Saudi weighs paying contractors with IOUs as oil slump continues

by WorldTribune Staff, May 20, 2016

Saudi Arabia continues to suffer from a massive cash-flow problem amid the ongoing slump in oil prices and has been forced to consider handing out IOUs to contractors.

Bloomberg reports that contractors “may receive financial instruments similar to a treasury bond which they could hold until maturity or sell on to banks for cash.” Some companies have received partial payments in cash and could receive the rest in a form of “I owe you” notes, sources said.

Riyadh metro construction.
Riyadh metro construction.

Payment delays could slow the completion of projects under construction, including the $22 billion Riyadh metro.

Riyadh is expected to record a record budget deficit this year after oil prices crashed from $70 to $30 a barrel. The price of a barrel of Brent crude recovered to $47 a barrel this week but the Saudis are still struggling financially. Last year the state budget deficit was $98 billion

The record deficit will force the government to borrow an estimated 120 billion riyals ($31.8 billion).

The Saudi Binladin Group, the kingdom’s largest contractor, recently laid off 55,000 workers. An estimated nine million foreigners work in Saudi Arabia.

OPEC will next meet in Vienna on June 2, when Saudi Arabia’s new oil minister, Khalid Al-Falih, will announce whether he plans to reduce output to drive prices up again.

Meanwhile, Deputy Crown Prince Mohammed bin Salman announced steps to reduce Saudi’s dependence on oil exports over the next 15 years, including subsidy cuts, tax rises, sales of state assets and a government efficiency drive.

The IMF said the plan was “an appropriately bold and far-reaching transformation of the Saudi Arabian economy.”