NO SHORTAGE OF AMBITION

Saudi Arabia’s plan to diversify its economy has led to many opportunities for construction with numerous mega-projects taking place simultaneously, writes Scott Hazelton

Saudi Arabia’s real Gross Domestic Product (GDP) growth is expected to accelerate in 2025 as restrictions on oil supply are partially rescinded. Non-oil growth is expected to slow but remain solid. Saudi real GDP grew by 2.8% year over year in the third quarter, according to provisional estimates from the General Authority for Statistics. The rate marked the first positive year-over-year increase following four quarters of decline as restrictions on oil output adopted by OPEC+ dampened headline growth since July 2023. Oil production declined in 2023 following the unilateral decision by Saudi Arabia to cut oil exports and reduced oil supply by OPEC is anticipated through year-end 2025.

Major spillover effects on the non-oil sector from the cuts to oil production are unlikely despite revenue losses for the government budget, which will likely record a deficit equal to 3.3% of GDP in 2024. Saudi Arabia’s Purchasing Managers’ Index (PMI) rebounded to 56.3 following a six-month period of comparably weak results.

Investment spending slowing

The steep surge of public-sector capital expenditures in 2022 and 2023 was discontinued in 2024 as the government slowed investment spending to rein in the budget deficit. The deficit ratio is therefore expected to shrink close to zero in 2025. However, while project-related investment spending is being postponed and ambitious schedules for megaprojects lengthened, the realisation of megaprojects connected with Vision 2030 remains a priority. Our outlook for Saudi construction spending growth in 2024 is lowered from 4.6% in April to 3.8%. Huge swings in 2021 construction activity mask some variation in the outlook by structure type. Considering 2021 is instructive, however. The severe economic downturn caused by Covid cratered oil demand and prices. Saudi Arabia reacted accordingly, slashing investments into oil-related infrastructure, which dominates their infrastructure spending.

Given Saudi interest in diversifying the economy and given global efforts to reduce petroleum consumption to control climate change, Saudi Arabia elected to limit oil infrastructure investment when oil demand and prices recovered. In real terms, energy related infrastructure fell from US$27.8 billion in 2020 to US$17.9 billion in 2021, and it does not re-attain its 2020 level even by the end of the forecast period.

This period also coincides with Saudi efforts to diversify its economy through ventures such as NEOM. Accordingly, residential construction expanded from US$35.5 billion in 2020 to $42.5 billion in 2021 and nonresidential structures grew from $22.6 billion to $29.8 billion.

The net impact was that total construction grew in 2021, albeit by a rather paltry 1.3%. Importantly, future growth rates take off from these record levels, so even modest forecast growth represents continued record spending. Total real construction expands 3.8% and 4.2% in 2024 and 2025, respectively. Residential is not featured as prominently as other structures in the country’s Vision 2030 but still grows by 2.7% and 3.6%. Saudi Arabia has one of the youngest, and fastest growing populations in the world, and the need for housing is growing.

Non-residential structures are the dominant growth engines, up 5.0% in 2024 and 4.9% in 2025. Even with energy infrastructure growth subdued, the water/sewer and transportation infrastructure needed for diversification is considerable, and total infrastructure grows 4.2% in 2024 and 4.5% in 2025.

Indeed, finer segmentation of structural detail indicates that transportation and water/ sewer infrastructure are construction growth drivers over the medium term. Construction of institutional structures will be least impacted by slowing public sector growth as the young and growing population needs educational and health care services with both segments offering double digit growth in 2024 and 2025.

As is true globally, office construction offers little growth. Other commercial activity saw its strongest growth over 2021-23 but still offers potential in the near term. Unlike most of the world, retail trade offers the highest growth due to the integration of shopping with residential and other activities within several megaprojects.

Hotels and restaurants led other commercial segments in timing of development and, while offering high levels of activity, are expected to feature only low single digit growth.

Growth of industrial structures offers scant opportunity with a couple of exceptions. Expansion of refineries offers the least potential within industrial, but few industrial processes offer significant growth. Best positioned is the manufacture of communications equipment, given the rapid adoption of AI and other tech. Utilities offer a real opportunity with Saudi targeting 130GW of renewable capacity by 2030, up from 5GW today. The International Energy Administration reports that renewable capacity expansion in the Middle East is expected to increase 62GW over 2023-2028. The pace of growth is expected to accelerate to more than three times the previous five-year period, with solar PV making up over 85% of the increase. Over one-third of that growth will be in Saudi Arabia alone. Hydrogen accounts for more than 13% of the region’s renewable capacity growth.

Saudi Arabia will build a $8.4 billion power plant at its NEOM megaproject. The goal is to produce 4GW of renewable energy to help produce up to 600 tons per day of green hydrogen. The Mohammed bin Rashid Al Maktoum Solar Park may be the world’s largest single-site solar park, and is scheduled for completion in 2030. Its fourth phase boasts the tallest solar tower in the world and the largest thermal energy storage capacity, and this is by no means the only large-scale renewable energy project taking place in the country. iC

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