5 minute read
Analysis
Saudi Arabia
Strong Advances in the Kingdom
SAUDI ARABIA David Clifton, regional director at Faithful+Gould, a member of the SNC-Lavalin Group, shares insights into the Kingdom’s future as it gears up for a crucial 2023
With 2022 having been turbulent globally, the region has been one of the few net beneficiaries due to the spike in energy prices, and thus significantly increased government revenues. Combined with a drive from developed countries to greater influence Saudi Arabian policy – based largely on the desire to encourage increases in oil output – this has provided the country with more political cache in the G7 and G20 (of which it is a member of the latter).
With oil prices trending above US$100 for a major portion of the year. Saudi Arabia is forecast to have run a budget surplus of c.US$22 billion. Thus, the Kingdom is in a strong fiscal position to not only aid its citizens by muting the inflationary pressures that are currently creating a cost-of-living crisis in large parts of the world, by adopting greater subsidies and price controls, but it is also able to deliver greater investment for 2023 and further ahead budgets.
The surplus finances are also likely to see further additions to PIF’s capital bank, along with further boosts to the fund via the increased revenues from dividends that ARAMCO will be expected to vest with shareholders as its 2022 results are announced.
With the oil contribution to GDP at over 40% of GDP, we expect GDP growth in 2022 of more than 12%. This is supported by the 11% growth noted in the first, second and third quarters of the year. With oil still trending above the budgeted for price per barrel, this is unlikely to subside in the near term, driving further growth in GDP.
We forecast the non-oil economy to have grown by c.3.5% in 2022, largely due to PIF programmes and government stimulus.
MANAGING INFLATION Global current inflation is trending towards our forecast of 10% for 2022, while in certain G7 countries such as the UK, France, and Germany, it is likely to be higher. The Saudi government has kept a suppression on this through a mix of price controls (e.g.: power and water) and subsidies (such as food), with a food and material security programme fully underway. With the budget surplus, we would expect to see inflation to continue to be managed even in the face of more rate hikes by the Fed, Bank of England, ECB and potentially Bank of Japan, due to the expected budget surpluses next year and in 2024.
For KSA, we expect inflation to have peaked in 2022 at 4.5% which has been our position for the majority of 2022.
With the global effect on input prices from the Russian invasion of Ukraine
Non-oil economic growth
Saudi Arabia’s non-oil economic growth was 3.5% in 2022 due to PIF programmes and government stimulus.
4.5%
Peak of inflation in KSA in 2022, compared to global current inflation trending towards 10% for 2022
6.0%
4.0%
2.0%
SAUDI ARABIA INFLATION RATE, 2011-2024
BASE CASE UPPER LIMIT LOWER LIMIT TRENDLINE
0.0%
-2.0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022e 2023e 2024e
largely mitigated to almost pre-invasion levels, we have seen industry inflation start to ease its steep upward trajectory, although it is still rising, which points to market sentiment over input prices.
By way of demonstration, landed rebar (in country) has declined 15.54% since its April peak and decreased by 7.85% from July to end of October. The initial shock to the market from the Russian invasion, and the post pandemic demand recovery, has started to be mitigated by a rebalancing of the supply and demand. It should be noted that the price point is still over 25% ahead of pre-pandemic prices in January 2020. This is largely being driven by energy costs in recent months.
With the industry continuing to expect a boom, what we are seeing more of is ‘tender fatigue’.
The supply chain cannot cope with the quantum of enquiries and is either unwilling or unable to scale their pre-contract teams to deal with the continued influx.
There are serious concerns in the market about not just the quantity of tenders, but the re-tendering, lack of decision making and a yet to appear move to fairer contracting mechanisms. This is driving selective behaviours and a lot of ‘cover’ pricing. This is where the supply chain estimates a high number at the bid, so that if they win it’s highly profitable. However, the expectation is that the bid will lose, but the bidder will still retain favour with the client body, ‘in case’ that entity becomes favoured with work or money or they have more interesting pipeline projects.
KEY CHALLENGE We have seen significant delays in the closing out of contract awards in H2 2022, with major delays in decision making and appropriate sign off to progress or retendering. This has dented some of the market enthusiasm that has been so high over the past years due to the cost of tendering unable to be matched by work in the backlog.
Our contract awards assessment in 2022 shows a 12% growth to c.US$41.2 billion, although moving forward, we expect to see a CAGR of awards of ~5%, with forecasts for 2023 and 2024 as growth areas to keep the market trending upwards.
However, this is not in line with market expectations and whilst 2023-2024 will be above average pre-pandemic levels, the contract awards are unlikely to touch on peak years such as 2012, 2015 and 2019.
With the market now in growth mode, 2023’s key challenge for major project owners is to engage ever wider with suppliers and potential employees to build not just the capacity, but the capability and knowledge to deliver. With a global slowdown and advanced economy recession (either here or coming), now should be the ideal time to push awards harder. Especially when coupled with the significant increases in oil revenues for the Kingdom, 2023 looks to be a positive year for the industry.
Easing trajectory
Industry inflation has started to ease its steep upward trajectory, although it is still rising, pointing to market sentiment over input prices, Clifton says.
12%
Growth in contract awards in Saudi Arabia during 2022, to a total value of $41.2bn
SAUDI ARABIA MAIN CONTRACT AWARDS ($ BILLIONS) AND PERCENTAGE CHANGE, 2015-2024
$ BILLIONS BASE CASE UPPER LIMIT LOWER LIMIT TRENDLINE
