BMI View: A significant upward revision of historical data by the Saudi National Commercial Bank , and a 140% year-on-year increase in contract awards during 2011, have prompted us to adjust our 2012 construction forecast. Taking into account 11.6% real growth in 2011 and the sheer number of projects now in the pipeline we expect an equally robust 9.3% real growth for 2012. We furthermore anticipate this trend to continue in the short- to medium-term on the back of the government's vast infrastructure investment scheme, aimed at staving off public discontent, and forecast an annual average real growth of 5.6% between 2012 and 2016.
Saudi Arabia's already buoyant construction sector was given an additional boost by a flurry of contract awards over the course of 2011, totalling US$72bn and now expected to filter through into 2012. In H211 alone, the value of awarded contracts reached US$50bn - higher that the total value for FY2010 - and overall 2011 represented a 140% year-on-year (y-o-y) increase in contract awards. January 2012 started off equally strong with a 68% increase y-o-y (Q112 is currently up 5% y-o-y).
Furthermore, following a significant upward revision of historical data by the Saudi National Commercial Bank ( NCB), real construction industry growth for 2011 came in at an exceptional 11.6%, with industry value reaching SAR88.98bn (US$23.76bn). We believe this sturdy growth to be maintained during the short- to medium-term with real growth in 2012 expected to reach 9.3%, and thereafter an average annual real growth of 5.6% between 2012 and 2016. However, on the back of the sheer size of the Saudi construction industry we forecast this growth to be contained in the longer term, and we therefore posit a much more moderate, yet still healthy, average growth rate of 2.9% between 2017 and 2021.
|Arab Spring Spurs Investment|
|Saudi Arabia Construction Industry Value (SARbn), Real Growth (%)|
The sectors that were highlighted in Saudi Arabia's 2012 budget as areas of focus; such as education, roads, healthcare and urban development; contributed to the strong start of 2012 as a result of the Saudi governments vast investment scheme. Those sectors alone accounted for more than SR15bn (US$4bn) or 30% of the total value of awarded contracts. Anchor sectors, such as the petrochemical, power and industrial sectors accounted for more than SR23bn (US$6bn) or 44% of the total value of awarded contracts, according to a report by the NCB. Thus, the high number of contracts awarded should feed into strong growth over the coming years and build on a robust existing project pipeline.
Hence, beyond the infrastructure sector there is considerable scope for construction activity that incorporates social infrastructure, real estate and industrial projects. Industrial projects, mostly related to the hydrocarbons sector, are a major source of construction output growth in Saudi Arabia. A growing number of petrochemical projects are also boosting construction activity, as the country attempts to diversify its industrial sector away from oil and gas.
In line with this diversification strategy, Saudi Arabia intends to use solar energy to generate 10% of its electricity needs by 2020. The government expects the country's solar energy sector to create 15,000 new jobs, encourage the development of solar farms, and lead to the establishment of factories for the treatment and collection of raw materials from the related utilities. Over SAR3bn (US$800mn) has been invested in solar energy plants in Yanbu Port in the Madina region and Jubail in the Eastern Province.
Social infrastructure has likewise received a significant boost from the government as a means of placating growing unrest in the country. Saudi Arabia has not escaped the political challenges that have gripped much of the MENA region. In response, the country announced two packages of social benefits (part of the SAR1,444bn (US$385bn) 2010-2014 Ninth Development Plan) amounting to around US$130bn, providing funds for education, healthcare and housing projects. A total of SAR250bn (US$66bn) was pledged for housing alone, with 500,000 new units in the pipeline. If forthcoming, these projects will provide further upside to our forecasts for the construction sector.
Furthermore, a draft law revolutionising the mortgage market has also been approved in Saudi Arabia, presaging the formation of a more liberalised housing sector. We believe that the move could prove a huge boon to both domestic firms and international players looking to capitalise on the significant growth potential possessed by the kingdom. The mortgage law has been under discussion for three decades but has not been approved until now due to resistance from religious scholars concerned about its appliance with Islamic, or sharia, law. We believe the regional political upheavals, which were largely triggered by youth unemployment, lack of proper housing and economic pressures, have now helped to push the law back on the political agenda. Yet, in light of the long and torturous history of the law we treat the news with caution, for now.
To conclude, the sheer value of awarded contracts during 2011, the government's continued investment commitment, and recent reforms, clearly demonstrates that the expansion of construction activities continues to be a focal point of Saudi's economy in the short to medium term.