Multinationals with links to Saudi Arabia may be asked to help the Kingdom’s infrastructure projects stay on target, it has emerged.
According to Bloomberg sources, the government is likely to delay or downsize large-scale public works in light of ongoing price woes in the oil sector – the business that forms the bedrock of the Saudi economy.
Bloomberg’s sources suggested that the government is poised to slash its budgets this year by SAR382bn (around $102bn), a reduction of approximately 10%.
Potential for such drastic measures has arisen in the wake of figures released on 17 August by the International Monetary Fund (IMF), which projected a Saudi fiscal deficit for 2015 of around 19.5%.
The IMF’s projection added: “Over the past year… the global oil market environment has changed substantially, with oil prices dropping by close to 50%.
“Real GDP growth is projected to slow to 2.8% this year, and then further to 2.4% in 2016, as government spending begins to adjust to the lower oil price environment.”
It went on to say that “while the deficit will decline in 2016 and beyond as one-off spending ends and large investment projects are completed, it will remain high over the medium term”.
However, the indications are now that Saudi Arabia will review its infrastructure programme entirely for ways of reining in capital expenditure – and this may open the way for corporate involvement on the financing side.
Commenting on the sources’ inside track on the Saudi economy, law firm Pinsent Masons’ partner Sachin Kerur – head of its Middle East division – said: “It is prudent for Saudi Arabia to revisit capital expenditure to ensure it is commensurate with the medium-term revenue position of the country, and that it takes into account where oil prices may settle.”
On the possibility of the Kingdom requiring external funding sources for its programme, he added: “Saudi Arabia’s infrastructure deficit remains significant, and therefore it is unlikely there will be a cull of key projects.
“What may well emerge is a solid programme of must-have projects – some of which will be financed by alternatives other than government spend.”
Kerur’s views chime with the findings of a June report from Deloitte, which projected that, by the end of the year, $172bn worth of public-project contracts would be awarded across members of the Gulf Cooperation Council – of which Saudi Arabia is one – in light of the oil price slump.
Andrew Jeffries, director of Deloitte’s Middle Eastern capital markets advisory service, noted in the report: “The continuing low price of oil… is the grey cloud threatening to put the brakes on growth, and on governments and private-sector spending, as revenues continue to be squeezed.
“What seems clear is that the necessity to move away from oil-based economies has never been greater, and that in the race to diversify, there will be winners and runners-up. Quite how this will play out is too early to say, but the gap is likely to grow, providing a regional hotspot of investment and development.”
Saudi’s largest current infrastructure project is the $15bn Al Mozaini to Riyadh East Sub Centre, with the $13bn regeneration of Jeddah in second place.