As oil prices continue to slump, Saudi Arabia has been forced to delay payments to its government contractors. For the first time since 2009, the government has been pushed into a deficit – and it is doing everything possible to preserve cash.
As of now, companies contracted to work on the country’s infrastructure projects have been waiting for payment for six months or more. Moreover, the country’s government has been seeking to reduce contract prices.
As 80% of Saudi Arabia’s revenue comes from crude oil, the current market has forced the country to cut spending, sell bonds and delay projects. In fact, net foreign assets decreased by $82 billion by the end of August. This is in sharp contrast to last year, when the country’s foreign assets were valued at an all-time high.
Simon Williams, chief economist at HSBC for central and eastern Europe, the Middle East and North Africa, stated that, “It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall. Cuts are coming – the budget deficit is too large to ignore and pretend it’s business as usual.”
As a result, it is likely that delays in payment to contractors will slow down the completion of projects under construction. Budget cuts will also slow the expansion needed to develop and create jobs for Saudi Arabia’s growing population.
In the past, the country’s government spending has been directly correlated to the growth of the economy. In 2011, the government announced it would spend $130 billion and the economy thereafter expanded by 10%. This year, economic growth will only be about 3%.
Declining oil prices coupled with the government’s spending plans will leave Saudi Arabia with an enormous budget deficit. A senior analyst at Saudi Fransi Capital, Aqib Mehboob, observed that, “We have already seen a pick-up in loan growth at some of the Saudi banks in Q2 as contractors borrow to fund their cash flows as a result of a slowdown in payments.”
Still, despite the numbers, Saudi Arabia’s debt load is one of the lowest in the world.
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