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August 15, 2016

Will Saudi Arabia Buckle in Oil Price War?

The Kingdom is struggling with weak GDP growth, higher fees and taxes, and an economy that is unable to pay the dues to its workers, leaving thousands of workers from South Asia with an uncertain future.

When a nation is unable to provide food to its migrant workers, it says a lot about their financial condition.

The oil price crash has forced the oil-rich Kingdom to introduce austerity measures, and delay payments to already cash-strapped contractors.

“It looks like austerity has hit hard and more than we had anticipated, halting construction projects and stopping hiring,” said Jason Tuvey, Middle East economist at Capital Economics, reports the Financial Times.

During the financial crisis in 2009, the government paid companies to help them tide over the cash crunch, however, this time, the finance ministry has cut advance payments from 20% to 5%.

“Money is not being paid at the top level,” said one banker to the industry. “This has been going on since October, and it is hard to know how long it will go on for,” reported Reuters back in February.

The stranded Indian and Pakistani workers are evidence that things aren’t any better now than they were in February.

Who is the Hardest Hit?

Construction laborers from India and Pakistan are most affected by the Kingdom’s hardships. This group of workers are left without a job, and without basic amenities such as insurance coverage, food, shelter and medical facilities—a situation that has improved after respective consulates stepped in to offer their own citizens aid.

Why Can’t They Go Home?

The laborers haven’t been paid many months of overdue salary and benefits, and most are not sure how and when their dues will be paid to them—if ever. Under the Saudi system, the employer’s approval is needed to obtain the visas, which has left many stranded.

After having toiled for years, the workers also do not want to return home empty-handed, without taking what is rightfully theirs—in essence, workers are left to wonder whether they should cut bait or double down and try to ride it out.

“They don’t give us any answers about our salaries,” said Mohammed Salahaldeen, a duct fabricator from Bangladesh, as he stood in a labor camp in Riyadh set up by the Saudi Oger construction company in better days. “After they pay me my salary and benefits, I will go,” reports the Financial Post.

Everything is Just Fine

In a meeting between the India’s junior foreign minister and the Saudi labor minister, Mufrej al-Haqbani, in Riyadh, the Saudi government has agreed to help the workers get their dues.
“Things are not as bad as they have been shown and projected,” the minister said in joint remarks with Mr. Haqbani after their meeting. “Things are very fine. We are in constant touch with all the officials and the various departments of the Kingdom of Saudi Arabia.”
Even other foreign governments are in touch with the both the Saudi government and the construction companies to ensure payment to their workers.

Saudi’s Empty Pockets

Setting aside the Kingdom’s positive outlook, until the Saudi economy reduces its reliance on oil, the situation is likely to get worse before it gets any better. With oil prices reeling close to $42 a barrel, the Saudi economy is likely to run out of cash, according to the International Monetary Fund, as shown in the chart below.


“All oil exporters will need to adjust to the new low oil price,” the IMF warned, reports the Independent. “All” in this case, includes, probably most importantly, Saudi Arabia.
Meanwhile, Saudi Arabia continues its record oil production, reaching 10.67 million barrels per day, up about 120,000 bpd on the prior month—with no signs of slowing. Although this will allow Saudi Arabia to hold onto its market share, which they can hardly be blamed for trying to cling to, it will no doubt add to the supply glut, and certainly will not bode well for oil prices in the short term.

And if oil prices continue to languish near today’s lows, it will be years before Saudi Arabia can regain its erstwhile glory. 

Courtesy of Rakesh Upadhyay, OilPrice.com via Wolf Street 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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