RIYADH: Saudi Arabia’s construction industry faces difficult times ahead as the prospect of state budget cuts adds to painful labor reforms, according to major builder Al-Khodari, in a sign of the strain on an economy squeezed by lower oil prices.
Companies in the sector have benefited from a construction boom over the past decade as the world’s top oil exporter has taken advantage of high crude prices to spend heavily on transport, social infrastructure and industrial facilities. But prices have more than halved since last summer due to a global supply glut and the volume of building projects looks set to shrink as the government, facing a mammoth budget deficit, starts to economize by slowing or shelving some plans.
Construction firms, including foreign companies operating there, have also been hit hard by labor reforms by a government seeking to reduce its reliance on oil, and also avoid the kind of social unrest seen elsewhere in the Arab world.
It has been pushing companies to hire more Saudi citizens instead of cheaper foreign workers, in order to move Saudis out of the state sector and into private industry. It is also keen to keep a lid on an unemployment rate standing at 11.6 percent. “I think we should expect the difficult situation in the (construction) sector to go on for 18 more months,” Fawwaz Al-Khodari, chief executive of Abdullah Abdul Mohsin Al-Khodari Sons, told Reuters in an interview.
“Companies are facing troubles mainly due to the labor reforms. We will see the result of the budget deficit later, but now we are in a situation where the pain is already there.”
Brent crude prices have fallen to around $45 a barrel from over $115 in June last year, slashing Saudi Arabia’s oil export cash – so-called petrodollars – which traditionally account for around 90 percent of its state revenues.
The Saudi finance minister said in September that the government was delaying some construction projects but those deemed important for the economy would go ahead. He did not elaborate. “I believe many projects that are not seen as being essential will be first to be shelved, including those that were tendered but not awarded,” Khodari said.
For example, a plan to build soccer stadiums around the country may be seen as non-essential, while projects such as housing, hospitals and schools look likely to go ahead, he said.
Saudi officials could not be reached for comment. The labor reforms, introduced in 2011, has hit companies’ profits as they compete to hire the limited number of Saudis willing to work in the sector, and also face higher costs obtaining work permits for foreigners.
Another uncertainty facing the sector is whether the government will raise subsidized domestic fuel prices next year to save money. The oil minister said last month that such reforms were being considered. Khodari said that depending on their size, fuel price hikes could have a considerable impact on companies which operated large fleets of vehicles and equipment, such as his own.
Some media reports have speculated that Saudi government bodies are delaying payments to contractors because of worsening cash flow – something the government has not commented on. However, such delays were common around the Gulf because of bureaucratic inefficiency even when oil was high, and Khodari said he did not see a general, oil-related slowdown in payments.
“We have always had certain clients that had slow payment processes, even when spending was very high. But since we have other clients that are paying timely, this leads us to believe that it is more an administrative issue within some institutions and therefore cannot generalize.”
However, the uncertain outlook for some projects is making contractors more cautious bidding for them, and many have decided to tender for fewer bids, Khodari said. He aims to raise the share of non-government contracts at his firm’s business to 35 percent by 2018 from 15 percent of the present backlog. His firm reported a 14.3 million riyal ($3.8 million) loss for the third quarter against a 15 million riyal profit a year earlier, its first net loss since its 2010 initial public offer. Revenue fell 17.5 percent and new contract awards slumped to 31 million riyals from 554.6 million riyals. Khodari said he expected an upward trend in profit margins, which started in 2014, to resume, without being specific on the timeframe.
Saudi Arabia’s oil minister Ali Al-Naimi said yesterday that future oil investments should continue to meet an anticipated global growth in crude demand by more than 1 million barrels per day. “Demand for oil is continuing to rise,” Naimi told an energy conference in the Bahraini capital Manama. “To meet this growing need, there should be a continuation if not an increase in the pace of investments in the petroleum industry to guarantee the stability of the market on the short and long term.”
Oil prices will start improving next year and OPEC’s decision last year to not cut supplies was the right one, the United Arab Emirates’ energy ministry said yesterday.
“We believe that OPEC policy is the right one… Next year will see improvement in prices… In 2016 we could witness some correction in the market,” Matar Al-Nyadi, undersecretary of the UAE’s energy ministry, told an industry conference in the Bahraini capital Manama. – Reuters