Saudi Arabia’s gross domestic product (GDP) shrank 3.8% in the third quarter, according to the Wall Street Journal, signaling that even the largest economy in the Middle East is struggling to respond to the increased stress brought on by the Iran War.
The decline is attributed to a 20.4% drop in oil activities compared to the same period a year prior. It’s a slight slowdown from the second quarter’s 4.7% on-year contraction, per the Wall Street Journal, but it still doesn’t reflect the conflict flare-ups with the Houthis seen in the past month. Attacks on civilian airports and infrastructure leading to civilian casualties and disrupted travel have sent ripples across the kingdom.
Despite steep drops in oil activity, non-oil activity rose 1.9% year-over-year in the third quarter in alignment with the nation’s Vision 2030 model which sees the kingdom easing their dependence on oil and diversifying their economy.
The kingdom’s quarterly fiscal deficit more than doubled in the third quarter, according to Bloomberg. The government posted a budget shortfall of 84 billion Saudi Arabian Riyals, a 145% increase from the previous quarter. The shortfall comes from decrease in government payments from Aramco, the state oil company.
While the conflict weighs on oil output, Aramco reported a 34.5% increase in third-quarter net profit, according to Reuters. Aramco, the top oil exporter in the world, reported $36.25 billion net profit in the third quarter, up from the $32.7 billion seen in the second quarter.
Higher oil prices have offset any losses due to lower volume. Saudi Arabia’s oil output was about eight million barrels per day in September, a drop from the 10 million barrels per day seen before the Iran War.
Despite increasing profits, Aramco is paying less in royalty fees because the average realized gas prices are lower, according to Bloomberg, exasperating the kingdom’s budget deficit. Tim Callen, a visiting fellow at the Arab Gulf States Institute and former International Monetary Fund mission chief for Saudi Arabia, predicts oil revenue will rebound in the fourth quarter as crude oil prices increase.
Credit managers with customers in Saudi Arabia find that they are 11 days beyond terms on average, according to FCIB’s Credit and Collections Survey. Creditors largely extend 1-30 day terms (38%) followed by 31-60 day terms (25%), 61-90 day terms (12%) or 90 days or more (12%). Another 12% of creditors do not extend credit to customers in Saudi Arabia.
Additionally, 38% of survey respondents find that payment delays are increasing. Payment delays are largely attributed to billing disputes (50%), regulatory issues (50%) and cultural norms and customs (50%).
“Put everything in writing,” one respondent advised. “Signed contracts and supporting documents are essential.”
“Respect local cultural norms when conducting face-to-face business meetings,” another respondent wrote.
“Be aware of withholding tax (WHT) requirements,” another respondent added. “Expect significant administrative work.”
