KSA Quarterly Update - Jan 2020

Saudi Arabia’s PMI declined to 56.9 in the final quarter of 2019, recording the lowest reading in 5 months with a slight fall in new export orders resulted in subdued growth in overall new orders.

The employment index also declined, which indicates stagnant growth within the private sector, coupled with price pressures remaining muted.

Although it was an unfavourable end to 2019 for Saudi Arabia, the average PMI reading for 2019 stood at 57.1 recording highest reading since 2015. The main drivers to this accelerated growth include structural reforms and expansionary fiscal policy.

Going into 2020, IMF forecasts healthy economic growth of 2.2%. However, the recent attacks on oil facilities and increased regional instability adds uncertainty in the near-term outlook. Overall, the IMF predicts growth in the region to rise as oil GDP revenue stabilizes and a solid momentum in the non-oil sector continues.

Tender price inflation within the Kingdom of Saudi Arabia is currently tracking in the range of 2-3% and we expect this range to be maintained moving into 2020.

Beyond mid-2020 through into 2021, as the pace of construction begins to pick up, it is envisaged that tender price inflation will gradually increase to levels that are within the range of 5-6%, driven by a number of factors including the giga city developments, which are an integral part of the Vison 2030.

Throughout the first half of 2019, we witnessed building costs beginning to move in an upward trend with the strongest growth forecasted for Saudi Arabia’s capital city Riyadh. Due to a rapidly expanding population, the Government is heavily committed to improving the country’s infrastructure, which along with the giga city developments will help drive construction activity beyond 2020.

The construction sector is currently expatriate reliant and projects will be weighed down by the increased costs for labour, higher transportation costs as a result of significant construction activity in locations outside of the main logistic hubs and increased demand of raw materials. With procedural reforms such as Public Private Partnerships legislation which encourages international investment within the Country and the new government tender and procurement law,which includes flexibility in raw material prices, customs duties/taxes, the government is aiming to ensure a wider participation by small and medium-sized enterprises by giving them priority over larger competitors and exempting them from providing initial guarantees. This will attempt to limit large size enterprises from dominating the market and ultimately driving up tender prices.