Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter.
Companies working on infrastructure projects have been waiting six months or more for payments as the government seeks to preserve cash, the people said, asking not to be identified as the information is private. Delays have increased this year and the government has also been seeking to cut prices on contracts, the people said.
Saudi Arabia is tackling the slump in crude, which accounts for about 80 percent of revenue, by tapping foreign reserves, cutting spending and selling bonds. Net foreign assets fell by about $82 billion at the end of August after reaching an all- time high last year. The country has raised 55 billion riyals($15 billion) from debt issuance this year. The government is also seeking to cut capital spending and delay projects.
“It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall,” Simon Williams, chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc, said in e- mailed comments. “Cuts are coming — the budget deficit is too large to ignore and pretend it’s business as usual.”
Payment delays could slow the completion of projects under construction, including the $22 billion Riyadh metro, and curb the expansion needed to create jobs for a rising population. In the past, government spending has been a catalyst for growth. For example, when authorities announced $130 billion in social spending in 2011, the economy expanded 10 percent. This year, growth will probably be about 3 percent, according to data compiled by Bloomberg.
A spokesman for the finance ministry declined to comment.
Crude’s decline – it’s about halved in the past 12 months – – coupled with the kingdom’s spending plans, will leave Saudi Arabia with a budget deficit exceeding 400 billion riyals this year ($107 billion), according to the International Monetary Fund. The aggregate deficit for 2015 to 2017 is likely to exceed $300 billion, according to a report by HSBC. The government has ordered a series of cost-cutting measures, including a freeze on new construction contracts and bans on buying new vehicles or furniture, two people with knowledge of the matter told Bloomberg earlier this month.
Approximately 140 billion riyals of construction contracts were awarded in Saudi Arabia in the first half, a 12.4 percent increase compared with the first six months of 2014, according to a report by Jeddah-based National Commercial Bank.
Recommended for you
