MASSIVE GIGA-PROJECTS TO THE FORE

Saudi Arabia’s construction industry is among the key sectors driving robust non-oil sector growth, especially through its gigantic giga- projects, reports Scott Hazelton

Source: IHS Marklit

While a major economic growth slowdown is expected for Saudi Arabia in 2023, the construction sector will continue to thrive.

We anticipate a major decline of the oil sector in 2023 and 2024 following the decision by Saudi Arabia to cut oil exports by 1 million barrels a day (b/d) starting July 1, 2023. Oil production averaged 10.6 million b/d in 2022; we assume the output level will drop to 9.6 million b/d in 2023.

In 2024, oil production will average 9.1 million b/d before being ramped up again in 2025. This will reduce real Gross Domestic Product (GDP) growth in 2023 and 2024, with real 2023 GDP growth revised down to 0.4%. However, we do not anticipate major spillover effects on the non-oil sector, which is expected to remain the key growth driver in both years.

While the Saudi government is unlikely to keep the 2022 pace of investment growth at over 20%, the current high level of public sector investment will be sustained. However, in growth terms, these trends combined mean that total investment spending will decelerate in 2023 compared to 2022.

Following a fiscal surplus in 2022, the budget will revert to a deficit of 2.5% in 2023 with lower oil revenues, while spending growth moderates. A balanced budget would likely need an average oil price of around $95/b, which is $11 below our projected oil price for 2023. Public investment spending, which was projected to decline in 2022, increased by 15%.

Construction driving growth

Saudi Arabia’s construction industry is among the key sectors driving robust nonoil sector growth. After estimated growth of 6.1% in 2022, real total construction spending in the kingdom is projected to increase 6.3% in 2023. While construction growth is expected to moderate, it will continue to register healthy growth, increasing by 5.3% in 2024.

Consumer spending is anticipated to see a pronounced recovery to 8.1% growth in 2023, which should support the residential segment. Residential construction spending is estimated to increase 4.1% in 2023.

Nonresidential construction components, driven by the diversification efforts of the government’s Vision 2030 programme, are the primary movers of Saudi construction. Nonresidential structures construction spending growth saw an estimated 5.7% growth in 2022 and is likely to experience further growth of 6.1% in 2023. Infrastructure construction spending, which has been enjoying the highest growth, is projected to continue this course, expanding 8.0% in 2023 after yielding healthy growth of 7.8% in 2022.

As part of the Vision 2030 agenda, massive ‘giga-projects’ are set to change the kingdom’s landscape. The planned projects have a projected cost in excess of US$600 billion, overseen by the Saudi Public Investment Fund (PIF) and include:

NEOM, Qiddiya, Amaala, Diriyah Gate, ROSHN, SPARK, and Al Ula. NEOM is an area in Saudi Arabia’s northwest, stretching along the Red Sea and Gulf of Aqaba coastlines covering 26,500 sq km, larger than the US state of New Hampshire. Among other things, it will host the Line, a smart city, and Oxagon, a new, floating industrial city.

Alongside SPARK, an industrial site located in Saudi Arabia’s eastern province, which aims to become an industry hub with a closed carbon circle by 2030 and which will feature companies from the entire energy value chain, NEOM is expected to lead the transition to a less-carbon-dependent economy. Most of the megaprojects in Saudi Arabia will become large tourist attractions for local and global tourists, which will trigger further multiplier effects for construction-sector spending in the form of accommodation, amenities, and other infrastructure.

Skills shortage

The challenge for the kingdom’s construction outlook is not lack of financing, but the availability of construction workers, especially skilled personnel, and rising construction material prices.

Both factors are likely to be mitigated by further inflows of construction workers, predominantly from countries in south Asia and east Africa, and by the current fall in construction material costs following a commodity price peak in the aftermath of Russia’s invasion of Ukraine. However, the sheer demand could lead to shortages for both materials and workers in the kingdom in the near term.

Source: IHS Marklit

The chart above indicates the declining importance of energy infrastructure, with the ramping up of transportation and water/sewer necessary for large scale development. The non-residential structures segments will see a two-stage growth acceleration. The first stage ignites in 2024 as excess capacity induced by pandemic restrictions has ended. This is particularly important for the hospitality sector as Saudi can once again host the Hadj (an annual Islamic pilgrimage to Mecca) without limitations.

There is a bit of a pause in 2025, although growth is still expected, before a second period of stronger growth in 2026 and 2027. The enormous scale of the kingdom’s projects suggests that there will be some lag for infrastructure to be put in place before residential and commercial activity can ensue. We expect a broad-based demand for structural construction as institutional structures will be needed to administrate the expanded non-oil economy.

The relatively tame growth of industrial structure construction masks a still large opportunity. The change in emphasis from an industrial policy based on hydrocarbons to one based on building materials, consumer goods and other diversification, will entail a level of spending in these new fields larger than the growth rates alone imply.

IC