Saudi Arabia's infrastructure sector is forecast to achieve a real growth of 2.88 percent y-o-y in 2009, with the construction industry's value to reach SR77.69 billion ($20.74 billion). According to “Saudi Arabia Infrastructure Report Q1 2010” released by companiesandmarkets.com, the upside forecast through to 2010 “is due to the Saudi government's decision that it will support infrastructure projects that it deems too important to fail in the event that they encounter problems with financing.” Last quarter the Ras Al Zour independent water and power plant (IWPP) was a prime example of this. The consortium awarded the contract was having trouble related to financing issues, following which the government decided it would take over funding for the project and therefore re-tender it as an EPC. In August, the $7 billion Saudi Landbridge rail project became the latest illustration of the government's financial support. The contract had gone through two inconclusive bidding rounds, with a preferred bidder chosen but no contract signed due to the challenging project financing climate. The government, after months of silence on the project, finally announced it would fund the project solely through public funds and therefore repackage the projects into a number of EPC contracts. Previously, the Haramain high-speed rail project, another element of the Kingdom's ambitious rail plans, was transferred to an EPC contract from a build, operate transfer one. This quarter, progress has been made on contracts for the project, with five consortia having qualified for the project as of October 2009. Progress for another element of the country's plans to build a national rail network “the North South railway” was also made over the last quarter, with a consortium of Chinese and Saudi Arabian companies awarded a $720 million contract for construction of a 500km section of track. Finally, the $1.7 billion monorail system connecting Makkah to Mina, Arafat and Muzdalifah is progressing well and due to be partly operational in time for the 2010 Haj. Saudi Arabia's ambitious rail plans are fuelling activity in the infrastructure sector, with $30 billion worth of contracts under way or at the bidding stage. Although transport projects have been the main focus of Saudi Arabia's infrastructure sector over the past quarter, the utilities sector has also seen a number of projects awarded and announced. Despite this activity, nonetheless, “the forecasts have been dampened to some extent by high levels of inflation in the country. Nominal growth in the construction industry is estimated close to double digits; however, inflation has negated this in real terms.” In a separate report, Gulf states are expected to witness a full economic recovery in 2010 amid oil high prices. A report released by the Institute of International Finance (IIF) and published by Bank Audi MENA Weekly Monitor said, said oil prices could average nearly $72 a barrel in 2010, compared with nearly $62 in 2009. The IIF's baseline 2010 projection for the GCC assumes modest global recovery, growth of 2.6 percent, average oil prices of $72 per barrel, and that the impact of the troubled family-affiliated conglomerates on banks is contained. But it noted that the recovery of the global economy in 2010 is expected to be sluggish, particularly in advanced economies, as financial systems remain impaired, and households will rebuild savings. Despite recent signs of the onset of recovery in many parts of the world, the global economy is still expected to contract by 2.5 percent in 2009, the IIF report noted. By later this year, the combination of easing monetary and expansionary fiscal policies should begin to yield some results, and the forecast remains for a return to modest global growth in 2010. The report further said if advanced economies move out of recession and global demand for oil recovers, a rebound in oil production of around 3 percent in Kuwait, Saudi Arabia and the UAE will be reflected in an overall real GDP growth rate of 3.5 percent in these countries. The report expected Qatar's nominal growth rate to exceed 30 percent, driven by a 60 percent rise in gas production. GCC activity in the non-hydrocarbons sector will continue to be supported by government spending on infrastructure and social sectors, the report added. While the private sector will recover modestly, it will be at a much slower pace compared to recent years. Past experience showed that private investment tends to recover slowly from downturns, especially those that involve financial stress. IIF expected inflation rate to decline to 2 percent this year, before rising slightly to 3 percent in 2010. It said cost-push pressures from a more-than-expected weakening of the dollar against major currencies over the next few months, and a modest recovery in nonfuel commodity prices, would add limited inflationary pressures next year. The weak domestic demand, the correction in housing-related prices and the fall in global commodity prices have brought down the 12-month inflation rate from over 13 percent in July 2008 to just 3 percent in July 2009, the report said. In another report, HSBC Global Research said GCC economies are now set for recovery as favorable conditions are finally in place and it will be Saudi Arabia, Qatar and Abu Dhabi leading the way. Despite the enormous wealth at its disposal, the Gulf has proved more vulnerable to global recession than many other emerging markets, it pointed out. “The conditions for recovery are now in place and that a somewhat overdue pick up in activity is about to begin,” David Bloom, global head of FX strategy, and Simon Williams, chief economist, Gulf markets, said. “In part this reflects our confidence that fiscal policy is set to gain traction as delayed expansionary spending from 2009 is coupled with increasingly confident expenditure growth in 2010,” they said. “With the dollar peg likely to remain in place, we expect monetary policy to remain highly accommodating. All regional economies are likely to prosper but our expectation is that it is Saudi Arabia, Qatar and Abu Dhabi that will lead the way,” they said. “Our long term view for the Gulf economy is bullish and unchanged. For us, the regional dynamic derives from the strength of emerging market economic growth that brings with it a sharp rise in demand for energy,” said Williams. The industrialisation of the region's hydrocarbon base through the expansion of the Gulf's energy-intensive, export-orientated manufacturing and industrial sector will also deepen its economic base. However, the increase in consumption will tend to push oil prices upward, driving a sustained transfer of wealth into the energy-rich Gulf region, and setting in train a wholesale overhaul of its domestic infrastructure, an upgrade of its service sector and a steady increase in employment, the report said. “Our concerns are focused on the downside risks to recovery, particularly the possibility that credit growth will be slow,” said Bloom. As 2010 progresses, however, the risk that regional economies will once again run too hot and that inflation will return may occupy center stage, the report noted. “A disappointing policy response, the excesses of the previous boom and an ongoing credit squeeze have also slowed recovery,” they said. The enormous wealth at the disposal of its governments, the early recovery in oil prices and the importance of domestic demand as a driver of economic growth should have seen the Gulf outperform most other emerging markets over the past year. “This hasn't proved to be the case. Although the region has weathered the global recession, the Gulf economies have decelerated more sharply than much of Asia, and have been slower to recover,” they said. “So far we see no data to suggest that this downswing in economic activity has passed,” they pointed out. __
