Contract awards expected to fall by $14bn in the kingdom
- Saudi Arabias projects market on course for worst year since 2008
- Finance ministry has ordered no more contract awards this year
- Contract awards that were expect include Mecca Metro and Waad al-Shamal power plant
Saudi Arabias projects market is on course to suffer its worst year since 2008 after the Finance Ministry ordered government clients to not award any project contracts for the rest of the year.
The order to cease awarding contracts means that the total value of contract awards made during 2015 is unlikely to change significantly before the end of the year. Major projects which had been slated for award in the fourth quarter include contracts on the Mecca Metro and the Waad al-Shamal integrated solar combined cycle (ISCC) power plant.
According to data from regional projects tracker MEED Projects, there has been $35bn-worth of contract awards this year, which is about a 28 per cent drop on the total value of awards made during 2014. The likely 2015 total is also down 38 per cent on the average yearly total of $56.3bn of contract awards made during the 2008-2014 period.
The negative outlook for the rest of 2015 is a major change from the strong start to the year, when $8.4bn of contracts 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 last five months, giving a monthly average of just $2bn.
|Value of contract awards in Saudi Arabia|
|Year||Conract Awards ($m)|
|Source: MEED, MEED Projects|
In early October, the Finance Ministry told government clients to cease contract awards and to not make any further appointments or promotions in the final quarter of 2015, according to a report by Bloomberg. The ministry was also reported to have prohibited any further expenditure on new vehicles or property rentals.
The move comes as Saudi Arabias finances weaken.
MEED reported in early October that Saudi Arabia is expected to run a government fiscal deficit of 19.5 per cent of its GDP in 2015. The IMF expects the deficit to decline in 2016, as one-off spending ends and large investment projects are completed, but the fiscal deficit is forecast to remain high over the medium term.
Saudi Arabia financial reserves
2015 Government budget breakeven oil price
The current account of the kingdoms central bank, Saudi Arabian Monetary Agency (Sama), is expected to fall by almost 9.8 per cent in 2015 to $659.8bn, from the $716.7bn recorded in 2014.
To bridge the budget deficit, the government is floating sukuk (Islamic bonds) to finance its record budget deficit, while Riyadh is also preparing to float up to $27bn-worth of bonds in the final quarter. Riyadh issued its first $4bn in local bonds in July the first sovereign issuance since 2007.
The kingdom can borrow extensively as government debt is still very low and was 1.6 per cent of GDP at the end of 2014.
Measuring the financial buffers that can be used by Riyadh to mitigate the effects of low oil prices is complex, as the government has an array of overseas assets. Saudi Arabia started drawing down its foreign currency reserves in February 2015, with the central banks net foreign assets reporting the first drop since February 2010.
Sama reported that the countrys net foreign assets fell by 2 per cent in June, with the government spending down reserves for the fifth straight month. Net foreign assets fell to $664.4bn, having fallen by $72.6bn from an all-time high in August 2014.
According to the UK-based Capital Economics the move to curb spending is not surprising and the Saudi economy is set to slow in 2016, with it forecasting 1.5 per cent growth in 2016-17.
Reports surfacing that Saudi Arabia is to undertake a significant fiscal squeeze come as little surprise and support our long-held view that, although the economy has held up well this year, GDP growth looks set to slow in 2016-17.