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Payment Slowdown Seen in Saudi Construction Projects

Saudi Arabia continues to pose some problems for companies that do business there. Several firms that serve the construction industry shared what they’re experiencing in the wake of low oil prices.

A business that sells to large contractors that usually do business with large government-backed projects and another that sells to three customers on open terms have not noted slowness in payments or business. Others, however, noted a slowdown in payments and business activity.

Activity in Saudi Arabia has slowed down over the past 12 months, according to one credit professional. “The whole country is on a slowdown and is looking to work on generating alternatives to non-oil revenues by allowing expat investments through residency.”

Purchasing regarding “shovel-ready projects” in the industrial sector is continuing, another said. Few new industrial capital projects, however, are being funded on engineered and planned jobs. The government is spending less on infrastructure, which has resulted in less volume, he explained. “The government has promised to review the situation concerning oil prices and release more funds on planned and approved projects in Q4 2016.”

According to Construction Week, anonymous sources close to the Saudi government said officials are going to review thousands of projects worth about $69 billion and could cancel about a third of them. Another one of its articles states one of the Kingdom’s biggest construction companies is in trouble. Saudi Binladin has put most of its projects on hold, and Saudi Oger has filed for bankruptcy, a credit professional added.

Another company with a major oil and gas end-user acknowledged a slowdown in all of its projects. “One of the most important main infrastructure contractors for our business, and this country stopped all payments to subcontractors and suppliers, which slowed down business and payments in that segment during the last year. Currently, the government agreed to pay $30 billion to this company, and hopefully, this may improve the situation next year.”

Over the last year to 18 months, one credit professional also noted slowdowns in payments. Another credited the trend to restrictions on government spending, which has resulted in less business. “A lot of customers are facing slow [or] delayed payments, and the payment cycle has reached up to a credit of 180 days.”

The next three months appear to be no different, especially regarding contractors on government jobs. One credit professional expects “slight improvement” in the fourth quarter due to promises by the government to look into projects and the oil situation.

“The message in the market and media is that there will be an inflow of funds from the government and all are hopeful that the money inflow will be coming in soon,” an individual in sales shared. “But realistically, I don’t think it will reflect in the market immediately. There would be a 3-month time lag from the start of the inflow of funds before the contracts will move forward.”

Further out, the future doesn’t appear any better. One company added it expects “more of the same pending oil prices and national treasury outflows. ... It’s a wait and watch for next year.” If the fourth-quarter does show improvement, then expectations for 2017 will improve. Otherwise, “a survival approach would be the right words for 2017,” it said.

If the government starts paying for projects, a sales professional said he is also hopeful that things will improve following the first quarter of 2017. “The announcement of projects continues, and the media is not always portraying the ground reality of no fund inflow to support the progress of the projects.”

Oil Production Cuts Coming?

Chris Kuehl, Ph.D.

For months now, it has been assumed that the Organization of the Petroleum Exporting Countries (OPEC) would take steps to get the price of oil back to a level it could be comfortable with. This had certainly been the pattern in the past—withholding output to create an artificial shortage and higher prices.

This tactic has not been working of late as the members have been far more concerned about their market share positions and the need for revenue. The Saudi Arabians have tried to get the group focused on reducing supply, but this has been to no avail.

The latest meeting of the OPEC states has seemingly broken through, but there are more than a few skeptics. The proposed cuts don’t kick in until November. Even then, they are not really cuts as much as they are a freeze. The current production has been at 33.2 million barrels a day. The cuts would take that level down to between 32.5 million and 33 million—not exactly a massive reduction. The market share motivation is clearly on the minds of most of the OPEC members. They are well aware that most of the non-OPEC states will seize the opportunity to produce should there be a real shortage.

The markets rallied a little on this news, but there is simply not all that much to react to. The problems that have kept the oil states from engaging in their old tactics have not gone away. There is simply more oil coming from non-OPEC states than before. Thus far, there is no sign that consumption is going to be making much of a comeback. The U.S. has returned to approximately what was consumed prior to the recession, but Europe and Asia remain well off their old pace. Even the U.S. is about 3 to 5 million barrels a day short as compared with the last decade.

EU Risks to Watch

Dr. Hans Belcsák

Those of us concerned with international trends have long become accustomed to being alert to political risk in Latin America, or in Africa, or in the Far East. But, the time has come to start paying more attention to a part of the world that has been widely regarded as safe, where multinationals are accustomed to operating in a relatively benign environment, namely the European Union. This is not to say that the EU is about to fall apart. But since the Maastricht Treaty, the forces clawing at the fabric of its cohesion have never been quite as malignant as now. And history has a confounded habit of turning what used to be viewed as impossible into something merely improbable, which then becomes unlikely and finally winds up as an accomplished fact.

