Introduction

Saudi Arabia's economy

Economic performance

Saudi Arabia is currently the largest economy in the Middle East, contributing to more than 10% of the Middle East region's GOP and more than 48% of the Gulf Cooperative Council (GCC) Countries' GOP.

Saudi Arabia is primarily an oil-based economy with significant dependence on oil as a source of government revenue (on average, the oil sector had contributed to approximately 40% of the country's GOP during the past years). However, recently, significant economic reforms and initiatives have been announced that are aimed at reducing Saudi Arabia's dependence on oil and diversifying its economic base.

Saudi Arabia has shown significant economic growth during the past 5 years. GOP has grown by 22.1 % in nominal terms (5.7% in real terms) during 2008, reaching to USO 469.4 billion. In line with the overall growth in GOP, GOP per capita has increased from USO 15,857 in 2007 to USO 19,257 in 2008, growing by 21.4%.

On the other hand, GOP is expected to decline by 9.9% in nominal terms (0.1 % in real terms), reaching USO 422.7 billion. Moreover, GOP per capita was also estimated to decline by 10.0% from USO 19,257 in 2008 to USO 17,321 in 2009E.

Key Economic Indicators FYO4A FYO5A FYO6A FYO7A FYO8A FYO9A
Nominal GOP (USO Billion) 250.7 315.8 356.6 384.4 469.4 422.7
Nominal GOP growth (%) 16.7% 26.0% 12.9% 7.8% 22.1% -9.9%
GOP Per Capita (USO) 11,126.0 13,663.0 15,060.0 15,857.0 19,257.0 17,321
Real GOP growth (%) 5.3% 5.5% 3.2% 3.3% 5.7% 0.1%
Oil Sector Real GOP (USO Billion) 63.1 67.0 66.5 66.8 N/A N/A
Non-oil Private Sector Real GOP (USO Billion) 84.0 88.9 94.3 99.8 N/A N/A
Non-oil Govt Sector Real GOP (USO Billion) 43.3 45.1 46.5 47.7 N/A N/A
Budget Surplus (USO Billion) 28.6 58.1 77.3 47.1 154.9 28.1
Budget Surplus, % of GOP 3.0% 4.9% 5.8% 3.3% 8.7% N/A
Source: SAMA, BMI

National Budget 2010

The Government of Saudi Arabia has projected revenues of SAR 470 billion as against expenditures of SAR 540 billion, reflecting a projected deficit of SAR 70 billion in the National Budget for 2010. This deficit is mainly attributed to the net increase in the budgeted expenditure for various investment programs:

Saudi Arabia's economic outlook

Government spending and domestic demand is expected to keep the Saudi economy on the positive growth path. Given the strong fundamentals of the economy and Saudi Arabia's strategic importance to the rest of the world, Saudi Arabia's economy is set to grow further.

Saudi Arabia Economic Outlook 2009E 2010F 2011F 2012F 2013F
Nominal GOP (USO Billion) 418.3 518.4 546.7 598.5 631.4
Real GOP (USO Billion) 226.6 230.9 231.9 243.1 252.8
Real GOP Growth (%) 0.4% 1.9% 2.7% 4.8% 4.0%
GOP Per Capita (USO) 17,142.0 20,691.0 21,281.0 22,832.0 23,613.0
Population (Million) 24.4 25.1 25.7 26.2 26.8

Source: SAMA, BMI

The Government has made strong commitments in terms of continuing investment in the infrastructure development. This is expected to keep the pace of economic development at a fairly high level. Inflationary pressure implies that the real growth rate in the budget will be slightly lower than the actual rate. In 2009, the Saudi Riyal depreciated 2.5% and 9.5% against Euro and Pounds Sterling, respectively, reflecting the US Dollar weakness against both currencies. In line with government plans, capital expenditure is expected to grow at a faster rate than current spending; reflecting the government focus on enhancing infrastructure.

The Saudi Arabian Construction Industry

General Overview

Saudi Arabia is enjoying strong growth driven by rising oil revenues. These revenues have stimulated massive government related project spending. In addition, the Government has taken important steps to improve the business environment. With further reform anticipated and oil prices expected to remain high, it is believed that the Saudi Arabia is set for a continued strong period of growth, especially in the construction and infrastructure sectors.

Saudi Arabia comprises one of the largest construction markets in the entire Middle East, with multibillion dollar projects currently under way and many more in the planning stage by both public and private sectors entities

The public sector mainly focuses on developing the infrastructure of the country in forms of building and/or renovating transportation facilities, educational facilities, healthcare facilities, pipelines, refineries, petrochemical complexes, power plants, etc.

On the other hand, the private sector has been playing a more active role in the growth of construction sector. Privately held firms and individuals have been investing in the development of the country in the form of residential and commercial estates, hospitals, educational institutes, tourism and retail outlets.

The contracting and construction sector in Saudi Arabia is hyping to record unprecedented growth in the coming years. The total value of construction contracts awarded to contractors is set to witness an impressive USD 63,383 million in 2012 with an annual growth rate of 23.4 %.

The need to cater for a growing population with increased per capita income combined with the availability of vast areas of undeveloped urban land are the primary driving force contributing to this progressive growth. Other factors that drive the market include the steady growth in religious tourism and the impending economic / industrial city developments in the country.

Demographic, economic and social elements are the most important determinants of demand for housing. Based on the preliminary results of the General Census of Population and Housing in 2004, the total demand for housing during the Eighth Development Plan is estimated to be one million units, up to 200 thousand units per annum, which will be a growth driver to the construction sector in addition to the Mortgage law approval.

The combined effect of a growing population, a new array of economic policies designed to attract foreign investors will insure that in the coming decade, the demand for real estate, both residential and commercial, will grow almost exponentially. Additionally, Saudi Arabia's transport infrastructure must cater to the needs of an expanding population.

However, it not only serves the Saudi population but also the tourist industry. The country's tourist industry is based around religious pilgrimage. The annual Hajj places intense pressure on the Saudi infrastructure framework as an estimated 1.9 million oversees visitors and over 500,000 domestic pilgrims make the trip every year. The transport network has also grown around the needs of trade.

However, it is important to note that the prime factors resulting in the growth in prices included an increase in demand for various real estate sectors, and consequently an increase in prices of both construction materials and land.

There have been announcements about several key projects from various industries in Saudi Arabia, of which some have been already awarded to contractors and the rest are still in the planning phase or the bidding phase. These key projects will be a key driver for the construction sector growth over the coming few years.

According to a recent study published by Global Investment House, the total value of investments are expected to reach SAR 1.3 trillion by the end of 2012.

Structure of the construction sector

According to a survey conducted by the Riyadh Chamber of Commerce and Industry (RCCI), the total number of Saudi contractors operating in the Central region specially in Riyadh region was 1,873 in 2008. Out of which, 35.4% were civil contractors, 21.9% were technical contractors, 15.7% were sewage contractors, and the remaining were general and roads & infrastructure contractors.

The majority of the construction sector firms operating in the regions are either proprietorship firms, (over 75.0% of the total), or limited liability companies, representing around 20.6% of the total contractors.

A significant portion of the firms are involved in projects which do not require heavy machinery or capital investment. As evident from the following table that more than 91.1 % of the contracting companies have a capital of less than SAR 5.0 million out of which 1,096 companies has a capital of less than SAR 200,000.

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