Rays of economic growth have begun to resurface in Saudi Arabia as stimulatory state spending starts to encourage a recovery in private sector investor sentiment, the Banque Saudi Fransi (BSF) said in its report on the Kingdom's economy released on Thursday. The report headed by its chief economist Dr. John Sfakianakis said, among others, that signs of a slow recovery have emerged in private sector loans, which rose 1.9 percent m-o-m in August, the biggest gain in 11 months. Credit rebound will be gradual and cautious, he said in the report. The latest economic data showed positive signs that an economic recovery is on its way for the Saudi economy, the report noted. “In our view, the slowdown in private sector engagement in the Saudi economy is not a matter of liquidity shortages,” the report indicated. “We expect the government sector's real GDP growth rate will be higher than the 3.5 percent reached in 2008, rising to 3.8 percent for 2009, close to its 2005 level of 4 percent,” BSF report said. The pace of credit recovery will accelerate in 2010, leading to healthier loan-deposit levels. But bank lending will not return to 2008 highs. Loans to the private sector witnessed their third month-on-month gain in August following a 2.5 percent contraction in the six months to May. The outlook for 2010 is one of circumspection for at least the first few months. But will this be enough for us to see a full rebound? At the moment we prefer to be cautious for at least the first quarter of 2010. The general business mood will adjust along with global conditions. The performance of global equities will guide sentiment in the local stock market, business and risk appetite. Needless to say, Saudi Arabian equities - as their regional counterparts - have been correlated with global markets far more on the way down than on the way up. Following a sharp downturn at the start of the year, bank lending is showing signs of picking up. Private sector credit growth and improvements in foreign trade support these expectations, and will enable a resumption of real GDP growth of 4 percent in 2010 according to our preliminary estimates. Banks started curtailing their lending in December and after a period of contraction in overall loans in the first half of the year, outstanding loans have stagnated. Banks adopted more cautious lending policies as they faced tight global credit markets and placed renewed emphasis on attracting greater deposits, with some facing loan-to-deposit rates of upwards of 85 percent or thereof. The emergence of the Saad and Algosabi debt default predicament has no doubt tainted the sturdy image of Saudi Arabia's corporate image, it said. Nonetheless, the macroeconomic and corporate landscapes remain healthy and “we believe the overall affect of the troubles on inhibiting bank lending in the coming year will be somewhat lessened.” Corporates in Saudi Arabia will have to adhere to greater transparency as local and international lenders will demand it. In August, bank claims on the private sector grew 1.9 percent month-on-month - the biggest advancement since September last year, when the collapse of Lehman Brothers brought the global financial crisis into full swing. Letters of credit, which provide insight about the future of the Saudi economy given the Kingdom's sizeable imports, are also showing signs of improvement. In August, settled LCs gained 7.9 percent compared with the month earlier. Still, year-on-year LCs were down 31.5 percent in August and new letters of credit eased for a second month by 3.9 percent. The gradual turnaround indicates the bottom was breached before the summer. The upward trend is set to continue, the report said, “but we do not foresee a massive and sudden jump in bank lending for at least the next two quarters.” “In our view, the banking sector faces no systemic risks; banks are very well capitalized, maintaining capital adequacy ratios double the Basel ratio. When confidence trickles back into the banking sector, SAMA interest rate policies should help along the recovery. Interbank interest rates have held at historic lows near 0.65 percent for the three-month Saudi Interbank Offered Rate (SIBOR) since June, when SAMA last reduced its key reverse repo rate by 25 basis points to a quarter percent in a bid to discourage banks from holding on to cash.” Since December, SAMA has reduced the reverse repo by 175 basis points and its benchmark repurchase rate by 100 basis points. “We believe the latest rate cuts mark the end of SAMA's monetary loosening cycle. Following the reverse repo cuts, banks have shown a tendency to place fewer deposits on an overnight basis with SAMA.” In August, banks placed SR65.6 billion with SAMA, far less than any other month in 2009. This showed some money is entering the domestic economy, while bank investments abroad rose to nearly SR95 billion in August from SR66 billion in February. Greater clarity on the ability of Saad and Algosaibi to meet debt obligations, as well as signals that their default troubles are unlikely to spread to other Saudi businesses, supported the longest rally in two years on the Saudi stock market, Tadawul, in late September. Between Sept. 2 and Sept. 30, the index climbed 12.2 percent, driven largely by gains among bank shares. In the first 10 days of October, the index managed to hold onto those gains. Volumes increased during the post-Ramadan period after a sluggish month. The market picked up a bit of steam and solidified above 6,300 points. Sustained high oil prices at or above $65 a barrel, which support domestic economic fundamentals, should also avert any selling pressures on local equities. Foreign swap agreements totaled SR921 million in September, a 48 percent surge on August levels. “It is, of course, not always possible to pinpoint the future direction of a market all too often driven by the sentiment of local retail investors, for whom discussing the bourse's ups and downs is a favored daily topic of conversation,” it said. In the coming month, the market's performance will be linked to how retail investors reacts to third-quarter earnings releases of key banks and industrials. Stocks will also follow trends depicted on global markets, such as the Dow, as there is no evidence indicating local equities have decoupled from global markets. “If we are to believe those who assume that global equities have been overbought, then we should expect a downward price correction in local stocks as well,” the report noted. Besides Saudi Arabia's systemic role in the global oil market it plays a crucial role in addressing fiscal imbalances. The Kingdom's participation in the G20 is directly related to its historical commitment to helping developing countries and being an important provider of Overseas Development Assistance (ODA). The Kingdom dedicates around 1 percent of GDP to foreign aid when many countries provide less than 0.5 percent of GDP. The only member with a seat on the G20, Saudi Arabia's imports have had a huge multiplier effect on the global economy. For every $2.6 the Kingdom earns in oil revenues it spends about $1 on imports. In 2008, Saudi Arabia's marginal propensity to import was 0.81, meaning that for every $1 increase in private consumption and investment some 70 cents were used to import goods and services. Saudi imports surged 27.7 percent last year to SR431.75 billion, attributed mainly to a rise in food product imports as part of a government policy to phase out domestic food production to reduce the strain on the Kingdom's water resources. The Kingdom, for instance, is giving up a 30-year program to grow its own wheat. This policy has exposed Saudi Arabia to dramatic swings in global commodity prices, the report said. Saudi imports are starting to recover. Private sector imports financed through commercial banks registered month-on-month gains in June, July and August of almost 13 percent - after plunging 39.5 percent in the nine months to May. “We expect this trend to continue and month-on-month as the recovery takes hold in the fourth quarter and early part of 2010. While imports are set to decline to $91 billion in 2009 from a high of $100.6 billion in 2008, most of this decline can be attributed to the drop in import value rather than purely to volumes,” the report said.
