Saudi firms cope with austerity
Saudi Arabian companies are faring better in an era of austerity than many investors feared, but they face more pain in the coming months as gains from cost-cutting and efforts to improve efficiency become more diffi cult.
The world´s largest oil exporting country is in the grip of a protracted adjustment to low crude prices, which have caused a state budget deficit of nearly $100 billion and has forced the government into spending cuts.
For decades, almost every corner of the economy has depended on lavish flows of petrodollars, so the austerity is bad news for Saudi corporate earnings.
Last December, the government announced its harshest set of measures so far, in the form of subsidy cuts that raised domestic prices of gasoline, electricity, water and the natural gas feedstock used by the petrochemicals industry.
The first-quarter earnings of listed Saudi companies, released over the last few weeks, show that many are managing to avoid a steep slide in profits.
The combined net profits of the 50 biggest companies by capitalisation, which account for the vast bulk of all earnings in the stock market, fell only 3.0 percent from a year ago to 19.88 billion riyals ($5.4 billion).
That was much better than the expectations of many analysts, who had believed profits might drop at least as steeply as they did in full-year 2015, when earnings shrank 13.9 percent. Nevertheless, there were big differences in first-quarter performance between individual sectors, with industries directly exposed to consumer demand, such as retailing, hit hard.
Statements by the companies attributed much of their better-than-expected earnings to cost cutting and gains in operational efficiency - processes that cannot continue indefinitely if they want to grow. That suggests the decline in profits could accelerate later this year or next.