JEDDAH, 2 October - Saudi Arabia, the largest producer and exporter of oil, is heavily dependent on its oil income that constitutes about 80 percent of the Kingdom's total revenues. Therefore, economic activity in Saudi Arabia is very much affected by what happens in oil, particularly in construction activities, which have a direct correlation to oil prices but with nearly one-year lag. This was apparent in 1999; whereas the weak average price of Brent crude at $12.72 per barrel in the previous year has caused the total value of publicly announced construction contracts to fall by a significant 32 percent to SR9.95 billion from SR14.61 billion in 1998.
Moreover, last year's rebound in construction contracts, which reached SR12.56 billion, was attributed to the recovery of oil prices in 1999, averaging for Brent crude at $17.7 per barrel. This however, prompted the Saudi Aramco and SABIC to step up their major expansion projects, in oil and petrochemical industries respectively, and at the same time allowed the government to speed up road maintenance and urban development projects. Average oil prices, which are very volatile, have surged significantly from $17.7 per barrel in 1999 to $28.3 per barrel for Brent crude in 2000. In turn, the Kingdom's total revenues grew substantially by 68 percent in the same period. In addition, with OPEC's prudent strategy of maintaining its oil basket price within the range of $22-$28 per barrel, average Brent crude stood at $26 per barrel for the first eight months of 2001. However, as the recent crises in the US more likely to deepen global recession and reduce demand for oil, average prices for Brent crude for 2001 is expected to fall at around $25.5 per barrel. Furthermore, GDP or total economic output in the Kingdom increased significantly in 2000 by 21.3 percent to SR649 billion and the construction contribution to GDP rose by a sharp 5.8 percent to SR51.3 billion. This year, due to relatively lower oil prices, GDP is expected to register a moderate increase of 3 percent to SR669 billion while construction GDP is likely to rise by 4.3 percent.
The Monthly Construction Contracts Awards Index (MCCAI), prepared by NCB's Economics Department, gives a good estimate of future construction activity in the Kingdom. It should be noted that the publicly announced construction projects account for only 20 percent of total construction investment, which includes villas and corporate projects in the Kingdom. The MCCAI was started in June 1994 with its benchmark equal to 100 points and continued to fluctuate in the next four years until 1997 in line with volatile oil prices. However, it assumed a relatively stabilized pattern in the last three years. Starting in January 1998 at 161.7 points, the MCCAI peaked to 166.8 points in February 1998, but ended the year at 125.56 points. Total publicly announced contracts reached SR14.6 billion, yet, it was attributed to the relatively higher oil prices of $19.12 per barrel in the previous year. However, oil prices plunged in 1998 to $12.72 per barrel, ultimately causing the value of the publicly awarded construction contracts to fall by 32 percent to SR9.95 billion in 1999. The MCCAI headed down with the high level of the year reached in August at 119 points but ended the year below the benchmark at 91.4 points. In line with a strong surge in oil price last year, the Saudi construction sector witnessed a very strong rebound with contracts awarded rising by 39 percent to SR12.56 billion. Moreover, the MCCAI remained above the benchmark level of 100 points for the whole of 2000, with the exception of a dip to 93.1 points in July. The momentum of buoyant economic conditions last year supported by high oil prices so far this year are poised to keep construction activities strong in the Kingdom. This was evident by the total value of construction contracts, which amounted to SR8.05 billion and SR8.24 billion, respectively in the first eight months of 2001 and 2000, compared to SR6.42 billion in the same period in 1999.
The Kingdom has developed the major task of building its necessary infrastructure in most of its provinces during the last three decades. However, slower spending on infrastructure projects in the late 1990s, heightened the need for new hospitals, sanitary projects and road maintenance. To enhance its revenue stream, currently the Kingdom focuses on the expansion of its industries, including the oil company Saudi Aramco and the petrochemical giant SABIC.
Also, there have been substantial investments in the Kingdom's local tourism industry, which is concentrated mainly in Jeddah, Abha and Taif. Meanwhile, in the first eight months of 2001, urban development accounted for the largest share of the publicly announced construction contracts awarded at (36 percent), followed by roads (32 percent) and industrial projects (20 percent).
The urban development sector, which includes sanitary projects in major regions of the country, surged by 14 percent to SR2.93 billion in the January-August period of this year compared to SR2.56 billion in the same period last year. The largest project of this type was the implementation of sanitary disposal scheme in Makkah, costing SR1,004 million and issued by the Water & Sanitary Disposal department to a number of local contractors. Another main urban development project this year was a water & sewage treatment project, issued by Water & Sanitary Disposal department to Civil Works Company, at a cost of SR148.4 million. Road construction contracts also increased so far this year, more than doubling to SR2.56 billion in the eight months ending August 2001 compared to SR0.74 billion in the same period last year. The value of Industrial sector contracts fell steeply by 48 percent to SR1.61 billion in the first eight months of 2001 compared to SR3.09 billion in the same period last year. The Saudi Aramco awarded the two largest industrial contracts to Snamprogeetti of Italy, at costs of SR525.0 million and SR412.5 million, respectively. The first is 'Phase 2 of Haradh Arabian light crude project in Dhahran' and the second is 'Khuff fraction project' in Ras Tanura refinery.
With capital investment exceeding SR14 billion, local industries continue to meet growing domestic demand for construction materials including cement, building blocks, iron & steel and tiles & glass. However, the import bill for building materials remains high at SR12.1 billion in 1999 against SR13.0 billion in 1998. Financing of private sector imports of building materials, which comes from the local domestic banks, rose slightly to SR3.50 billion in the first half of 2001 from SR3.48 billion in the same period last year. With an annual designed capacity of 22.2 million tons, the eight Saudi cement companies witnessed domestic sales reaching 15.4 million tons last year compared to 14.5 million tons the year before.
(The author is a chief economist at the National Commercial Bank in Jeddah)
