Bloomberg News

Saudi Arabia Loans Growing Fastest in Persian Gulf: Arab Credit

July 05, 2011

July 6 (Bloomberg) -- Saudi Arabian bank lending is climbing the most among the six Gulf Cooperation Council nations this year as growth in the biggest Arab economy accelerates.

Bank credit to the private sector expanded 4.6 percent in the five months through May, according to data from the Saudi Arabian Monetary Agency this week. The rate ranged from a 4 percent drop in Bahrain to a 2.7 percent increase in the other five GCC countries.

Higher oil production to compensate for a drop in output from Libya and increased government spending to counter the political unrest in the region are boosting the economy of the world’s largest exporter of crude, according to John Sfakianakis, the Riyadh-based chief economist at Banque Saudi Fransi, a lender part-owned by Credit Agricole SA.

“There is a recovery under way, the retailers, the family businesses, they are all benefiting, which is spurring lending from the banks,” Sfakaniakis said. Saudi Arabia’s economy “didn’t have the excesses that some of the other countries in the region had, like the real-estate bubble in Dubai, Abu Dhabi and even Qatar” to which the banks were exposed, he said.

The $130 billion spending plan announced by King Abdullah Bin Abdulaziz Al Saud in February and March after protests toppled rulers in Tunisia and Egypt will help boost economic growth this year to 5.3 percent from 3.8 percent in 2010, according to National Commercial Bank, Saudi Arabia’s biggest bank by assets.

Slower Growth

Saudi bank lending had slowed in the previous two years after two family-owned businesses defaulted on at least $15.7 billion of loans and the economy was hurt by the global credit crunch.

Five months of political unrest have shaken the Middle East as citizens demand civil rights, higher living standards and the ouster of autocratic regimes. Yet Saudi Arabia, the self- proclaimed leader of the Gulf states, hasn’t been affected by the events, sending troops to end protests in Bahrain and stifling demonstrations in its own Eastern Province.

The cost of insuring Saudi debt against default was unchanged at 94.5 basis points on July 4, and is down from a three-month high of 117 on May 6, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The cost of insuring Bahrain’s debt fell one basis point, or 0.01 percentage point, to 225. Default swaps for Lebanon were at 350 basis points.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

$100 Billion Package

King Abdullah announced a package of about $100 billion on March 18 which included funds to build 500,000 homes and for military and religious groups that backed the government’s ban on domestic protests. Unrest spread across the Middle East and North Africa, leading to armed conflict in Libya and protests in Syria, Bahrain and Oman. Banque Saudi Fransi raised its 2011 state expenditure forecast by 25 percent to $225 billion after the announcements.

Saudi banks led by Samba Financial Group, the kingdom’s biggest publicly traded lender, and second-ranked Al Rajhi “have been conservatively building up capital buffers during the crisis and now that the economic environment is turning they can start to lend again,” Khalid Howladar, a vice-president at Moody’s Investors Services said in an e-mail. “The recent social measures have given people a boost in confidence and spending power which is facilitating more borrowing.”

Faster Growth

Saudi Arabia’s economy may grow 6 percent this year, compared with an initial estimate of 4.3 percent, Saudi central bank Governor Muhammad al-Jasser said in a speech June 8. Growth had slowed to 0.2 percent in 2009 from 4.2 percent in the previous year.

Oil production rose 3.2 percent to 9.21 million barrel per day in June from May, according to data compiled by Bloomberg. The kingdom will boost output to 10 million barrels a day in July, Al-Hayat newspaper reported June 6, citing senior officials.

Saudi bank credit to the private sector grew 5.7 percent in 2010 after declining 0.04 percent in 2009, according to data from the central bank. In 2008, it jumped 27.1 percent.

Average yields on conventional bonds in the GCC have declined 31 basis points this year to 4.97 percent, according to HSBC/NASDAQ Dubai GCC Conventional Bond Indices.

Qatar, Bahrain

Bank lending in Qatar is expected to accelerate from next year as government spending on infrastructure for the 2022 soccer World Cup kicks in, according to Janany Vamadeva, a Dubai-based analyst at HC Securities. Kuwait’s banks still have problems with loan defaults and need to book provisions, while political unrest in Bahrain has hurt lending, she said.

In the United Arab Emirates, the second-largest Arab economy, lending is also recovering as Dubai government-owned companies agree with lenders on delaying debt repayments. Dubai World, one of the emirate’s three main state-owned holding companies, reached a deal with about 80 creditors in March to restructure about $25 billion of loans. Property prices in Dubai, the second-biggest of seven states that make up the U.A.E., had fallen by about 60 percent from their peak in 2008.

U.A.E. bank lending grew 1.3 percent in 2010 after rising 2.4 percent in 2009. Loans had jumped more than 30 percent annually between 2005 and 2008. The U.A.E. 3-month interbank interest rate, the rate at which banks lend to each other, has dropped 27 percent since April to 1.5475 percent. Saudi Arabia’s 3-month interbank rate was at 0.63625 percent yesterday.

“In the U.A.E., interbank interest rates are coming down but taking time, although they are still much higher than in Saudi Arabia,” Simon Williams, an economist at HSBC Holdings Plc, said in an interview. “The U.A.E. banking system is normalizing, it’s just further behind on the cycle than in Saudi Arabia.”

--Editor: Riad Hamade, Laura Zelenko.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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