Faithful + Gould’s David Clifton says the kingdom’s construction market is likely to contract further
Saudi Arabia’s construction sector faces an uncertain 2017 due to the slowdown in the government awarding work over the last year and a lack of liquidity to finance projects and pay contractors, an industry expert has said.
In a report – KSA Update 3Q 2016 – issued earlier this month, David Clifton, regional development director at Faithful+Gould, said that although the outlook for the Kingdom’s finances is improving, there remains a significant deficit.
He pointed out however that oil prices are beginning to recover to more than $45 a barrel, and that OPEC’s recent agreement to slow production output would start easing some of the fiscal pain the country is facing.
Despite this, Clifton cautioned that 2017 would continue to be a slow year for the Saudi construction industry, with the market likely to contract further. In his report he said that awards would drop by 9% to around $27 billion.
“The market will again be reliant on private developers and Saudi Aramco. The situation is only forecast to ease in 2018, although there is a strong case for one off major infrastructure awards such as Makkah Metro,” he explained in the report.
“The main question around KSA’s project pipeline is not around cut backs per se, but around reprioritisation and timelines. The Government’s $700Bn programme was on a ten-year timeline. Extending this to twenty will have a dramatic effect on the industry as essentially the government sector halves the awards.”
Speaking to MEConstructionNews.com, Clifton added that the primary challenges in the KSA construction market revolve around the shutdown of government contracts over the last year.
“Government entities have typically awarded 70%-75% of all construction contracts in Saudi Arabia. In 2016, without the private sector and Saudi Aramco, there wouldn’t be much of a contracting market this year.
“Liquidity is tightening globally, but with the regional government withdrawing from local banks, their deposit to loan rates have increased. SAMA raised the limit in February from 85% to 90%, but the market in the round has reached this level now,” he continued.
Clifton’s report added that construction inflation is expected to go negative in the last quarter of 2016, with awards struggling to meet forecasts and the worsening of the short term outlook over the previous quarter.
“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 and also the re-entry of the government to the construction awards market,” it said.
“To be honest, 2018 onwards is about as optimistic as I can be,” Clifton said. “The government has identified the need to restructure, reprioritise and reorganise to limit exposure to spending, diversify the economy and reduce reliance on the government sector for contracts.
“To make any meaningful impact will take time, and the government needs to, as a matter of urgency, support some larger infrastructure schemes in the market as the diversification cannot just be switched on like a light.”