Saudi Arabia's Construction Sector Forecasts Remain Attractive

BMI View: Saudi Arabia's construction industry, one of the largest in the Middle East, will continue to present opportunities to investors as infrastructure, both economic and social, continues to be central to the government's expenditure plans.

BMI is forecasting the construction sector to grow by 6.81% y-o-y in 2010, fuelled by billions of dollars of projects either in the pipeline or currently under way. According to BMI's Key Projects Database, a compilation of all the key projects planned and ongoing in the transport and utilities infrastructure sectors, US$80bn-worth of infrastructure projects are currently under way in the county. Based on the number of ongoing projects, we are optimistic for the medium term outlook for Saudi Arabia, with average real growth of 4.13% forecast per year between 2010 and 2014. Although not exactly booming, considering the size of the industry, it is strong growth. Industry value, in turn, is forecast to rise from SAR92.2bn (US$24.57bn) to SAR122.48bn (US$37.70bn) over the same time period.

This is couched in strong fundamentals for continued demand for construction projects, from housing to transport. Saudi Arabia's strong native population is a key factor behind the stable and growing demand for infrastructure in the country. Another integral element is the government's commitment to infrastructure investment and its ability to support these plans with funding. Investments have been pledged by the government, and these are materialising, unlike plans which have a tendency to remain just plans in many other emerging economies. With the capital to back up projects running into the billions, planned infrastructure projects are pushed through even if private financing is unavailable. The Ras Al Zour IWPP and the Saudi Landbridge rail project are two pertinent examples.

The government's commitment to infrastructure was further illustrated by news that the government handed out US$16bn in construction contracts in the first half of 2010, confirming our optimistic view. According to the Finance Ministry, as cited by Arabian Business, US$2.8bn was invested in roads and telecommunications, with another US$2.8bn on education facilities as well as US$1.6bn on water projects and US$1.5bn invested in rural and urban development projects.

Saudi Arabia's construction sector grew by an enviable 4.71% y-o-y in 2009, according to data from the Saudi Arabian Monetary Agency, coming in above our estimates for the country. This strong growth in the face of difficult access to credit and a global recession illustrates just how resistant the Saudi Arabian construction industry is. Compared to many other countries in the region which rely of demand from expatriates or the tourism sector. Saudi Arabia's infrastructure projects are in response to actual, sustainable demand from a native population.

Housing will be one of the strongest sectors going forward, as the government invests heavily in affordable housing to meet a substantial shortfall in units. Continued investment in the utilities sector is also on the cards, as the country's growing demand for electricity, as well as an inefficient use of electricity, has led to an increasing number of power cuts during peak times. The Saudi Electricity Company is planning to invest US$80bn in the sector to 2018 to address this.

This article is tagged to:
Sector: Infrastructure, Power
Geography: Middle East, Saudi Arabia

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