Saudi construction slowdown set to continue: CE

The slowdown in Saudi Arabia’s construction sector is expected to persist in the “foreseeable future” as a fiscal squeeze will continue to force cuts in capital expenditure, research consultancy Capital Economics (CE) said in a note on Thursday.

The downturn in the sector also has the potential to knock 0.6 percentage points from the country’s annual GDP growth, the London-based agency said, while referring to the 1980-90 period of low oil prices when Saudi Arabia had seen a similar decline in GDP growth.

“Some construction companies may run into financial difficulties, but we don’t think this will cause major ructions in the banking system,” the note said.

Lending to the construction sector accounts for only around 8 percent of total credit, the agency said, adding that the banking sector as a whole will meet minimum capital requirements even if all loans to construction sector were to sour.

The agency noted that the weakness in the construction sector will feed into other parts of the economy. With a decline in new projects, builders are facing difficulties in paying salaries and have had to lay-off employees. The slowdown also poses challenges for fresh employment.

“All of this will add to the headwinds facing consumer-facing sectors,” the note said.