Saudi Arabia’s massive construction sector has sharply rebounded over the past few years following a downturn in the wake of the 2008 global fiscal crisis and is expected to remain buoyant in the medium term, according to the Gulf kingdom’s largest bank.
Construction spending slipped from 9.2 per cent of non-oil GDP in 2008 to 8.4 per cent in 2010 before recovering to 8.9 per cent of non-oil GDP in 2012, National Commercial Bank (NCB) said in its latest economic report, sent to Emirates24|7.
From around SAR186.3 billion (USD $49.7 billion) in 2011, spending on the construction sector grew to SAR216.6 billion ($57.7bn) in 2012 and a record SAR240.3 billion ($64bn) in 2013.
“The significant growth in government contract awards, coupled with healthy lending appetites by Saudi banks towards the construction sector provide for a strong outlook over the medium-term,” the report said.
“The level of spending in the construction sector has seen remarkable growth over the past few years and is projected to continue this pattern over the medium-term.”
NCB said the 2008 crisis, which severely hit the economies of Gulf oil producers, played a significant role in the declining growth of construction spending as a result of numerous project delays and cancellations.
“To gauge the level of activity in the construction sector, the Gross Fixed Capital Formation (GFCF) reveals a static snap-shot of the degree of growth in both, residential and non-residential construction within the Kingdom,” the report said.
It showed residential GFCF has been hovering around 2 per cent of nominal GDP over the past couple of years, while non-residential GFCF jumped from 5 per cent in 2006 to an estimated 6 per cent of nominal GDP in 2013.
“This indicates the government has put a strong emphasis on expanding the infrastructure sector over the last six years to offset the effects of the global economic downturn, which caused delays and suspensions due to limited commercial financing of many planned projects,” it said.
It showed that over the last several years, the construction industry has witnessed a boom in contract awards and ongoing construction activities.
As part of the kingdom‘s initiative to diversify its economy away from the oil and gas industry, the construction sector has benefited from heavy expenditures, it added.
Citing official data, the report showed bank credit to construction sector soared from SAR37.8 billion ($10.08bn) in 2006 to SAR76.5bn ($20.4bn) in 2012, representing a CAGR of 10.6 per cent.
“The global financial crisis hampered loan distributions during 2009 as banks became increasingly risk averse following rising non-performing loan ratios,” it said.
“However, the rebound exhibited during 2010-2013 coincides with the growth in contract awards, as the public and private sectors regained their confidence and reinvigorated more lending and construction activities. As a result, the share of bank credit to the building and construction area relative to total bank credit extended to all economic activities jumped from 6.1 per cent in 2009 to 6.8 per cent in 2012.”