Saudi Arabia expected to cut budget spending in 2016

19 November 2015

Reducing expenditure on infrastructure projects is easiest option for policy makers

Saudi Arabia could potentially reduce the size of its 2016 budget by 5-10 per cent from what it announced this year, as the kingdom tries to steer its economy amid slumping oil prices.

Policy makers are most likely to cut capital expenditures, affecting infrastructure projects in the Middle East’s largest contracting market, according to Jean-Michel Saliba, MENA economist at Bank of America Merill Lynch Global Research.

“It’s easier for them to do it and if the sector slows down, it’s mostly foreign labour,’’ says Saliba . “For them as a policy maker it’s the easiest tool to adjust.’’

Saudi Arabia, the biggest Arab Economy, is trying to curb spending as the price of crude, its main source of income, has fallen more than 50 percent since August last year.  Oil prices of more than $100 per barrel over the past few years has been the key driver for economic growth and increased infrastructure spending.

The kingdom has now resorted to tapping foreign reserves, and selling bonds to local lenders and financial institutions and has delayed projects..

The most explicit evidence of the predicament regional contractors face came when the Saudi Finance Ministry ordered government bodies to not award any contracts for the rest of the year.

According to regional projects tracker MEED Projects, the negative outlook for the rest of 2015 is a major change from the strong start to the year, when $8.4bn of deals were awarded in January, followed by $6.4bn of awards in February and $7.2bn of awards in April. From May, the market has been in steady decline, with just $10.9bn of awards over the past five months, giving a monthly average of just $2.2bn.

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