JEDDAH, 25 June 2003. The Saudi construction activity continues to be in good health following an excellent performance in 2002. The strong investment in the construction sector, as measured by the gross fixed capital formation was estimated to have jumped by 8.8 percent to SR61.5 billion last year compared to SR56.5 billion in 2001. In value terms, the demand for residential buildings grew by 2.7 percent to an estimated SR30.3 billion, on the back of a rapidly growing population, availability of consumer loans from commercial banks and easy long term credit from the Real Estate Development Fund. Meanwhile, the other construction projects, which include government contracts, have reached SR31.2 billion in 2002. The surge in the construction sector was also reflected by the publicly announced projects that rose sharply by 32 percent to SR15.6 billion in 2002 compared to SR11.8 billion the year before. The strong construction activities emanating from the last two years continued during the first five months of 2003. The value of publicly announced contracts reached SR8.3 billion during January-May 2003 compared to SR8.4 billion over the same period last year.
Given that oil remains to be the dominant source of government revenues, oil prices tend to have a strong correlation with the construction activity in the Kingdom. Brent crude averaged $25.13 per barrel last year compared to $24.20 per barrel in 2001, registering relatively strong levels that have provided a major catalyst to the booming construction activity. Moreover, Brent crude is expected to average around $27 per barrel in 2003, giving a 65 percent increase in the total government revenues or SR110 billion over the original budgetary revenues. This will ensure a cushion for the likely increases in government expenditure on projects. Meantime, local construction companies have limited chances of being included in the rebuilding of Iraq, but building materials could be supplied from Saudi Arabia, suggesting an increase in cement exports.
The major contracts by top sub-sectors included urban development (SR2.1 billion), social (SR1.8 billion), commercial (SR1.5 billion) and road projects (SR1.2 billion) during the first five months of 2003. However, the Iraqi conflict appears to have delayed the larger government contracts in the first half of the year, particularly in the industrial sector. Industrial projects fell steeply by 82 percent to SR726 million during the January-May 2003 compared to SR4.1 billion over the same period in the year before. This was largely attributed to the expansion facilities of Saudi Aramco and the petrochemical giant SABIC in 2002, which provided lucrative contracts to international construction companies. Over the first five months of this year, the largest construction contract was a new residential building, Zamzam Tower in Makkah, which was awarded by a private investor to Saudi Binladen Group at a total cost of SR1,460 million. The Zamzam Tower will be constructed on the basis of Build-Operate-Transfer (BOT), having 31 floors and 1457 residential units. Meanwhile, the Ministry of Education issued four major contracts for building 134 schools around the country. By regional distribution, Riyadh comes first with 46 schools, followed by Makkah (38), Northern Border (29) and Madinah & Al Qassim (21), amounting to a total cost of SR1.1 billion.
Elsewhere, there was a contract for 4 new dams to be constructed in Makkah, with a total cost of SR718 million and was awarded to various local contractors. Road construction in the Kingdom, which includes renovating existing roads or asphalting, was concentrated in the three major cities, Jeddah & Makkah region (30 percent), Eastern province (28 percent) and Riyadh (13 percent), based on the share of total value. Power projects issued during the same period amounted to a total contract cost of SR6.0 billion, while the construction component was estimated at SR907 million or 15 percent share.
The Monthly Construction Contracts Awards (MCCA) index, which is prepared by NCB’s Economics Department, depicts a forward looking direction of construction activity in Saudi Arabia. The MCCA index, based on a six-month moving average of publicly awarded construction contracts, is estimated to capture about 25 percent of total construction investment in the Kingdom. The majority of the construction contracts announced are government projects that include industrial, urban development, roads and power projects. Setting the benchmark at 100 points in June 1994, the construction index moved in response to changes in oil prices. Therefore, the Saudi construction sector has been gaining momentum since 2000, and the publicly awarded construction contracts reached a five-year high of SR15.6 billion in 2002. This was depicted in the MCCA index that spent all of last year above the benchmark peaking in July 2002 at 200.49 points, where the 200 point-level has not been broken since October 1997. Moreover, the MCCA index stayed above the 100 point-benchmark during the first five months of 2003, and reached its highest level of 157.52 points in May. This upward trend so far this year suggests another strong performance from the Saudi construction sector in 2003. The value of contracts awarded in the last two years is expected to keep the medium term outlook for construction activity vibrant, given that the average duration of such projects is two to three years.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah.)
