Saudi Arabia is spending more than $60 billion on a logistics hub, airport improvement and roads to reduce travel time in the Arab world’s biggest economy.
The investments also yielded the largest sukuk, or Islamic bond, offered in the Middle East this year and an initial public offering on the stock exchange in June.
“There is a large infrastructure boom happening in Saudi Arabia,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said in a phone interview on July 30. “Once they create these sukuk instruments, they cut their reliance on direct government funding and make it possible to buy into the projects. This policy benefits the government and investors.”
The world’s top oil exporter is spending $500 billion to build power plants, schools, roads and other facilities to modernize the country and create jobs for youth. Earlier this month, the kingdom’s Ministry of Transportation signed contracts valued at 4.4 billion riyals ($1.2 billion) to build new roads and maintain and operate existing ones.
Saudi Arabia’s economy is forecast to expand 4.8 percent this year, the fastest rate after Qatar among the six Gulf Cooperation Council states, according to an April survey of economists compiled by Bloomberg. Net foreign assets of the kingdom’s central bank increased 20 percent in June to 2.2 trillion riyals from a year earlier, central bank data show.
Under the $53 billion five-year aviation investment program, the government plans to triple passenger traffic at Riyadh’s King Khaled International Airport to 25 million people, build an airport in Jazan in the southwest and renovate other airports.
The efforts to build a modern logistics and transportation system also spawned the single biggest debt debut in the Middle East this year to help fund expansion work on the international airport in Jeddah on the Red Sea.
The General Authority for Civil Aviation in January sold 15 billion riyals ($4 billion) of Islamic bonds and plans to issue a second tranche to fund airport expansion. The 10-year notes, which comply with Islam’s ban on paying interest, will pay a profit rate of 2.5 percent.
“The aviation sukuk is paying next to nothing,” Asim Bukhtiar, head of research at Riyad Capital, said in a phone interview. “The demand has been very strong.”
Qatar raised the same amount, $4 billion, in an Islamic bond sale last month, two people familiar with the transaction said.
Saudi Airlines Catering Co. in June offered 24.6 million shares, or 30 percent of its total shares, according a statement posted on the Capital Market Authority’s website. The stock has risen 17 percent since it started trading on July 9.
“The government realized that instead of putting money into projects itself, it was better to involve professional institutions, which can best ensure progress,” Murad Ansari, Riyadh-based analyst at investment bank EFG-Hermes Holding SAE, said in a phone interview.
The volume of cargo and mail through the kingdom’s airports increased 13 percent in 2011 to 641,896 tons from the year earlier period, according to the civil aviation authority. Riyadh handled the most cargo at 274,342 tons, while Jeddah followed at 265,629 tons, the authority said.
The cost of insuring Saudi debt against default for five years fell to 103.5 basis points on July 25, the lowest since Oct. 28, according to prices compiled by Bloomberg. Credit-default swaps on the country were little changed at 107 basis points today.
The kingdom’s 2012 budget includes 35.2 billion riyals for transportation projects, according to the Ministry of Finance. They include financial appropriations to expand King Khalid International Airport and build 4,200 kilometers (2,600 miles) of roads in addition to 28,100 kilometers already under construction, the ministry said.
“Transportation infrastructure is an important enabler of growth,” Kotilaine said. “They are trying to create a national transportation network that links more of the country together.”
Saudi Arabia said on July 30 it had shortlisted four groups to submit bids to build an electrical subway train network linking major areas of Riyadh. The 175-kilometer electrical rail link will connect its airport with other parts of the city, including the new King Abdullah Financial Center, according to the website of ArRiyadh Development Authority.
The first group, led by France’s Vinci SA, includes Siemens AG of Germany and Saudi Arabia’s Almabani General Contractors Co., the official Saudi Press Agency reported. The second is headed by Canada’s Bombardier Inc. and includes Saudi Arabia’s Al Rajhi Holding Group and South Korea’s GS Engineering & Construction Corp. The third group includes Samsung C&T Corp., while the fourth is led by Strabag SE, central Europe’s biggest construction company.
In April, TAV Insaat, a Turkish builder, won a contract with partners worth $800 million to construct and maintain hangars at King Abdul Aziz international airport in Jeddah. Boeing Co. delivered one 777 ER300 aircraft to Saudi Arabian Airlines Co., also known as Saudia, in June. And Boeing has an order to deliver eight Boeing 787-9 Dreamliners.
Domestic flights are currently limited to Saudia and discount carrier National Air Services. Sama, a discount carrier that had competed with National Air, collapsed in 2010 after only three years of operations. With travel demand increasing as the population of 28 million grows by 3 percent annually, the government plans to issue a license for a third carrier.
“Since Sama closed down it has been difficult to get flights to Jeddah on the weekends,” Ansari said. “The idea that this new airline, whoever is going to be licensed, will be allowed to fly domestic routes also tells you there is a need for more operators in the domestic space.”
Domestic airline traffic last year jumped 19 percent, more than the increase in international and domestic together of almost 14 percent to more than 54 million, according to the aviation authority’s website.
Qatar Airways Ltd. and China’s Hainan Airlines Co. are among carriers vying to offer domestic flights in Saudi Arabia after an initial 14 applicants were cut to a shortlist of seven, the kingdom’s aviation regulator said.
Qatar Air Chief Executive Officer Akbar Al Baker said on July 3 that the carrier was interested in establishing a Saudi offshoot only if the government there agreed to a “fundamental rethink” of aviation policies, including fare controls and “excessive” fuel charges.
“Any airline within Saudi is pretty fettered domestically by having fare controls imposed upon them, which doesn’t make good commercial business sense,” said John Strickland, director of JLS Consulting in London. “It is a big country, a big market both for domestic travel and travel in and out of Saudi for business and leisure. The potential is there for liberalization to really expand that.”