Dubai: 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.
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 per cent of economic output this year, according to International Monetary Fund estimates, pushing the government to borrow an estimated 120 billion riyals ($32 billion).
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 8:48am in Riyadh. Saudi Arabia’s Finance Ministry declined to comment. The Saudi Arabian Monetary Agency didn’t immediately respond to a call and email outside office hours.
