Saudi Arabia

In its annual budget, the Saudi government has announced plans to spend up to SAR 580bn with a higher focus on investing in infrastructure, health and education to spur growth and job creation in 2011. Driven by high oil prices, the Saudi government has decided to increase economic stimulus to encourage sustainable growth. 

Robust public spending outlays and a moderate return in private sector activity supported stronger money supply and credit growth in Saudi Arabia in June 2010, according to the latest central bank data says a report by Banque Saudi Fransi.

According to the report oil prices at or above $75 a barrel will continue to support confidence and fiscal stability in the kingdom. Nevertheless trade flows continue to be volatile demonstrated by a slowdown in new letters of credit on the one hand and recent data suggesting a recovery in imports on the other.

Banks continue to adopt a watchful attitude towards extending new credit as demand from the private sector remains subdued. Bank credit growth, while improving, continues to fall far short of double-digit levels of 2007 and 2008. Although the KSA government has provided the largest fiscal stimulus in the G20 as a share of GDP, the investment appetite in the private sector has still not picked up. Credit growth remains sluggish and is driven almost solely by government funded projects.

As a result most new loans are project oriented rather than short-term working capital for private firms. The government will therefore need to do much more to ensure a trickledown effect for SMEs to benefit from credit growth.

An upward trend in retail and consumer spending is also evident but Saudi Arabia remains vulnerable to a global economic slowdown. In summary, the latest monetary indicators appoint to a sustainable recovery that should take hold in the second half of the year.

Source: Monetary Watch by Banque Saudi Fransi

'Unless the world's top oil producer tackles inefficiencies in its energy system, the Kingdom's stockpile of crude for export is in danger of falling by as much as 3m barrels per day by 2028' said Khaled al-Falih, Head of Saudi Aramco.

Mr. Falih's comments are significant given that Gulf States (excluding Qatar) face a shortage of gas at a time when domestic demand for energy is soaring and governments are seeking to diversify their economies. In Saudi alone, domestic demand is expected to rise from 3.4m b/d of oil equivalent in 2009 to approximately 8.3m b/d in 2028 – this translates into an increase of almost 250 per cent.

There is a glimmer of hope as Mr. Falih suggested demand could be halved by efficiency improvements provided hard decisions are taken. Such steps would include tackling subsidies that cost billions of dollars each year and foster a culture of waste.

Governments across the region continue to invest heavily to expand crude production capacity. But if solutions are not found, increased capacity will be consumed domestically rather than increase export potential. The irony is that the Middle East sits on 40 per cent of the World's proven gas reserves, a relatively clean source of energy but largely ignored by successive governments.

Oil officials in Saudi Arabia have privately raised concerns about efforts to lure energy-intensive industries such as steel factories and aluminum smelters to the Kingdom. They fear that foreign companies will benefit from cheap power and export a basic material with little advantage for the state. Mr. Falih said growth in energy requirements was not matched by a rise in gross domestic product; something he said was "receiving government's urgent attention".

How quickly will governments across the region mobilize to leverage gas resources? Only last month ConocoPhillips withdrew from a joint venture to develop Abu Dhabi's Shah sour gas field. It seems the road to increasing domestic energy supply will be long and bumpy.

Source: Financial Times

'Trade with Europe, source of almost a third of Saudi imports and destination of 10.6% of exports, could get slightly shaken by debt woes, but impact on trade remains minimal' says a report by Banque Saudi Fransi on concerns over Greece's debt crisis.

The report further adds that any contagion from the intensifying troubles in the European financial markets will inevitably unfold across the globe and this will hurt equities, currencies and commodities alike. However, the report mentions that the fallout for the Saudi economy will be restrained as the Kingdom is better insulated than neighboring Gulf States due to solid macroeconomic fundamentals.

In 2008, Saudi exports to Europe accounted for 10.5% of total Saudi exports. Greece accounted for 6.3% of all exports to Europe. On the other hand, a third of Saudi imports during 2009 came from Europe with Greece accounting for a negligible 0.3% of the European total. A weakness in European economies should mean a slowdown in export growth and in tourist visits but this should be felt more by the tourist-reliant North Africa than Saudi Arabia as per the report.

The report goes on to suggest that the Saudi economy remains insulated from the European contagion and that Saudi Arabia withe its twin surpluses is well positioned to respond to possible headwinds coming its way.

Source: Flash Note by Banque Saudi Fransi

Christopher Garnett, Director of Euromoney Conferences rounded off the first day of the Euromoney Conference in Riyadh, Saudi Arabia by moderating a lively discussion on Saudi corporate finance. The panelists included Mutlaq Al-Morished - Vice President of Corporate Finance and CFO SABIC, Shaheen Amin – General Manager Saudi ORIX Leasing Company, Michael Essex - Director for the Middle East and North Africa, International Finance Corporation (IFC) and Zulfi Hydari, Co-Founder and Group Managing Director, HBG.

The panelists were unanimous in their belief that small and medium sized companies were the key to unlocking significant corporate finance activity in Saudi Arabia. It was also highlighted that private equity capital would be central in an economy where smaller entities find bank credit difficult to access.  Saudi attempts to diversifiy its oil economy would be dependent on the growth of the private-sector which in turn will require alternative sources of finance.

When asked by Christopher Garnett to name one thing the panelists would like to see implemented within one year they all replied – bankruptcy law.

The overall event had an upbeat mood with around 1,200 delegates attending the two day conference in Riyadh. For further details visit the official website here.