Said Al-Shaikh
JEDDAH. The Saudi construction activity continues to be in good health following an excellent performance in 2002. The strong investment in the construction sector, as measured by the gross fixed capital formation was estimated to have jumped by 8.8 percent to SR61.5 billion last year compared to SR56.5 billion in 2001. In value terms, the demand for residential buildings grew by 2.7 percent to an estimated SR30.3 billion, on the back of a rapidly growing population, availability of consumer loans from commercial banks and easy long term credit from the Real Estate Development Fund. Meanwhile, the other construction projects, which include government contracts, have reached SR31.2 billion in 2002. The surge in the construction sector was also reflected by the publicly announced projects that rose sharply by 32 percent to SR15.6 billion in 2002 compared to SR11.8 billion the year before. The strong construction activities emanating from the last two years continued during the first five months of 2003. The value of publicly announced contracts reached SR8.3 billion during January-May 2003 compared to SR8.4 billion over the same period last year.
Given that oil remains to be the dominant source of government revenues, oil prices tend to have a strong correlation with the construction activity in the Kingdom. Brent crude averaged $25.13 per barrel last year compared to $24.20 per barrel in 2001, registering relatively strong levels that have provided a major catalyst to the booming construction activity. Moreover, Brent crude is expected to average around $27 per barrel in 2003, giving a 65 percent increase in the total government revenues or SR110 billion over the original budgetary revenues. This will ensure a cushion for the likely increases in government expenditure on projects. Meantime, local construction companies have limited chances of being included in the rebuilding of Iraq, but building materials could be supplied from Saudi Arabia, suggesting an increase in cement exports.
The major contracts by top sub-sectors included urban development (SR2.1 billion), social (SR1.8 billion), commercial (SR1.5 billion) and road projects (SR1.2 billion) during the first five months of 2003. However, the Iraqi conflict appears to have delayed the larger government contracts in the first half of the year, particularly in the industrial sector. Industrial projects fell steeply by 82 percent to SR726 million during the January-May 2003 compared to SR4.1 billion over the same period in the year before. This was largely attributed to the expansion facilities of Saudi Aramco and the petrochemical giant SABIC in 2002, which provided lucrative contracts to international construction companies. Over the first five months of this year, the largest construction contract was a new residential building, Zamzam Tower in Makkah, which was awarded by a private investor to Saudi Binladen Group at a total cost of SR1,460 million. The Zamzam Tower will be constructed on the basis of Build-Operate-Transfer (BOT), having 31 floors and 1457 residential units. Meanwhile, the Ministry of Education issued four major contracts for building 134 schools around the country. By regional distribution, Riyadh comes first with 46 schools, followed by Makkah (38), Northern Border (29) and Madinah & Al Qassim (21), amounting to a total cost of SR1.1 billion.
Elsewhere, there was a contract for 4 new dams to be constructed in Makkah, with a total cost of SR718 million and was awarded to various local contractors. Road construction in the Kingdom, which includes renovating existing roads or asphalting, was concentrated in the three major cities, Jeddah & Makkah region (30 percent), Eastern province (28 percent) and Riyadh (13 percent), based on the share of total value. Power projects issued during the same period amounted to a total contract cost of SR6.0 billion, while the construction component was estimated at SR907 million or 15 percent share.
The Monthly Construction Contracts Awards (MCCA) index, which is prepared by NCB’s Economics Department, depicts a forward looking direction of construction activity in Saudi Arabia. The MCCA index, based on a six-month moving average of publicly awarded construction contracts, is estimated to capture about 25 percent of total construction investment in the Kingdom. The majority of the construction contracts announced are government projects that include industrial, urban development, roads and power projects. Setting the benchmark at 100 points in June 1994, the construction index moved in response to changes in oil prices. Therefore, the Saudi construction sector has been gaining momentum since 2000, and the publicly awarded construction contracts reached a five-year high of SR15.6 billion in 2002. This was depicted in the MCCA index that spent all of last year above the benchmark peaking in July 2002 at 200.49 points, where the 200 point-level has not been broken since October 1997. Moreover, the MCCA index stayed above the 100 point-benchmark during the first five months of 2003, and reached its highest level of 157.52 points in May. This upward trend so far this year suggests another strong performance from the Saudi construction sector in 2003. The value of contracts awarded in the last two years is expected to keep the medium term outlook for construction activity vibrant, given that the average duration of such projects is two to three years.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah.)
Said Al-Shaikh
© Arab News 2003
