Oil Revenues Plummet : Saudis’ Cash Machine Is Sputtering

RIYADH, Saudi Arabia —  The forest of construction cranes that blights the skyline of Riyadh once was regarded as an emblem of the success that flowed from the oil boom. Petrodollars were being transformed virtually overnight into the hard assets of marble palaces, high-rise office buildings and extravagant shopping malls.

The cranes are still there, but now they are an embarrassing reminder of the precarious state of Saudi Arabia’s economy. Many of the machines have been idle for months, the buildings are rusting skeletons and the contractors working on them are awash in bankruptcy.

Throughout the Persian Gulf, the drop in oil prices has sent national economies reeling. The image of profligate spending so common five years ago has been replaced by layoffs--especially of foreign labor--bad debts and business failures. Experts agree that a major bank crisis is brewing in the region that could have far-reaching repercussions.

‘Painful Restructuring’

“We’re going through a painful restructuring,” Saudi businessman Youssef Hamdan said. “People are liquidating their unprofitable businesses, scaling down operations and getting rid of people. Luckily, the first people hit were foreign companies.”

Saudi Arabia offers the most dramatic example of the changes wrought by the fall in the price of oil. In the heyday of the Organization of Petroleum Exporting Countries, the Saudis were earning more than $100 billion a year from oil exports.

Last year, they earned less than $12 billion, and estimates for the current year are for oil revenues of about $15 billion. The Saudis have achieved that level only by doubling their output from less than 2 million barrels a day last August to 4.7 million barrels a day in January.

“The amazing thing is that this place is running at all,” said one Western economist in Riyadh. “They have suffered an 80% decline in income in the space of five years. At least they’ve tried to spread the hurt around.”

Saudis Delay Budget

The price of oil--and thus Saudi Arabia’s oil revenues--has been so uncertain that King Fahd announced on March 10 that the country’s budget was being delayed for five months. The government is having to draw down its foreign reserves--estimated at about $80 billion--at the rate of more than $1 billion a month.

Until there is a new budget, ministries are being allowed to spend one-twelfth of last year’s budget every month but cannot buy new equipment or start new projects. The result has been a severe recession in the construction business; government spending accounts for 80% of all building contracts.

“The economy is very tied up with government spending,” said Abdullah T. Dabbagh, head of the Saudi Chamber of Commerce. “I expect a lot of businesses will go bankrupt. Everybody overbuilt in reaction to the acute shortage in 1975 and 1976, and nobody looked at long-term demand.”

New Refinery Abandoned

The most visible sign of the depression was the government’s decision in November to abandon the $1.4-billion Kassim refinery well after construction had started, forcing the government to pay out $600 million in compensation to contractors.

Generally, government spending on new projects has been needed to prime the economic pumps because businesses have grown accustomed to completing their old projects with cash the government paid in advance for new contracts.

Thus, when the chain was broken, many projects--including some new ministry offices in the capital--were idled just before completion.

“It’s becoming survival of the fittest in the market,” said Khalil Diek, a California-educated executive for a large Saudi trading house. “Most of the marginal businesses which sprang up in the boom are finding it difficult to survive.”

According to Saudi and Western businessmen, many businesses are being forced to renegotiate payment schedules--to the government’s advantage.

Middlemen Switch Roles

The small army of middlemen who materialized to help foreign companies get contracts in the oil boom have found a lucrative new means of employment: They collect bad debts for a cut of the amount due. Huge numbers of tractors and other construction equipment lie by the side of roadways, offered at bankruptcy prices.

The real estate bubble burst in January when owners of office buildings and residential property started scrambling for business after months of refusing to reduce rents. In one month, rents crashed 40%, and many homes are available for less than half of what their owners were demanding just three months earlier.

“The shopping centers of Riyadh are like huge marble mortuaries,” said one agonized resident of the capital. “Many shops are not opening, and there are no customers. They seem like places for the dead.”

‘It’s Up to Allah Now’

In Jidda, where more than half of the new shops are empty, a huge new shopping center is rising along the city’s seafront boulevard. The $200-million center was forced to suspend construction last month when financing ran out, but the owners were able to resume work after a month’s search for new cash. “It’s up to Allah now,” said a spokesman for the firm.

There are now 350,000 fewer foreign workers in the kingdom than at the same time last year, and thousands are being sent home every month. The American expatriate community has declined from 65,000 to 40,000 in the same period.

“There is a definite move down the wage scale,” noted one diplomat. Employers used to hire Americans who brought their families with them, but now employers opt for less costly British workers, preferably bachelors. Europeans are being replaced by Filipinos, while other expatriates are giving way to still cheaper Pakistani and Bangladeshi labor.

Banks Hardest Hit

Many foreign economic experts say that the decline in oil prices is having its most serious impact on Saudi banks, which hold billions of dollars in outstanding loans to construction companies and real estate developers.

“The banks are making massive provisions for bad debts,” said one Western banker. “Most banks reckon that between 30% and 35% of all loans are non-performing.”

A non-performing loan is a banker’s jargon for a bad debt.

While a similar trend is found throughout the gulf, there is a second factor at work in Saudi Arabia that may bring several large banks to their knees.

Confounding the Bankers

Under Islamic law, or sharia, lending money for interest is forbidden. A growing number of Saudi businessmen are confounding bankers by refusing to pay debts on religious grounds--and they are being upheld by Islamic courts, which rule Saudi Arabia.

“There is an unquestionable double standard,” said a high-ranking Saudi official who asked not to be identified. “When things were going well, everybody paid. Now they are hiding behind sharia and weaseling out.”

“We have a relative inability to collect on our debts,” complained a European banker. “As a result, banks are quite reluctant to lend new money, which might normally help troubled businesses at times like these.”

Saudi bankers say that the Saudi Arabian monetary agency, the equivalent of a central bank, has quietly begun making large deposits in the most troubled banks to improve their liquidity.

Looking to Government

“Everyone hopes the government will do something in the event of a bank failure,” said one foreign adviser to the government, “but no one knows what it may be.”

According to a number of Saudi businessmen, most Saudis are moving their assets out of the country because of growing fears of bank failures and the better investment opportunities abroad.

For the first time in its history, Saudi Arabia is also experiencing an unemployment problem. In the past, trained Saudi workers could command enormous salaries and benefits, but they are now being forced to lower their expectations.

“Five years ago, you couldn’t find a Saudi to fill a job,” Saleh Toaimi, head of Riyadh’s Chamber of Commerce, said. “They were demanding 15,000 riyals (about $4,000) a month and getting it. Now we’re offering 8,000 ($2,200) and have plenty of takers.”

Unemployment to Increase

Manpower experts believe the unemployment problem will increase, particularly if the government makes good on promises to trim back the swollen bureaucracy, a form of welfare that allows thousands of middle-aged men to be paid for reading newspapers and drinking endless glasses of tea.

Until now, Youssef Hamdan had been one of Saudi Arabia’s luckier businessmen. He heads a conglomerate called Mabco, one of the world’s largest producers of pre-stressed concrete.

But now even his luck seems to be running out.

“We are doing all right because we have a backlog of orders through 1987,” Hamdan said in an interview recently. “We are now at 70% of capacity. What concerns us to the point of disturbance is the second half of 1987. According to our estimates, the business just stops then.”