Waves Made by Brexit
To begin with, the continuing influence of Britain’s vote to leave the Union should not be underrated. It has made the issue of Irish reunification once again a subject of political debate, given that Northern Ireland, which is the only part of the U.K. to share a land border with the rest of the EU, will face serious economic and social challenges as a result of Brexit. At the very least, the development may bring the day closer on which the referendum is held that is provided for in the 1998 Good Friday Agreement. Plebiscites have their own dynamic. And the impending negotiations between Whitehall and Brussels could also raise bitter antagonism within the EU between hardliners who want to make Brexit as painful as possible for the British and those who think that accommodation is a wiser and, for both sides, more beneficial course to choose.

As matters stand, the bloc may not be exactly “on the brink of a popular revolt,” as Slovakia’s Prime Minister Robert Fico puts it. But under the influence of populist parties, which have been on the rise from Poland to Austria and even Germany, Eurosceptic language has been creeping into the pronouncements of mainstream parties. And if referenda were held today in all the Union’s member countries, the odds are that several would follow the British example and vote for opting out.

The Refugee Crisis
The reasons are manifold. Worries about the ongoing refugee crisis are certainly high on the list. Voters across Europe have been voicing fears of crime, cultural change and unbearable burdens on their social services caused by the tide of refugees from Syria, Iraq, Afghanistan and the Maghreb and Sahel countries of Africa. In the EU’s East, this has given wings to ethnic nationalists who have never been quite comfortable with the idea of liberal democracy. In the West, it has boosted such anti-immigrant groups as the Freedom Party in Austria, Marine Le Pen’s National Front in France and the Alternative Fuer Deutschland in Germany.

To underscore the seriousness of the matter and the intensity of the emotions stirred up, just this month Luxembourg’s Foreign Minister Jean Asselborn insisted that Hungary should be “excluded temporarily or, if need be, forever” from the EU because its government has been building fences along its southern border to gain at least a measure of control over the migration problem. Chancellor “Mutti” Merkel is paying heavily in Germany’s political arena, even within her own party, for the strong pro-refugee stance she has been taking. Clearly, the recent terrorist attacks have had an impact. Even so, people might be a bit more inclined to welcome immigrants if Europe’s economy made better progress. But real GDP across the bloc dipped in the second quarter after an uptick in the first, and growth will continue to leave much to be desired in the year ahead.

Anti-Globalization Trends
There is also a worldwide trend against globalization, which today is stronger than I have ever seen it in my lifetime. The ambitious Transatlantic Trade and Investment Partnership (TTIP), on which U.S. and EU negotiators once hoped to conclude talks before the end of President Obama’s term, is likely to be an early victim of the mushrooming discontent with trade liberalization. Increasingly intense protectionism on both sides has given rise to myths that many take as hard truths. One such claim is that the deal would force EU governments to privatize public services. Another holds that it would fatally weaken EU environmental standards, while still another insists that it would kill off the European movie and other creative industries.

Smug Bureaucrats
Not to be forgotten is that the European administration in Brussels has expanded explosively and is today widely regarded as an agglomeration of elitist bureaucrats who live high on the hog, are increasingly corrupt and have not the faintest understanding of the needs of the people they purport to govern. Aloof and disconnected, they hand down one-size-fits-all rules to nation states with very different notions of local and European interests. National politicians ignore this schism at their risk. Mostly they choose not to do so, not with the Netherlands, Germany and France going to the polls next year.

Hard Tasks Ahead
The coming year will be particularly critical because there are several areas where leaders will have to decide whether they want to push for more or less integration. This will be clearly visible in the field of finance. In order to step up its efforts to forge a common EU capital market, Brussels will have to stick its fingers into highly sensitive areas such as national tax and insolvency laws. At the outset of this year, moreover, new EU rules came into force that do not just enable but impel national financial authorities to deal with failing banks without heaping the cost on the shoulders of taxpayers. A Single Resolution Mechanism has been fashioned, on the heels of a major expansion of the European Central Bank’s powers to let it supervise all 5,500 Eurozone banks. But this created a stool with two legs.

It does need a third leg in the form of a common deposit insurance scheme, against which there is intense resistance in, for instance, Germany. Without this third leg, the Single Resolution Board will be a wobbly affair, especially in confrontations with countries where a large number of mom-and-pop investors stand to get hurt, as in Italy. Technically, one would have to assume that this and other complications, e.g., disparate bankruptcy laws, point to a need for more integration, at least for the members of the Eurozone, which share a currency. But this is easier said than done. It seems to go well beyond the boundaries of what is achievable in today’s political climate. Jean-Claude Juncker, the European Commission president, minced no words in his annual state of the union message when he complained bitterly that the bloc was in an “existential crisis.”

