World Economy

Saudi Firms Grapple With Austerity, See Bleak Future

Saudi Firms Grapple With Austerity, See Bleak FutureSaudi Firms Grapple With Austerity, See Bleak Future

Saudi Arabian companies are faring better in an era of austerity than many investors feared, but they face more pain in the coming months as gains from cost-cutting and efforts to improve efficiency become more difficult.

The world’s largest oil exporting country is in the grip of a protracted adjustment to low crude prices, which have caused a state budget deficit of nearly $100 billion and forced the government into spending cuts, Reuters reported.

For decades, almost every corner of the economy has depended on lavish flows of petrodollars, so the austerity is bad news for Saudi corporate earnings.

Last December, the government announced its harshest set of measures so far, in the form of subsidy cuts that raised domestic prices of gasoline, electricity, water and the natural gas feedstock used by the petrochemicals industry.

The first-quarter earnings of listed Saudi companies, released over the last few weeks, show that many are managing to avoid a steep slide in profits.

The combined net profits of the 50 biggest companies by capitalization, which account for the vast bulk of all earnings in the stock market, fell only 3% from a year ago to SR19.88 billion ($5.4 billion), Reuters calculations show.

That was much better than the expectations of many analysts, who had believed profits might drop at least as steeply as they did in full-year 2015, when earnings shrank 13.9%.

“The next several quarters will prove companies will be scavenging for top-line growth and undergoing massive restructuring as they face further pressure from austerity,” said Jassim Al-Jubran, senior analyst at Aljazira Capital in Riyadh.

  Banks, Petrochem in Mess

Most of Saudi Arabia’s 12 listed banks beat analysts’ expectations in the first quarter as their combined earnings rose 0.6% to 10.01 billion riyals, a slowdown from 7.2% growth in all of 2015.

Many analysts, however, think provisions could rise in the coming quarters as austerity continues to hurt the economy. Major construction company Saudi Binladin Group, close to Saudi Arabia’s ruling family for decades, for example, has been laying off thousands of workers and bankers believe a restructuring of some of its debt is possible.

Recently, employees at Binladin have set fire to more than seven company buses in the latest protest by disgruntled staff over not being paid salaries for months and a layoffs of local staff as well as 50,000 foreign workers.

Another concern for banks is slowing deposit growth because of reduced inflows of petrodollars. Total bank deposits shrank 0.6% from a year earlier in March; as recently as last year, they were growing at double-digit rates.

“Many believe that Q1 results for banks in particular were a ‘lagging’ indicator, not forward-looking i.e. results are more reflective of pre-subsidy change days,” said one Saudi economist who works with the government, declining to be named because he is not authorized to speak to media.

“In coming quarters you will start to see defaults increasing and banks getting into a mess, so results will worsen.”

Earnings of the top 10 petrochemical companies shrank 8.9% in the first quarter to SR4.33 billion, but that was much better than in 2015, when low product prices due to cheap oil slashed their profits 36.9%.

Saudi Basic Industries Corp, one of the world’s largest petrochemical groups, reported a 13.2% drop in first-quarter profit to SR3.41 billion, but that was better than analysts’ average forecast of SR2.84 billion.

So far, the impact of the subsidy cuts on petrochemical firms’ margins has been far lower than analysts and even the companies themselves had expected, said Jubran. But he warned that some firms were still enjoying low feedstock prices and these would eventually rise in an environment of austerity.

“Part of the current strategy adopted by companies to improve efficiency and slash costs may prove to be unsustainable, because if current prices of feedstock, which some players continue to use at discounted prices, increase then margins will compress in future quarters.”

The earnings of retailers reveal the effect of austerity on consumer demand in the country, as some of its 10 million foreign workers are laid off and sent back to their home countries.