The US$1.2 trillion Saudi construction sector is starting to show signs of stress as spending slows and contractors are hit by payment issues.
That slowdown could also be felt by UAE contractors that have invested heavily in the world’s largest oil exporter.
As earnings season got under way in the kingdom this week, the results of the contractor Al Khodari & Sons reflected the slowdown in the sector.
The Al Khobar contractor on Monday reported a loss of 14.3 million Saudi riyals (Dh14m) for the third quarter of 2015, which sent its stock tumbling more than 8 per cent.
The company, which earns about 95 per cent of its revenue from government-related projects, made a profit of 15m riyals in the same period last year.
It blamed a decline in revenue for the loss.
Significantly, the amount of new work won during the quarter fell to just 31m riyals, from 554.m a year earlier.
Rim Ben Saleh, an analyst with the Tunisian equity research company Alpha Mena, said that while some of the decline could be explained by seasonal factors, it may also be “due to contracting payments postponement as the liquidity shortages of the Saudi government and the high fixed costs incurred by contractors” make their mark.
Saudi government departments have slowed payments to contractors working on projects as a result of the oil price slump, Bloomberg reported this week, citing anonymous sources who said they had been waiting for up to six months for payment for work carried out.
It also said that the Saudi government’s finance ministry has ordered departments not to award new contracts during the fourth quarter of the year.
“For now, these measures only apply for the remainder of this fiscal year, but they may well set the tone for 2016,” said Jason Tuvey, a Middle East economist at London’s Capital Economics.
“We had warned before that a fiscal adjustment was always likely to fall heavily on infrastructure spending,” Mr Tuvey said.
“Indeed, it’s worth noting that following the oil slump of the 1980s, capital spending was cut by more than 98 per cent from peak to trough.”
The impact may not be felt so drastically this time, said Alan Richell, the head of business advisory for Arcadis Middle East.
He said that although there is “definitely a short-term reconsideration” of budgets, this is largely a matter of deferring some project schedules and reassessing non-core work.
“But there’s no sense that any major pieces of infrastructure work are going to be cancelled,” he said.
“All they are doing is responding to what looks like a determinedly low oil price for some time to come by doing the same with their capital spending – stretching it over a longer period.”
According to Deloitte’s 2015 Powers of Construction report, Saudi Arabia remains the GCC’s biggest construction market, with more than $1.2 trillion worth of projects either planned or under way.
The market has attracted a number of UAE contractors, including Drake & Scull, Arabtec, Habtoor Leighton Group, Amana Contracting and Dubai Contracting Company.
Drake & Scull in August reported that it had incurred costs of Dh818m on a single project as a result of expenses and change demands that have yet to be approved by its client.
The project is understood to be the 2bn riyal King Abdullah Petroleum Studies & Research Center it is building in Riyadh for Saudi Aramco, the state-run oil company.
mfahy@thenational.ae
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