Saudi construction sector faces tough times ahead, says leading builder

Companies in Saudi Arabia have benefited from a boom over the past decade as high oil prices have prompted heavy spending on transport, social infrastructure and industrial facilities, but those prices have more than halved since last summer

PUBLISHED : Monday, 23 November, 2015, 6:20pm
UPDATED : Monday, 23 November, 2015, 6:20pm

Saudi Arabia's construction industry faces difficult times ahead as the prospect of state budget cuts adds to painful labour reforms, according to major builder Al-Khodari, in a sign of the strain on an economy squeezed by lower oil prices.

Companies in the sector have benefited from a construction boom over the past decade as the world's top oil exporter has taken advantage of high crude prices to spend heavily on transport, social infrastructure and industrial facilities.

But prices have more than halved since last summer due to a global supply glut and the volume of building projects looks set to shrink as the government, facing a mammoth budget deficit, starts to economise by slowing or shelving some plans.

Construction firms, including foreign companies operating there, have also been hit hard by labour reforms by a government seeking to reduce its reliance on oil, and also avoid the kind of social unrest seen elsewhere in the Arab world.

It has been pushing companies to hire more Saudi citizens instead of cheaper foreign workers, in order to move Saudis out of the state sector and into private industry. It is also keen to keep a lid on an 11.6 per cent unemployment rate.

“I think we should expect the difficult situation in the (construction) sector to go on for 18 more months,” said Fawwaz al-Khodari, the chief executive of Abdullah Abdul Mohsin al-Khodari Sons.

“Companies are facing troubles mainly due to the labour reforms. We will see the result of the budget deficit later, but now we are in a situation where the pain is already there.”

Brent crude prices have fallen to about US$45 a barrel from over US$115 in June last year, slashing Saudi Arabia's oil export cash – so-called petrodollars – which traditionally account for about 90 per cent of its state revenues.

The Saudi finance minister said in September that the government was delaying some construction projects but those deemed important for the economy would go ahead. He did not elaborate.

“I believe many projects that are not seen as being essential will be first to be shelved, including those that were tendered but not awarded,” Khodari said.

For example, a plan to build soccer stadiums around the country may be seen as non-essential, while projects such as housing, hospitals and schools look likely to go ahead, he said.

Saudi officials could not be reached for comment.

The labour reforms, introduced in 2011, has hit companies' profits as they compete to hire the limited number of Saudis willing to work in the sector, and also face higher costs obtaining work permits for foreigners.