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Saudi Bank Lending Rates Rise After Cabinet Changes: Arab Credit

Saudi Arabia’s three-month interbank interest rate climbed to the highest level in seven months after King Abdullah appointed a new team to manage the Arab world’s biggest economy.

The rate climbed to 0.745 percent yesterday, the highest since May, according to Bloomberg data, as the cost of credit-default swaps linked to Saudi Arabia rose to the highest this month. The derivatives are used as a measure of confidence although they reference no debt.

Saudi Arabia, the world’s largest exporter of oil, replaced its central bank head and economy minister as it presses forward with a record spending plan aimed at reducing unemployment of 10 percent and reliance on crude exports. Fahad al-Mubarak was appointed governor of the Saudi Arabian Monetary Agency, replacing Muhammad al-Jasser, who was named economy and planning minister, state-run al-Ikhbariya said on Dec. 13.

“Maybe some people are nervous, probably unnecessarily, that al-Jasser’s move from SAMA will mean a change in monetary policy and possibly greater pressure on banks to lend,” said Jarmo Kotilaine, chief economist at National Commercial Bank. “It is probably just a short-term market reaction to perceived uncertainty.”

Monetary Policy

Saudi Arabia, which boosted production to more than 10 million barrels a day in November, won over fellow OPEC members yesterday to agree to raise the ceiling to 30 million barrels a day, bringing the target nearer to current output. The move comes amid concerns Europe’s debt crisis is driving the world toward a recession, and would thus give OPEC a base-line from which to cut output if the economy further deteriorates.

Under al-Jasser, Saudi Arabia has maintained a monetary policy that aimed to meet “domestic demand for credit” and enable local banks “to play their financing role in the development process of the kingdom,” the central bank said in an annual report published Dec. 12 on its website.

This isn’t likely to change under al-Mubarak, said Murad Ansari, an analyst at investment bank EFG-Hermes Holding SAE in Riyadh. “I don’t think there should be too much nervousness about the appointment because the monetary policy of the bank will be more or less similar.”

Bank Lending

Al-Mubarak worked as managing director of Morgan Stanley Saudi Arabia before his appointment. He was also chairman of the Saudi Stock Exchange. He declined to comment on central-bank policies when contacted this week.

The Saudi riyal is pegged to the dollar and central bank policy often tracks the U.S. Federal Reserve. In 2009, the bank cut the repurchase rate to 2 percent, the lowest since 2004, and the reverse repurchase rate to 0.25 percent.

Bank lending to the private sector rose to a record of 810.2 billion riyals ($216 billion) in October, an increase of 10 percent from the same period last year, according to data on the central bank’s website.

Al-Jasser said in an interview in October that lending through the remainder of the year would continue at about 9 percent. “The pace is reasonable at this point,” he said. The same month, he said Saudi Arabia has no reason to change its policy of pegging the riyal to the dollar.

The outlook for the Saudi Arabian banking system “remains stable” based on the expected decline in problem-loan levels and Saudi banks’ supportive capital, profitability and liquidity attributes, Moody’s Investors Service said on Dec. 5. “These positive factors are counterbalanced by structural weaknesses that include high loan and deposit concentrations, the opacity of family conglomerates and a vulnerability to a sustained drop in oil prices.”

Lending Criteria

The kingdom’s banks tightened lending criteria after two businesses owned by prominent Saudi families defaulted on at least $15.7 billion of loans in 2009 and the global credit crisis hurt the economy. Growth slowed to 0.1 percent in 2009 from 4.2 percent the previous year, International Monetary Fund data show. Bank lending to the private sector fell 0.3 in 2009 to 702 billion riyals from a year ago, central bank data show.

Saudi Arabia’s spending to create jobs and diversify its economy comes amid a wave of popular uprisings in the Middle East, triggered in part by unemployment. King Abdullah announced a $130 billion spending plan in the first quarter and in August 2010 unveiled a $384 billion plan to develop transportation, housing and education.

Corporate Borrowing

Saudi Arabia’s real gross domestic product will expand 5.1 percent this year, according to the central bank’s annual report. The non-oil sector will expand 5.4 percent, while the oil industry will grow 4.9 percent, the bank said.

Companies are benefitting from government expenditure, James Reeve, a senior economist at Samba Financial Group in London, said in response to e-mailed questions.

“The economy is still fundamentally driven by government spending,” Reeve said. “Large numbers of private sector sectors benefit directly or indirectly from government spending.”

Saudi Arabian Mining Co., the state-controlled company known as Ma’aden, said on Dec. 5 that one of its units obtained a 1.35 billion-riyal loan. Ma’aden Petrochemicals Co. and Sahara Petrochemicals Co. signed the one-year bridge loan with Saudi British Bank and Banque Saudi Fransi.

Jabal Omar Development Co., a Saudi property company, signed an agreement this month with the finance ministry for a 3 billion-riyal commercial loan, according to a statement to the Saudi bourse on Dec. 13. Both Saudi Aramco Total Refining & Petrochemical Co., a joint venture between Saudi Arabian Oil Co. and Total SA, and Saudi International Petrochemical Co. sold debt this year.

Credit-Default Swaps

While the cost to insure Saudi debt rose to 128 basis points yesterday, it is less than half the Middle East sovereign average, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a borrower fail to adhere to its debt agreements.

The country needs the non-oil economy to expand at an average 7.5 percent in the next five years to lower joblessness by half, the IMF said. Non-oil output growth will slow to 5 percent in 2012 from 5.4 percent this year, while the expansion in oil GDP will grind to a halt next year, IMF data project.

The latest Cabinet changes, along with King Abdullah’s appointment earlier this year of a successor to the late Prince Sultan as defense minister, are the first since 2009. That year, Abdullah appointed al-Jasser as the central bank governor and named new ministers of information and education.

The king appointed Prince Nayef, 78, as crown prince on Oct. 28 and later named Prince Salman bin Abdulaziz as defense minister. The appointments followed the Oct. 22 death of Prince Sultan, formerly crown prince.

Al-Jasser, who had been a deputy governor of the Saudi Arabian Monetary Agency since 1995, replaced Hamad Saud al-Sayari in 2009. Al-Sayari had served as the central bank’s governor since 1983.

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