Oil price collapse will not halt Saudi construction drive

January 08 , 2015

undefinedFalling oil prices will not halt Saudi Arabia’s multi-billion dollar investment in infrastructure, according to a new report.

But it warns that there will be a slowdown in contract awards compared with the country’s previous ‘frantic pace’.

The Saudi government has set a budget of $167.82 billion for infrastructure and transport in 2015, its third largest commitment ever.

The report, Saudi Arabia Construction Update January 2015, says this year will see continued investment in construction across the kingdom despite falling oil revenues.

“Analysts believe that the budget deficit of $14.4billion projected by the government…can be comfortably met from its $736billion of net foreign assets,” says the report, prepared specifically for The Big 5 Saudi.

There are more than $3 trillion worth of development projects due to start in the kingdom by 2020 and the International Monetary Fund has projected the country’s economy will grow 4.5 percent this year and next. 

It will be boosted by a forecast 5.75 percent growth in  its non-oil private sector, which accounted for 14 percent of government revenues in 2014. 

The report says that over the first six months of the year there are five strong drivers of growth:

  • Strong demand – 40 percent of its 30m population is under 14 years old.
  • Infrastructure – improving rail, roads and transport have been a focus for a decade as part of its drive to modernise and attract private investment.
  • Social infrastructure buildup – education is a central part of investment in the future with three new universities and refurbishment elsewhere as well as healthcare and housing. The country needs 5.5 million new homes, says the report and health accounts for 19 percent of this year’s spend, including three new hospitals.
  • Developing religious tourism in the Madinah-Makkah corridor, worth millions in pilgrim revenue.
  • Relaxation of stock market regulation and restrictions on international contractors. 

Ventures ME also examines the long-term prospects for the Saudi construction market but sees no reason for significant slowdown even if oil prices fail to recover.

The country’s main problem is from supply and government regulation over operation and the employment of Saudi nationals (Saudization).

The report says: “Contracts awarded began falling slightly to $58.2 billion in 2014, propelled largely by the supply constrains and strict Saudiization measures imposed on the industry that accentuated the labour shortage and delayed existing projects from 2013, resulting in a slower pace of fresh contract awarded in 2014.

“Slowing oil prices by the end of the year are further likely to slow down the contractor awards in 2015 to $52.9billion though, growth is likely to continue at a moderate pace until oil prices recover and the frantic pace of development is restored.

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