'Worst is over' for Saudi construction sector: MUFG

Signs of weakness persist in the Saudi construction industry, but the sector has a robust project pipeline amounting to a total $658.5 billion from 2019 and beyond, MUFG Bank noted in a report on Tuesday.

“We remain cautiously optimistic surrounding the prospects of the Saudi construction sector owing to the robust project pipeline, in line with Vision 2030 targets,” Ehsan Khoman, Head of MENA Research and Strategy, MUFG Bank, noted in the report.

Saudi Arabia’s construction industry was severely hit by cutbacks in capital spending between 2015 and 2016, following the crash in oil prices. As a result, several construction projects were cancelled or postponed, in conjunction with delayed payments to contractors that led to large-scale layoffs.

“Despite higher oil prices which has led to the authorities turning the attention to fiscal stimulus this year, there are little signs that the Saudi construction sector is improving at the current juncture,” Khoman said.

The latest available statistics on cement deliveries continue to demonstrate a marked slowdown in the Saudi construction sector, which is confirmed by weakness in the building and construction component of GDP, he added.

Given the cyclicality of the construction sector, the report foresees two key factors which can lead to a rebound in the space going forward, namely – oil prices and administrative challenges.

“With oil prices currently hovering around three year highs, the authorities are experiencing a cyclical upswing which bodes well for the construction sector at the current juncture,” the report noted.

On administrative challenges, the report said the legal, bureaucratic and regulatory characteristics of Saudi Arabia are such that contractors are currently structurally disadvantaged relative to their developer customers.

“As such, the creation of a more equitable system would avoid the severe swings in contractors’ revenue streams,” it said.