Saudi Arabia’s plan to cut up to US$20 billion worth of infrastructure projects will have a staggered impact on the region’s largest economy, say analysts.
The cuts will “increase pressure on a sector which has already struggled”, said Khatija Haque, Emirates NBD’s head of Mena research. But she said its effect will probably be spread over many years.
She was speaking at an infrastructure forum held jointly by the Spanish, German, British, Italian, French and Canadian business councils at Dubai Chamber on Thursday.
Ms Haque said that Saudi Arabia has been a major market for infrastructure investments since announcing some big long-term infrastructure projects after the Arab Spring in 2011.
“Now Saudi Arabia has to adjust to a world where their revenues are significantly lower than they thought they might be,” said Ms Haque. “They’re looking at those projects again, they’re scaling some down, they’re looking at ways to cut spending not all in one go, but over the medium term.”
Last week, Bloomberg revealed that PwC had been appointed to review $69bn worth of government contracts, with a view to culling one-third of them.
Ms Haque said that she envisaged that the Saudi market for infrastructure investment this year is likely to be similar to last year. “We don’t think that government spending is going to be very different. We think they will probably overshoot the announced figure of 890bn riyals [Dh871.59bn]. We are looking for around 950bn riyals of spending this year – not that different to the 930 billion for 2016.”
Ms Haque said that “a lot of the challenges that were faced last year are going to remain issues” for the infrastructure sector, but that the worst of the problems were likely to be over given that the oil price had improved, which will mean there is more liquidity. “We don’t think that governments in 2017 will have to be as careful with the spending and as aggressive with the cuts to spending as they were in 2015 and 2016.”
As a result, debt issuance is expected to be slightly lower than last year and governments will also seek to plug funding gaps by privatisations and asset sales, which could take time to bring to market.
“It’s not something that can be done quickly because a lot of the companies that the government wants to privatise first need to be restructured and put in a position where investors find them attractive. That kind of restructuring takes time but the preparations are underway and we expect to see and hear more of those kinds of deals in the next one to two years.”
On Thursday, the consultancy firm JLL published its KSA Year in Review report, which said that the kingdom’s real estate sector suffered from a lack of liquidity for most of the year. It said that this was eased following the $17.5bn international bond sale the kingdom pulled off in October, which led to the start of repayments to the country’s contractors worth $10.6bn.
It also said that the likelihood of improved oil prices paved the way for a more positive economic environment.
Jamil Ghaznawi, JLL’s country head of Saudi Arabia, said: “The government’s major plans to energise the market have resulted in a more positive outlook for 2017 in line with measures to counteract reduced government and consumer spending.”
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Company Profile
Name: Thndr
Started: 2019
Co-founders: Ahmad Hammouda and Seif Amr
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Founded: September, 2020
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