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Higher Saudi Growth Spurs Sabic Credit Risk Drop: Arab Credit

Saudi Basic Industries Corp.’s credit risk is poised for the biggest monthly drop in almost a year as the world’s biggest petrochemicals maker by market value benefits from higher Saudi economic growth expectations.

Five-year credit default swaps for the state-owned company known as Sabic have decreased 10 basis points this month, the most since February, to 102 yesterday, according to data provider CMA. That compares with 116 for Dow Chemical Co., the world’s third-biggest publicly traded chemicals maker.

Saudi Arabia’s economy expanded 5.6 percent this year, the second-fastest pace in almost a decade, according to the median estimate of 16 economists compiled by Bloomberg this month. That’s up from an earlier forecast of 5.1 percent as the world’s top oil exporter pursues more than $500 billion of investments in areas including industry and petrochemicals. The kingdom’s credit risk almost halved this year to 69, the lowest in the Middle East and below similar-rated Japan.

“International companies are comfortable with the current risk in the Saudi market and don’t have to buy insurance for their investments, which is what is pushing the credit defaults swaps lower,” Abdulwahid Al-Matar, head of trading at Riyadh-based Saudi Hollandi Bank, said by phone on Dec. 23. “Sabic is the closest thing to sovereign debt that we have.”

Big Reserves

Saudi Arabia has built up its reserves this year as the price of Brent crude, the benchmark for more than half the world’s oil, averaged $112 a barrel, almost unchanged from 2011. Net foreign assets held by the central bank jumped 21 percent in the year to October to 2.35 trillion riyals ($627 billion) -- the third-highest for any country after China and Japan, according to data compiled by Bloomberg.

“The kingdom has strong foreign currency reserves around 100 percent of GDP, a fiscal surplus and low debt levels that are domestically held,” Monica Malik, Dubai-based chief economist at EFG-Hermes Holding SAE, said in response to e-mailed questions.

Lending rates advanced the most in the six-nation Gulf Cooperation Council in 2012 as government spending spurred annual loan growth to businesses to 15 percent in October, the highest in almost four years.

New Plants

The three-month Saudi interbank offered rate, the benchmark used by banks to price loans, gained 22 basis points this year to 0.995 percent today, near the highest since April 2009, according to data compiled by Bloomberg.

Sabic, 75 percent owned by the government, is building a $3.4 billion specialty-elastomer plant with ExxonMobil Corp. on the Persian Gulf coast that’s set to produce 400,000 tons of rubber product a year when it starts in 2015. The yield on the chemical-maker’s 3 percent bonds due November 2015 has dropped 112 basis points, or 1.12 percentage points, this year to 1.78 percent today, according to data compiled by Bloomberg.

Still, Sabic’s 2012 profit is set to decline 13 percent, the first annual retreat in since 2009, to 25.3 billion riyals, the average estimate of 14 analysts compiled by Bloomberg shows. “Weak demand for polymers and key derivatives, mainly on a structural slowdown in China, and strong volatility in oil and feedstock prices” were behind the decline, Ahmed Shams El Din, Cairo-based director of equity research at EFG-Hermes, said by e-mail.

Attracting Investments

A pick up in the U.S. chemicals industry on the back of shale gas may test the long-standing competitive advantage that Sabic has enjoyed from its proximity to the world’s largest conventional oil reserves, he added. “The impressive turnaround in North America’s shale gas economics is providing U.S. producers’ with a significant cost advantage stemming from their access to cheap ethane gas,” Shams El Din said.

Investor appetite in the kingdom’s assets has heightened as the nation emerges mostly unscathed by the political unrest that swept across the Middle East and North Africa since the so-called Arab Spring started two years ago.

Egypt’s credit risk jumped 100 basis points this month, set for the biggest monthly advance in a year, to 491 basis points yesterday. Political clashes between the country’s Islamist government and its opponents in the past month led to a delay in the approval of an International Monetary Fund loan. In Syria, more than 44,000 people have been killed since the conflict started in March 2011, according to the U.K.-based Syrian Observatory for Human Rights.

“The situation in Egypt doesn’t look good, nor does it look good in Syria,” Matar of Saudi Hollandi Bank said. “The Saudi economy is doing really well. Multinationals are establishing businesses here and placing money into the economy.”

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