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Saudi Arabia construction industry to dominate the region

Posted in Middle East Business by thomthumb84 on October 7, 2009
King Abdullah bin Abdul Aziz. (2002 photo)

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The construction industry across the Middle East has taken a hammering from the global financial crisis which has seen a large number of projects across the region being put on hold or even cancelled. The United Arab Emirates (UAE) as a whole, especially Dubai has suffered the hardest from the global recession.

With a total value of around $900 billion, 1,372 building projects are under construction or in bidding across the commercial, hospitality, residential and retail sectors in the UAE, and 566 projects have either been shelved or postponed, Proleads said in a report.

One the biggest fears before the global crash late last year was that the massive surge in construction costs had left real question marks over the viability of many projects in the region.

This was made worse as banks refrained from extending new credit, especially to the private sector, amid the global economic crisis. This new trading environment could be seen as an opportune time for Saudi Arabia, the wealthiest Arab nation, to become the biggest player in the construction sector. In the Proleads report, Saudi Arabia has total projects worth more than $387 billion across four sectors, with 442 in construction or bidding, and 106 cancelled or on hold. Saudi Arabia stands apart from many of its regional peers as demand for infrastructure and construction projects is fuelled by domestic demand which, given the size and population growth in the Kingdom, hands Saudi Arabia a real advantage.

The Saudi authorities knew that they had to act in order to invigorate the construction sector and help stimulate growth. In December last year, the Saudi government announced a SR475 billion economic stimulus package for 2009. This direct government intervention has been vital in allowing the Kingdom to maintain momentum in the construction market. In June, Prince Saud bin Khalid Al Faisal, Director of Operations, Saudi Arabian General Investment Authority (Sagia), said that investment in the Saudi power and energy sector, as well as the new economic cities, could reach SR300 billion.

Business Monitor International forecasts an expected real growth of 2.86% yearon- year in the construction industry, to reach a value of SAR78.71bn ($21.02bn) by 2014. A major development during the course of the year that is further boosting the construction sector in the kingdom has been the fall in costs for building materials which have come down significantly during the global recession. Prices of steel fell 55 percent in the year to end-June but the commodity recorded a near-9 percent rise since the start of 2009, data from the kingdom’s statistics authority showed. Prices for cement at the end of June also fell by 7 percent from their level a year earlier and were 1.9 percent below their level at the end of 2008, according to the data published on the Central Department of Statistics and Information’s website.

The data’s publication, a first by a government body in Saudi Arabia, followed moves earlier in 2009 to end, under certain conditions, bans on steel and cement exports that have lasted almost a year after construction costs surged to records in 2008. Steel prices in Saudi Arabia stood at 2,256 riyals ($601) per tonne at the end of June against 5,021 riyals in June and 2,076 riyals by end- December. Steel prices hit a record price of 5,046 riyals per tonne in July, 2008. Cement was priced at 13.63 riyals in June for a 50 kilograms (110 lbs) bag against 14.65 riyals a year earlier, and 13.9 riyals by the end of last year. Cement prices hit a record 14.95 riyals per bag in May, the month which coincided with the imposition of the export ban. These lower commodity prices are helping spur construction activity in the kingdom just as the first signs of a recovery in the global economy start to take shape.

The attraction of the Saudi construction market is evident as the number of foreign firms trying to enter the Saudi market and get a foothold in a fairly untapped construction sector is increasing. UAE firms in particular are pushing for a greater share of the Saudi market. Ziad Makhzoumi, Chief Financial Officer of Arabtec Holding, explained the rationale of the company’s strategy to enter Saudi Arabia: “Saudi Arabia has very attractive economic dynamics because of its size and our partnership in the market. We also had a more investment oriented approach towards our resources, equipment and assets, which were becoming idle when projects in Dubai (the biggest market for us) were completed, reduced or put on hold post-crisis. We did move some of our resources to Abu Dhabi and then to Qatar. The next logical decision was to move to Saudi Arabia.”

The Saudi construction market will be worth billions of dollars. In three to four years’ time, Saudi Arabia will be the biggest market for Arabtec in the GCC countries,” said Makhzoumi.

This view that the Saudi market will come out of global recession sooner than other Arab states coupled with the enormous local demand for infrastructure projects will enable the Kingdom to dominate the regional construction and infrastructure market. The efforts by the Saudi authorities to improve the country’s business readiness has been recognized in a report from Sagia, which has shown that Saudi has made significant improvements in the Doing Business rankings over the past five years,  leaping from 67th position in 2004, to 38th in 2006, 16th in 2007 and to this year’s ranking of 13th.

As Amr Al Dabbagh, Governor of Sagia explained: “Saudi Arabia has set a goal for the Kingdom to become one of the top 10 most-competitive countries in the world by 2010.” There are still many hurdles to overcome before the Saudis can claim they are properly out of recession. Activity is still down on previous years, with financing remaining hard to come by. However, the government on Riyadh has stepped in and made sure that key projects, such as the various economic cities, remain at the forefront of Saudi Arabia’s ambitious plans. Construction and infrastructure seem certain to be the main engines of the Saudi economy when the global economic recovery starts to fully kick in.

Published in Issue 6, October 2009, of The Falcon (An Egyptian Gulf Bank Publication)

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