KSA quarterly update - October 2019

The OPEC+ agreement is likely to effect real oil growth for 2019 as IMF predicts a change of 0.9% for this year. Real non-oil growth is anticipating a growth rate of 2.9% which is reliant on Government spending and an increase in confidence. Real GDP growth for KSA is forecasted to increase from $782BN for 2018 to $785BN by end of 2019 reflecting a growth rate of 1.9%.

The oil production cuts and lower oil prices could place more emphasis on the strategic plan surrounding the 2030 Vision, diversifying sources of income, higher government spending whilst supporting economy growth within the Kingdom. 2020 is expected to see an easing of oil production cuts and private sector growth aiding GDP growth to 3% for next year.

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 for the next 6-9 months 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 have seen 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 Partnership’s 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.