Saudi Arabia Considers Paying Contractors With IOUs

Saudi Considers Paying Contractors With IOUs
  • Projected deficit prompts government to weigh alternatives
  • Bond-like instrument would cover part of amount owed by state

Saudi Arabia is considering using IOUs to pay outstanding bills with contractors and conserve cash, according to people briefed on the discussions.

As payment from the state, contractors would receive bond-like instruments which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private. Companies have received some payments in cash and the rest could come in the "I-owe-you" notes, the people said, adding that no decisions have been made on the measures.

QuickTake Saudi Arabia's Strains

Saudi Arabia has slowed payments to contractors and suppliers, tapped foreign reserves and borrowed from local and international banks in response to the decline in crude oil, which accounts for the bulk of its revenue. The country will probably post a budget deficit of about 13.5 percent of economic output this year, according to International Monetary Fund estimates, pushing the government to borrow an estimated 120 billion riyals ($32 billion).

Deputy Crown Prince Mohammed bin Salman speaks in Riyadh, on April 25, 2016.
Deputy Crown Prince Mohammed bin Salman speaks in Riyadh, on April 25, 2016.
Source: Anadolu Agency via Getty Images

The Saudi government owes approximately $40 billion to the country’s contractors, estimated Jaap Meijer, managing director of research at Dubai-based Arqaam. Companies such as the Saudi Binladin Group are cutting thousands of jobs amid a slowdown in the construction industry, according to media reports.

“This would make sense and would help contractors get back on track,” Meijer said of the possible move. “Banks, however, would be more interested if it were a floating rate.”

Contractor Bonds

Saudi Arabia used a similar policy of repaying contractors in the 1990s, said Raza Agha, chief economist for the Middle East and Africa at VTB Capital. “This time, Saudi Arabia’s cash flow has been impacted by the fall in oil prices, but weak public financial management may also be to blame,” he said.

Deputy Crown Prince Mohammed bin Salman told Bloomberg News in an interview in March that authorities have started paying companies back.

“Much will depend on the details of the contractor bonds,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, said in an emailed response to questions. “The ability of contractors to sell these bonds to domestic banks will depend on how the pricing compares to that of government debt and if they have a floating rate.”

One-year forward contracts for the Saudi Arabian riyal surged the most since January on Wednesday, jumping 115 points to 515, according to data compiled by Bloomberg. That’s the highest level in almost three months. The contracts fell five points at 8:48 a.m. in Riyadh. Saudi Arabia’s Finance Ministry declined to comment. The Saudi Arabian Monetary Agency didn’t immediately respond to a call and e-mail outside office hours.

Moody’s Cut

The country was among oil producers that had their ratings lowered by Moody’s Investors Service because of a collapse in oil prices, the credit-ratings company said Saturday. The long-term issuer rating on Saudi Arabia, the world’s biggest oil exporter, was cut to A1 from Aa3 as lower crude may lead to a "material deterioration" in the nation’s credit profile, Moody’s said.

Saudi Arabia’s economic growth is slowing as revenue from oil exports declines. Gross domestic product will likely expand 1.5 percent this year, the slowest pace since the global financial crisis, according to a Bloomberg survey of economists.

“Until there is greater clarity on this situation some negativity and increased speculation from investors and other market participants should be expected,” said Chavan Bhogaita, head of market insight and strategy at National Bank of Abu Dhabi.

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