December 31, 2008

Saudi Construction Down

Financial Times
Dec 30, 2008

For the past few years, much of the talk coming out of Saudi Arabia has been about opportunity – a chance to use the oil boom to develop the economy and go some way to heading off pressing social and economic pressures that have been building up in the kingdom.

During the late 1980s and 1990s, the economy stagnated while the population ballooned. By the turn of the century, unemployment had reached double digits and, with some 60 per cent of the 17m national population estimated to be under 25, the need to expand the private sector and create jobs was deemed vital to the nation’s stability and its future prosperity.

The oil boom and the massive accumulation of petrodollars provided a chance to tackle those issues and rehabilitate decaying infrastructure. But just as the process is beginning to inch forward, the Arab world’s largest economy faces a slowdown and is grappling with the prospect of a dramatic fall in revenue following the collapse in oil prices and reductions in crude output.

Now the onus is on the kingdom’s traditionally cautious leaders to ensure that the process of diversification – a huge task even in the boom years – continues in a downturn, analysts say. If not, they warn, the small gains made over the last few years will be lost, the private sector will contract and the pool of unemployed Saudis will grow.

All the Arab Gulf countries are braced for a slowdown after a period of incredible growth. But given Saudi Arabia’s demographics and size, its needs are considered more urgent than those of its smaller and wealthier neighbours.

One analyst says: “It’s taken [Saudi Arabia] five years just to warm up and begin running, and they need to keep the momentum for at least five years for that pace to be set in motion. The most dangerous thing now is for them to say ‘we are not going to invest’. If they don’t do it, they will reset the development process for at least the next five years.”

Last week, the government projected it would post a budget deficit in 2009, the first for seven years, with revenue expected to tumble to 410bn riyals ($109bn) in the next fiscal year, from a record 1,100bn riyals this year. But, to the relief of economists and businessmen, the finance ministry announced an expansionary budget, putting expenditure at 475bn riyals for 2009, about 16 per cent higher than budgeted spending for 2008, although 35bn riyals less than expected actual spending.

The oil-dependent economy relies heavily on government spending to stimulate private sector growth, and although projects estimated at $600bn have been announced, many have yet to begin and those that have are predominantly in hydrocarbons, real estate and infrastructure – sectors that provide few jobs for Saudis.

The analyst estimates that some 1m jobs have been created since 2002, but three-quarters of those were low-salary positions that were predominantly occupied by cheap foreign labour.

Official unemployment has dropped gradually to about 9 per cent, but there are concerns that the middle class is shrinking while the sizeable lower-income segment of society is becoming larger. Analysts estimate that some 3m Saudis are expected to enter the labour market up to 2020.

Worryingly, growth in the private sector – which is critical to job creation – slowed in 2008 in spite of the massive inflow of petrodollars, falling from 5.8 per cent in 2007 to 4.3 per cent.

That is expected to slow further next year, and estimates of 2009 real economic growth range from about 2 per cent to a 1.5 per cent contraction. The business community’s confidence has been dented by falling oil prices and the private sector also faces the problem of liquidity drying up in local and international banks.

Some $26bn worth of industrial infrastructure projects have either been cancelled or put on hold, according to Samba bank. This month, Rio Tinto said it would not be able to finance its 49 per cent stake in a $10bn aluminium project with state mining companyMaaden, seen as an important pillar of diversification.

On the positive side, the government is praised for acting prudently during the boom years and has significantly reduced its debt while also building up foreign assets estimated to be in excess of $500bn, making it far better placed to weather a downturn than in the 1990s. But the government will have to tap into its savings to fill the role expected to be vacated by a cautious and credit-starved private sector, analysts say.

“The $60m question is whether the government is going to step in to finance a lot of these projects, or guarantee them, or deposit enough money in the banking system so they can finance these projects,” says John Sfakianakis, chief economist at SABB Bank. “They don’t have the luxury to stop doing the reform because they are fighting time. They have to keep going at all costs.”

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