Saudi Arabia s construction sector weak economy
Men at the construction site of Riyadh Metro in Saudi Arabia on May 4.
Faisal Al Nasser/Reuters
A few ugly economic signs have been bubbling up in Saudi Arabia
The state statistics office recently reported that the kingdom's first-quarter gross domestic product grew by 1.5% compared with the prior year - its lowest growth since the first quarter of 2013
Moreover, the non-oil sector
shrank by 0.7%
, with the non-oil private sector growing just 0.2% year-over-year, its lowest level in about 25 years.
Still, Capital Economics Middle East economist Jason Tuvey argued in a recent note that there was "one area of the economy that seems to be suffering particularly badly": construction.
Output in the construction sector dropped by 1.9% year-over-year in the first quarter, and the NCB Construction Business Optimism Index does not paint a rosy picture for the second quarter, which you can see in the chart.
"Saudi Arabia's construction sector has borne the brunt of fiscal austerity, and we expect activity there to remain weak for the foreseeable future - history suggests that it could knock as much as 0.6%-pts off annual GDP growth," Tuvey wrote.
He added that the construction sector's weakness could trickle into other parts of the economy - in particular, consumer-facing sectors - noting that builders already had delayed salary payments and cut employment amid a lack of new projects.
The sector also seems as if it might have some financial health concerns. A September 2015 report from the International Monetary Fund
found that balance sheets in the Saudi construction sector were "weaker than in other sectors" and that it was the "only major sector with a debt service coverage ratio below 1." More recently,
Reuters reported on Monday
Saudi Binladin Group
multinational construction conglomerate,
asked for an extension
on an 817 million riyal, or $217.8 million, Islamic economics; Islamic public finance; Islamic finance; Islamic accounting; Islamic business ethics; Islamic banking; Islamic insurance; Islamic human resource management; Islamic microfinance; Islamic capital market loan.
"However, the chance of this triggering widespread stress in the financial sector seems low," Tuvey argued.
"Lending to the construction sector accounts for only around 8% of total credit. And by our estimates, all loans to the sector could sour and the banking sector as a whole would still meet minimum capital requirements."
So, there's that.