How the drop in oil prices is delaying a major Saudi hotel

(Abraj Kudai)

Makkah’s $3.5-billion hotel project, Abraj Kudai, is expected to become the world’s biggest hotel by room count when it makes its scheduled debut next year. That debut, however, may be delayed thanks to a range of economic factors. 

According to Forbes Middle East, last year's drop in oil prices is causing a ripple effect on the Saudi economy, with hotel developments caught up in the waves. 

The Kingdom of Saudi Arabia’s Ministry of Finance is the owner of the project, and is also a prime customer of The Saudi Binladin Group, one of the country’s largest construction companies. When the low oil prices began forcing the government “to cancel or suspend projects and delay payments,” SBG saw a decline in profits. A construction accident at Makkah's Grand Mosque resulted in SBG being banned “from receiving new state contracts.” In response to its potential financial collapse, the conglomerate dismissed "thousands" of employees and stopped work on several important projects—including Abraj Kudai.

In the past three months, however, the Saudi government has taken a more benign approach to SBG, allowing the company to resume bidding for new contracts and, according to banking and construction industry sources, making some payments to the group. This has helped the firm secure a $667-million loan from local banks, repay bondholders and resume work at some stalled projects.

An SBG spokesman declined to discuss details of the conglomerate’s finances or the status of its projects.

But for all of SBG's problems, the economic challenges of the oil-rich Kingdom cannot be ignored. At Boston University's School of Hospitality Administration, Tarik Dogru, assistant professor of hospitality finance and accounting, noted how the country’s fiscal deficit has risen to approximately $100 billion in 2015, which effectively makes budget management of a major project like Abraj Kudai especially challenging.

Dogru expects that the hotel project will move ahead, but perhaps more tentatively than originally planned. The opening, he said, would most likely take place after 2018.
Completing this development through this difficult time would mean applying different strategies—from finding other construction companies to finish the job or entering into a joint venture with a foreign investor, “but in theory, the solutions are endless,” Dogru said.