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, Bloomberg reported.
Delays have increased this year and the government has also been seeking to cut prices on contracts, the people said.
Saudi Arabia is responding to the decline in crude, which accounts for about 80% of revenue, by tapping foreign reserves, cutting spending, delaying projects 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.
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.
400b Riyal Deficit
The lower price of crude coupled with the kingdom’s spending plans, will leave Saudi Arabia with a budget deficit exceeding 400 billion riyals this year, 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.
“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,” Aqib Mehboob, a senior analyst at Saudi Fransi Capital, said from Riyadh Monday.
Saudi Arabia, the world’s largest oil exporter, has led the Organization of Petroleum Exporting Countries in boosting production to defend market share, abandoning its previous role of cutting output to boost prices.
The country is now storing record amounts of crude amid a decline in shipments. Exports dropped to 7 million barrels a day in August from 7.28 million in July, according to data posted on the website of the Riyadh-based Joint Organizations Data Initiative.
