By Mohammed Al-Aufi
Makkah
MINISTER of Finance Mohammed Al-Jadaan’s frank talk with the business community on the possibility of the private sector incurring losses and even facing bankruptcy as a result of the new economic austerity measures has many connotations.
The minister has also spoken about the significance of corrective economic measures. He has indicated that there is no shame in facing bankruptcy and that we should not shy away from corrective steps or announcing the bankruptcy of a company or an economic entity.
The most important thing, according to the minister, is we need to work to protect those firms by speeding up bankruptcy and liquidation proceedings and giving them legal protection.
The minister’s statement can be read from different angles.
If we suppose the minister was addressing local firms it can be considered as a move to prepare them to face the worse to come, especially when he was talking to a group of businessmen. He wanted to tell them the various possibilities their companies could face.
He also wanted to indicate that the government would not intervene when their companies face bankruptcy and they should accept their plight without pinning hopes on a government bailout. The statement came after two giant contracting companies faced financial difficulties.
Al-Jadaan has sent an implicit message that the outcome of the ongoing economic transformation and restructuring process could become harsher and many companies would not be able to withstand its impact and some of them might leave the market as a result of their inability to cope with the financial situation and sometimes they have to even declare bankruptcy.
There is no doubt, foreign companies and investors that observe Saudi economic developments and Vision 2030 would have got the message from the minister’s candid statement regarding negative indicators of the economy and future economic situations.
The second part of the minister’s statement will increase their fears about the lack of a bankruptcy law. Consequently foreign investors and companies will change their decisions and look for countries having better economic prospects and investment conditions. This goes against the government’s strategy as it wants to increase the private sector’s contribution to the gross domestic product from 40 to 65 percent and raise direct foreign investment from 3.8 percent to 5.7 percent. It also wants to increase the contribution of small and medium enterprises from 20 to 35 percent.
If we agree with the minister and consider that bankruptcy is not a shame and it will not negatively affect the economy and the ongoing efforts to increase the private sector participation, it is better for our lawmakers to pass a bankruptcy law in order to protect companies, especially at a time foreign investors have been demanding such a law. We hope such a law would improve the legal dimensions of trade in the Kingdom. It would reassure foreign investors who will think that even if their companies face bankruptcy the law would protect the interests of both creditors and customers.
As the minister has frankly pointed out the possibility of some companies declaring bankruptcy, the absence of a bankruptcy law may obstruct ongoing efforts to attract more foreign investment. No doubt a bankruptcy law will strengthen the Kingdom’s economic and business competence as it wields significant influence on decisions by investors.
The absence of bankruptcy proceedings limits the ability of Saudi companies to overcome financial problems and continue business activities or implement liquidation process in order to protect the rights of all stake holders.
A bankruptcy law will reduce the risks to creditors and provide opportunities for companies to extricate themselves from financial crises through restructuring.
