By: Mohammed Idris

Edited by: Mohamed Abumeleeh

Riyadh - Mubasher: Cutting government spending has impacted the building and construction sector in Saudi Arabia, leading to scarce liquidity in the market and especially in the banking sector, according to analysts.

The construction and building sector accounts for the biggest share of government contracts.

Since economic activity in Saudi Arabia is mainly driven by government spending, there has been an 8% increase in bank loans and a 2% decrease in bank deposits in H1-16, the analysts added.

Lowering government spending to reduce the budget deficit has led to a scarcity in liquidity in the market, resulting in companies withdrawing deposits or getting loans which pressured the banking sector, according to financial analyst Mansour Al-Ammari from Riyad Capital.

The building and construction sector was without a doubt the most affected by the decline in economic growth, he highlighted

However, it’s worth noting how banks were affected, with the building and construction sector loans reaching SAR 113 billion by the end of the second quarter of 2016, accounting for 8% of total loans, added Al-Ammari.

The declining liquidity was also reflected in the hike in the Saudi Arabia Average Three Month Interbank Rate (SAIBOR) to 2.22% by the end of Q2-16, compared to 0.78% in Q2-15, an unseen level since 2009.

The crisis affected major companies such as the Saudi Binladin Group, and Saudi Oger, according to financial analyst Ali Al-Gaafari.

The problem started in Q3-14 when oil prices dropped. It was worsened in 2015 when oil plunged below $40 per barrel, increasing pressure on the budget and forcing the government to stop some projects and delay others.

Paying contractors will improve the situation of both the building and banking sectors, but the economy needs more. It requires the launching of developmental projects, supporting small and medium industrial projects, in order to boost economic growth in KSA, Al-Gaafari added.

Translated by: Moslem Ali