribution to real GDP is forecast to rebound this year, boosting its share of the domestic economy to more than 10 per cent, National Commercial Bank (NCB) said in a study sent to Emirates 24|7.

Its figures showed growth in the kingdom’s construction sector, the second largest in the Middle East after the UAE, is projected to reach 6.4 per cent to widen its contribution to gross domestic product to SR64.1 billion (Dh62.7bn) this year.

The growth in this sector will surpass the 4.4 per cent expansion in the non-hydrocarbon sector in 2010 and will boost it share of GDP to 10.4 per cent.

Furthermore, the construction sector alone provided employment to more than 2.51 million workers in 2008 and accounted for nearly 40.4 per cent of the kingdom’s total labour force, up 1.5 per cent from the previous year.

“The increase in demand for construction labor reflects the growing volume of work being implemented. We estimate that the investments made in 2009 would have increased the size of the construction sector’s labour force by four per cent to reach 2.62 million workers. With this rise, we anticipate that sector’s share of the Kingdom’s total labor force to have remained unchanged,” it said.

Citing a recent survey conducted by NCB, nearly 52 per cent of Saudi companies expect to hire new employees by 2010 and only five per cent expect reduction in their headcount.

NCB expected the number of employees in the construction sector to rise by five per cent over 2010 to reach 2.75 million workers.

“Total expenditures in the Saudi construction sector, as measured by the level of gross fixed capital formation (GFCF), is estimated to have risen by 5.8 per cent to SR147 billion in 2008. Although growing in absolute terms, the pace of expenditure expansion contracted over the year due to delays in the bidding process, the re-tendering of contracts and a limited number of qualified contractors able to take on big projects. Expenditure is estimated to have risen by 13.01 per cent to SR165bn in 2009 as the Saudi government dips into its foreign reserves to shore up projects,” NCB said.

”The GFCF will continue to rise in 2010, with residential construction showing faster growth as real estate developers attempt to subdue the kingdom’s housing shortage. By 2010, total capital expenditure in the sector is expected to reach SR188 billion, with 72 per cent being invested in non-residential works.”

The report noted that Saudi Arabia’s construction sector, like other sectors in the region, has been adversely affected by the 2008 crisis but added that government intervention partly mitigated the downturn in construction.

It showed that construction’s real GDP growth rate fell to 1.5 per cent and 4.7 per cent in 2008 and 2009 respectively, but is expected to expand by 6.4 per cent in 2010 on the back of increased government investments.

Furthermore, despite its minimal decline in 2008, the sector’s share of non-oil GDP is forecast to rise to a high of 10.48 per cent in 2010, it added.

“The government targeted its expenditure at key infrastructure and power projects; deeming these projects necessary to the long-term economic development of the kingdom. This has increased the GFCF, particularly in the non-residential component. This trend is expected to continue in 2010, with non-residential work accounting for 72 per cent of capital involved in construction.”

NCB said financing became an immense struggle for contractors during the economic downturn, as lending came to a standstill.

Its figures showed bank credit to the construction sector declined by 17.7 per cent to around SR44.7bn in 2009, as banks felt overexposed after five years of heavy lending.

“Although this led to project delays and cancellations, we believe 2009 was an adjustment for the banking sector. We forecast that credit to the building and construction sector will grow by 7.5 per cent in 2010.”

The study showed that the sharp slowdown in bank lending has slowed down project execution in the kingdom, with the value of ventures put on hold or cancelled reaching around SR195bn during 2008- 2009.

“However, the value of projects planned or announced for 2010-2015 is roughly SR1,575bn. When comparing this to the SR825 billion worth of contracts awarded between 2005 and 2010, it suggests that Saudi Arabia has a large capacity for growth in project markets and is yet to pass its activity peak,” it said.

It said the improvement in oil prices in 2010 allowed the Saudi government to set a more ambitious budget of SR540 billion, a 14 per cent rise on the previous year, and ensure the expansion of its capital investment programmes.

“Assuming that the price of oil remains over $50 a barrel, we forecast that value of contracts awarded in 2010 and 2011 will be SR240bn and SR323bn, respectively. The construction sector will continue to dominate the share in volume and value of contracts awarded in the next five years, followed by the power, oil and gas, and petrochemicals sectors,” it said.

Turning to bank lending, NCB noted that it plays a key role in funding construction activities in the kingdom, adding that credit to the sector grew at a compounded annual growth rate of about 9.7 per cent during 2000-2009, faster than the nine per cent recorded for the nominal GDP over the same period.

It said the crisis brought about the first decline in the construction sector’s borrowing activities in 2009 since 2001, with total bank credit to this sector declining by nearly17.7 per cent to SR44.7bn.

“Furthermore, the share of banks’ building and construction loan portfolio in the total exposure to the corporate sector narrowed down from about 10.2 per cent in June 2008 to 9.4 per cent in June 2009, it said.

“It is also important to note that the building and construction sector’s share of overall credit to the domestic economy has been gradually declining. Unfortunately, the negative impact of the economic crisis forced banks to take a more cautious standpoint, reducing the sector’s weighting from its peak of 7.9 per cent in 2007 to 6.1 per cent by the end-2009.”

“Despite these declines, we believe 2009 was an adjustment phase that was needed to cleanse and reassess the loan portfolio mix following the Kingdom’s years of strong credit growth. However, credit is showing a recovery, which is evident by the 7.8 per cent quarter on quarter rise in bank lending to the sector in the first quarter of this year…we  forecast that credit to the building and construction sector will grow by 7.5 per cent in 2010 to reach SR59.5bn."
 

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