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Saudi import financing jumps

Saudi businesses are taking out bank loans at the fastest pace

Gulf News

Dubai: Saudi Arabian import financing posted a record first half as economic growth in the world’s biggest oil exporter spurs demand for goods including building materials and cars.

The value of letters of credit signed by lenders in the largest Arab economy surged 24 per cent in the first six months of 2012 to 107 billion riyals (Dh106.5 billion), the most on record for the period, according to the most recent central bank data. That compares with 10 per cent growth in the same period last year.

Saudi businesses are taking out bank loans at the fastest pace in three years and pursuing record bond sales as they take part in the government’s $514 billion plan to build housing, infrastructure and industry. This is stimulating the non-oil economy, which is poised to grow 6.5 per cent this year, the second-fastest pace in the six-nation Gulf Cooperation Council after Qatar, according to the International Monetary Fund.

“Imports are being driven by both consumption and investment-related goods, reflecting the broad-based drivers of Saudi’s non-oil economy,” Monica Malik, Dubai-based chief economist at EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank, said on Sunday.

Financing needs

Supported by oil prices that have averaged $96 a barrel so far this year in New York, state and private investors in Saudi Arabia are importing more. Saudi Arabia’s $597 billion economy, may grow five per cent this year, including the oil industry, the second-fastest pace since 2005 according to the median forecast of 12 economists surveyed by Bloomberg in July.

The pick-up has prompted banks to accelerate the pace of lending and spurred higher borrowing costs. Loans to private businesses expanded 13.9 per cent in June, the fastest pace since March 2009, central bank data show.

The three-month Saudi interbank offered rate, known as Saibor and the benchmark used by banks to price loans, has added 17 basis points this year to 0.95250 per cent today, the highest since April 2009, data compiled by Bloomberg show. That’s widened the spread with the equivalent US rate to 53 basis points on August 24 compared with 20 at the end of 2011.

The yield on Saudi Arabia’s six-month treasury bills is up six basis points in 2012 to 0.46667 per cent after an auction on Monday. The kingdom holds weekly T-bills sales on Mondays. The Saudi riyal weakened to 3.7501 a dollar in the 12-month forwards market on Monday, the lowest level since April, the data show.

Port traffic

Growing import financing this year “is a testament to a story of positive domestic demand,” Dubai-based HSBC Holdings Plc senior economist Liz Martins said on Sunday.

Cargo traffic through the Jeddah Islamic Port on the Red Sea, the port handling more than a third of the kingdom’s traffic, surged 31 per cent in the first half, the fastest pace in at least seven years, according to data of the Saudi Ports Authority.

Letters of credit to finance building material imports gained 46 per cent in the first six months to 13.4 billion riyals, central bank data show. Import financing for machinery climbed 15 per cent to 15.9 billion riyals.

The data also show a trend toward greater consumption by the nation’s 28 million people. Letters of credit against the import of cars jumped 24 per cent in the period, while those for foodstuffs surged 61 per cent.

Consumption ‘Drivers’

“We see a wide number of direct private consumption drivers, with government policy focusing on job creation and wealth distribution,” Malik of EFG-Hermes said.

Consumer demand hasn’t stoked inflation, which eased to four per cent in July, the lowest since October 2009, according to data compiled by Bloomberg. “The fact that we don’t have inflationary pressures, however, suggests that there are limitations to the story of strong private consumption,” Martins said.

HSBC’s monthly Purchasing Managers Index for the kingdom, fell for a second month to 58 in July, although this level “firmly in expansionary territory,” HSBC said in a report this month.

Saudi Arabia’s spending plan includes more than $60 billion to build a logistics hub, and improve airports and roads. To finance the plans, state and private businesses have turned to the debt markets, selling $8 billion of bonds this year, the most on record according to data compiled by Bloomberg. The biggest issue was a 15 billion-riyal sale of Islamic bonds by state-run General Authority for Civil Aviation in January to fund an airport expansion.

Building Homes

Building homes is also a priority to stem an increase in real-estate prices, with the government approving its first-ever mortgage law in July. Shares of Riyadh-based Dar Al Arkan Real Estate Development Co soared 35 per cent this year, outpacing the benchmark Tadawul All Share Index’s 11 per cent advance. The yield on the developer’s 10.75 per cent dollar-denominated sukuk due February 2015 fell 11 basis points last week, the biggest weekly drop in six weeks, to 7.81 per cent on August 24, data compiled by Bloomberg show. It was little changed on Monday.

“Moving into the second half, we will see a large increase in imports, particularly in the building materials, and that will translate into a very strong performance in the construction sector,” said Fahad Al Turki, Riyadh-based senior economist at Jadwa Investment Co. “The government approved last year money to fund housing. Basically this is the second-round impact of the stimulus package introduced last year.”