Bank credit to Saudi construction sector rises 10.6%

The level of spending in Saudi Arabia’s construction sector has seen remarkable growth over the past few years and is projected to continue this pattern over the medium-term, according to National Commercial Bank. (NCB).
Construction spending represented 4.4 percent of nominal GDP during 2012 and has been steadily rising over the past five years, says the NCB’s Semi-Annual Sector Review for the second half of 2013.
The report, prepared by the research team of the NCB’s Economic Department, pointed out that the global economic slowdown played a significant role in the declining growth of construction spending as a result of numerous project delays and cancelations. Hence, construction spending slipped from 9.2 percent of nonoil GDP in 2008 to 8.4 percent in 2010. Spending on construction has meanwhile rebounded to 8.9 percent of nonoil GDP in 2012.
To gauge the level of activity in the construction sector, the Gross Fixed Capital Formation (GFCF) reveals a static snapshot of the degree of growth in both, residential and non- residential construction within the Kingdom.
The NCB report also said that residential GFCF has been hovering around 2 percent of nominal GDP over the past couple of years, while non-residential GFCF jumped from 5 percent in 2006 to an estimated 6 percent of nominal GDP in 2013.
This indicates the government has put a strong emphasis on expanding the infrastructure sector over the last six years to offset the effects of the global economic downturn, which caused delays and suspensions due to limited commercial financing of many planned projects, said the researchers.
The stagnation in residential Gross Fixed Capital Formation over the last several years hindered the availability of housing units to meet the rapidly growing younger population, according to the report.
Over the last several years, the construction industry has witnessed a boom in contract awards and ongoing construction activities.
As part of the Kingdom‘s initiative to diversify its economy away from the oil and gas industry, the construction sector has benefited from heavy expenditures.
Bank credit to Saudi Arabia’s construction sector soared from SR37.8 billion in 2006 to SR76.5 billion in 2012, representing a CAGR of 10.6 percent.
The global financial crisis hampered loan distribution during 2009 as banks became increasingly risk averse following rising non-performing loan ratios.
However, the rebound exhibited between 2010-2013 coincides with the growth in contract awards, as the public and private sectors regained their confidence and reinvigorated more lending and construction activities.
As a result, the share of bank credit to the building and construction area relative to total bank credit extended to all economic activities jumped from 6.1 percent in 2009 to 6.8 percent in 2012.
While the Saudi cement sector has continued to witness growth on the back of many major infrastructure projects in the Kingdom, the structural change in the labor market calling for a market correction has affected the demand for sales toward the end of the year, causing an estimated 31 percent drop, said the report.
It said construction projects in recent months in both the public and private sectors have been delayed; part of which is due to a shortage of laborers.
According to Zamil Al-Miqrin, head of the National Committee for Cement Companies, recent trends indicate that supply has continues to outweigh demand for cement companies.
This, coupled with the Commerce Ministry‘s continued export ban, is likely to cause slower growth across the Saudi cement sector over the short-term, according to the NCB report.
For November 2013, sales dropped by 17 percent to 3.65 million tons compared to 4.37 million tons for the same period in 2012. In January 2013, this figure was 5.3 million tons.
Nonetheless, cement companies have been in the process of adding more capacity throughout last year.
Al-Jouf Cement launched an operations trial of a second production line, which is anticipated to have a clinker production capacity of 5000 tons/ day.
This would double Al-Jouf‘s daily clinker production. In October, Al-Jouf signed an agreement with Al-Rajhi Bank for a SR400 million loan to partially finance the construction of a new production line.
Southern Province Cement has also signed a finance agreement worth SR700 million for the installation of a second production line.
In April 2013, in the face of a cement shortage, a royal decree was issued to import 10 million tons of cement to meet the rising demand for expansionary projects including both residential and non- residential real estate.
Consequently, moving forward, plans announced in 2013 pointed to the construction of up to four plants over the next years with a grant of SR3 billion by the government.
As a result of the long-term solution for the supply and demand dynamics of the market, total production is planned to be 12 million tones per year.
Nonetheless, the securing of fuel supplies for planned expansions continues to be a challenge for the sector.