Due to the deterioration in demand competition has increased, as builders operate on lower margins in order to obtain the remaining available business.
Construction demand in Saudi Arabia is expected to remain subdued in 2017. Due to the sharp decrease in oil prices since the end of 2014 the Saudi government, as the largest sponsor of construction acitivities, suffered a deterioration of its fiscal position.
Due to the deterioration in demand competition has increased, as builders have begun to operate on lower margins in order to obtain the remaining available business, which is leading to price wars. As a consequence, construction business profits will deteriorate further in 2017.
For construction businesses banks are the primary sources of funding. While banks were pursuing a very open loan policy strategy in the past, now lending has turned very restrictive due to the difficult economic situation and increasing default rates. This, together with the deterioriated demand situation, has strained the management of working capital and the cash flow position of most construction businesses, especially for smaller players.
Payment duration in the industry is 120-180 days on average. Payment experience has been bad over the past year, and non-payment notifications and insolvencies increased in 2016 due to the squeeze on working capital and reduced demand and prices. Both payment delays and protracted defaults are expected to increase by about 30% in the coming six months.
- Due to the deteriorated business performance and credit risk situation, our underwriting stance has become restrictive for all construction subsectors.