As oil prices crash, Saudi, UAE businesses scramble for cash

Saudi Arabia and the United Arab Emirates are spending tens of billions of dollars to shore up their economies against coronavirus disruptions and a brutal crash in oil prices. But that state largesse is falling short of need as work is halted on big government projects - depriving both countries of a major growth driver - and as private sector businesses scramble for cash.

Tourism, retail, hospitality and logistics were the first sectors to get pummelled as coronavirus hobbled global travel and shut down most public venues. But that pain quickly spread to the energy sector as demand for crude plummeted, and Saudi Arabia initiated an oil price war in a battle for market share with Russia. 

The twin shocks from the pandemic and the price war have seen prices of global benchmark Brent crude nosedive more than 60 percent from the start of the year.

While the Kremlin said on Monday that United States President Donald Trump and Russian President Vladimir Putin agreed to have officials from both countries discuss ways to stabilize energy markets, Saudi Arabia is still planning to pump crude with abandon.

The kingdom is aiming to export 10.6 million barrels per day (bpd) because of lower domestic consumption, and Saudi Aramco has asked energy service firms to support plans to produce to its maximum capacity of 12 million bpd from April 1 "for the foreseeable future", a Saudi oil industry source told Reuters news agency on Tuesday.

Construction halted

Last week Saudi Arabia announced it is suspending work on the third phase of a $100bn expansion of the Grand Mosque in Mecca over coronavirus fears. Two days earlier, construction giant Saudi Binladin Group said in an internal note, seen by Reuters news agency, that two employees on the project had been infected.

Riyadh-based MOBCO Civil Construction sent a memo to staff in the Saudi cities of Riyadh, Mecca and Medina notifying them that it plans to cut wages between 25 percent and 50 percent due to "unforeseen circumstances of COVID-19", according to the internal document dated March 25, which was seen by Reuters.

MOBCO, a medium-sized firm that handles commercial, residential and infrastructure projects, did not respond to a Reuters request for comment.

A source at a major Gulf contracting firm, who declined to be identified due to sensitivities around discussing business plans, told Reuters he has not seen any new Saudi projects awarded in the last two months.

"There are a lot of concerns, though work has not been suspended in the project we have now," a Saudi contractor, who also asked not to be identified, told Reuters, voicing fears that the state-backed project could be at risk.

"These workers eat, drink and sleep in the same place. If one only is infected, the whole project will stop," he said, adding that it was too costly for contractors to halt work unless there is a government directive to do so.

Revenue squeezed

State spending in the energy-producing Gulf is the main engine of economic growth, and Saudi and UAE authorities have announced nearly $70bn in stimulus to ease the impact of the coronavirus outbreak.

Fitch Ratings said this accounted for more than 10 percent of the UAE's economic growth and over four percent of Saudi Arabia's growth. 

The stimulus consists largely of monetary and off-budget measures, such as loan repayment holidays to distressed businesses and individuals.

But there is a limit to how much money governments, who rely heavily on oil export income, can inject as oil prices collapse. 

Global oil markets were already saturated when they were hit with an unprecedented demand shock as governments put countries on lockdown to contain the spread of COVID-19. Then Saudi Arabia declared an oil price war as a three-year market alliance with Russia dissolved into acrimony after Moscow refused to back deep output cuts sought by Riyadh. 

The blow has triggered serious belt-tightening, even among giant state oil firms, with those of Abu Dhabi and Kuwait issuing directives for cost cuts.

Abu Dhabi's energy department last week postponed the announcement of winning bids for a solar power plant and said it was monitoring energy prices and supply chains.

Yousef al-Benyan, chairman of the business group of the Group of 20 economies, told Reuters that small and medium-sized businesses (SMEs) were most vulnerable to the coronavirus outbreak, whose impact he said could spill over into 2021.

"That's where the regulators are trying to come up with support packages to help those SMEs to retain their work focus ... and in order not to have an implication on jobs," said Benyan, who is also chief executive of Saudi Basic Industries Corp.

Cash crunch

Job losses are not unusual during Gulf slowdowns: both Saudi Arabia and UAE saw big reductions during the last oil price slump in 2015, when state spending was slashed.

Bankers said liquidity is the biggest immediate challenge.

"Across the region, we have spoken to every single customer across all sectors in the last 10 working days from a commercial banking perspective. The key thing is the concern around liquidity - have I got enough cash to trade," said Daniel Howlett, head of HSBC's commercial banking for the Middle East, North Africa and Turkey.

Mazin Al Khatib, CEO of Nostalgia Classic Cars in Dubai, told Reuters his firm is negotiating a bridge loan to help cover operating costs but may still need to take painful decisions.

"I'm worried about the salaries at the end of the month; a lot of orders got cancelled, a lot of orders that were almost about to be done were delayed," Khatib said.

Hathal al-Utaibi, chief executive of Riyadh-listed Alandalus Property, agreed the main challenges for the retail industry were managing cash flow and servicing loans.

"It goes without saying that the Q2 2020 financial results for many companies will reflect the business challenges of this period," he told Reuters.

Saudi Arabia could see its 2020 deficit widen to 16.1 percent from a previous projection of 6.4 percent if oil prices average $40, according to Arqaam, a securities firm. At $30, the deficit would hit 22.1 percent, it said - roughly $170bn, according to Reuters calculations.

The kingdom's radio of debt to gross domestic product was around 20 percent in 2019, and according to rating agency S&P, it is projected to rise to nearly 34 percent in 2020 and about 36 percent in 2021.

S&P expects the fiscal deficit of the government of Abu Dhabi, the richest of the UAE's seven emirates, to increase to 7.5 percent in 2020, compared with 0.3 percent in 2019.