Dubai: Saudi Arabia's private sector non-oil GDP (gross domestic product) grew by a modest 3.7 per cent year on year in 2010, largely unchanged from 2009. Analysts attribute the slow recovery to sluggish private sector credit growth.

The private sector credit growth was about 5 per cent last year compared to flat growth in 2009.

"Banks' risk aversion post the Saad/Alghosaibi defaults as well as structural factors, including the reliance on "name lending" and regulatory limits on exposure to a single borrower, were all contributors to weak private sector credit growth in Saudi Arabia," said Khatija Haque, an economist with Shuaa Capital.

Long way to go

Although the government provided alternative sources of funding through its specialised credit development institutions and financing programmes, analysts say private sector credit growth has a long way to go. Shuaa Capital has forecast 9 per cent credit growth in 2011. Standard Chartered economists have projected more modest private sector credit growth in 2011.

"Credit growth in the private sector started to rebound in 2010 and will grow further in 2011. We expect credit growth to be within a range of 3 to 5 per cent year on year in 2011," said Shady Shaher, an economist with Standard Chartered in the UAE.

Shaher is hopeful of a robust recovery in private sector lending as strong policy spending moves into its third year in 2011.

"As policy spending filters through to the broader economy, we expect lending growth momentum to be sustained in 2011," he said. The Saudi banking sector remains robust with loan-to-deposit ratios below 85 per cent. This means banks have the capacity to lend and, unlike some banks in the region they are not challenged by the structural problem of high loan-to-deposit ratios.

Saudi consumer lending is growing faster in the GCC countries. After a prolonged period of flat-to-negative growth, consumer lending growth in Saudi Arabia is back to double digits (last reported at 9.4 per cent year on year as of September 2010). This is also in sharp contrast to the rest of the GCC, where consumer lending growth is below 5 per cent.

With interest rates likely to remain low and banks still showing reluctance towards corporate lending, analysts expect consumer lending growth to remain in double digits through 2011.