Ominous Words
“Never before,” he said, “have I seen such little common ground between our member states. So few areas where they agree to work together. ... Never before have I seen national governments so weakened by the forces of populism and paralyzed by the risk of defeat in the next election.” Indeed, not more than two decades ago, Europe was a place of hope and great expectations. The Soviet Union had just caved in, the Berlin wall had been torn down, a peaceful divorce had separated the Czech Republic and Slovakia, there was tangible enthusiasm for the concepts of liberal democracy and market economy, and the EU was expanding.

What a contrast with today, as the EU is still struggling with an unresolved financial crisis, an unfinished monetary and banking union, negative real interest rates, sluggish investment, growing imbalances, falling real incomes in parts of the Union and a current-account balance of payment surplus being racked up by Germany tantamount to 9% of GDP. No wonder populists have a field day pushing nationalism, anti-globalization and xenophobia.

Most who take an objective view will agree that the EU needs more integration (albeit under better leadership) to make the Eurozone work. They also know that the moment of truth is no further away than the next banking crisis, which may well show that the Italian system is too big to fail, but also too big to rescue. Meanwhile, Premier Matteo Renzi has threatened to resign if he loses a constitutional referendum in December, creating political upheaval just as the Italian banking system is at its most vulnerable. And Angela Merkel, the Iron Lady of European politics, will continue to be hurt badly by her unpopular immigration policy.

This constellation will have unpredictable consequences. Two things can be said with near-certainty, though: One, the EU will make no real progress in any of the problem areas until after next year’s French and German elections; and two, whatever happens then will have far-reaching economic and legal implications. EU countries now require much closer monitoring than they have been getting.

Global Roundup

Deutsche Bank troubles denting Germany’s role as European anchor. Troubles continue at Deutsche Bank, one of Germany’s largest financial institutions, as the U.S. government is considering imposing a fine of around $14 billion on the bank for selling faulty mortgage-backed securities in the run up to the financial crisis. This adds to the troubles that Deutsche and other European banks have been struggling with—negative interest rates, which are squeezing profits. (EconoTimes)

Global trade growth slows to financial crisis levels. Global trade is growing at the slowest pace since the financial crisis, with the WTO revising its forecast dramatically down for 2016. World trade is now expected to grow at just below 1.7% this year, down from the 2.8% the WTO forecast in April. Falling import demand and slow economic growth in major economies such as Brazil, China and North America are to blame, according to the WTO, which has also revised down its forecast for next year. (Global Trade Review)

Nigeria mulling oil and gas assets sale that could reshape industry. Nigeria’s possible sale of some of its oil and gas assets to raise money and boost the contracting economy could reduce the government’s influence over its biggest industry. President Muhammadu Buhari’s economic advisers are working on a plan “to generate immediate large injection of funds into the economy through asset sales, advance payment for license rounds and infrastructure concessioning,” to help deal with the slump in oil revenue. (The Star)

China promises policies to boost foreign trade. China will adopt various measures to boost foreign trade as the sector is still under considerable pressure, the Ministry of Commerce (MOFCOM) said last Thursday. Policy priorities will include eliminating unreasonable charges on exports and imports, alleviating financing difficulties for enterprises, facilitating trade and investment, and actively coping with trade frictions and strengthening intellectual property protection to boost imports and exports. (Global Times)

IMF calls on governments to challenge rhetoric against free trade. In a chapter of its biannual World Economic Outlook, released ahead of the fund’s annual meetings in October, the IMF said that popular support for globalization needed to be sustained. Otherwise, spreading protectionism could weigh heavily on trade growth, which was already at historically low levels. The OECD also warned last week that global trade is now about half the rate seen before the global financial crisis, and below the rate of global GDP growth, when in the past it had been double that. (Public Finance International)

Managing risk and driving trade will shape next chapter of Africa’s growth. “A correct understanding of risk in Africa—along with an appreciation of the growth potential yet to be unlocked by trade, both cross-border and intra-Africa—provides global corporates with a new lens through which to identify and access African growth,” says Vinod Madhavan, head of transactional products and services, Africa at Standard Bank. Currently, a large number of the world’s high-growth emerging markets are in Africa. Forecasts for 2016-20 place Africa as the second-fastest growing region in the world, just below emerging Asia. (New Era)

Trade can boost Chile’s economic resilience. Chile’s economy has underperformed in recent years. The country, however, has the ability to endure challenging growth conditions. International trade built on a secure financial landscape and strong banking partnerships will be vital to sustained recovery. Chile’s economic growth has been rather modest lately. Yet, Chile can count on key assets that will allow its economy to brave the current environment, including a progressive sovereign wealth fund, a weak currency and a strong local banking sector. (International Banker)


Week in Review Editorial Team:
Nicholas Stern, Editorial Associate and Diana Mota, Associate Editor