By - chamber.org.sa...man and CEO of Al-Khobar-based Al-Tuwairqi Holding, strongly be-lieves that...

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The countries across the world

gauge the extent of dent the pre

create in their economies and fina

dollar plus financial crisis started in

in 2001with subprime mortgages an

a full-blown credit crunch by 2007

US banks were on the verge of financ

Bankruptcy declaration by Lehman w

in the coffin. Experts fear an imminent

believe it may not result into d1930s. In thhow safe

Growth of Sub-Prime Lending

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SAUDI COMMERCE& Economic Review

AUDI Arabian MonetaryAgency (SAMA), in anunprecedented move,slashed its main inter-est rate on Nov.23 forthe third time in six

weeks. This was to encouragemore lending to companies strug-gling to find credit.

SAMA has eased reserverequirements as part of the gov-ernment’s efforts to help the localfinancial market cope with tight liquidity. It reduced its key repur-chase rate by 100 basis points to 3

percent to keep credit marketsmoving and boost domestic liquidity.

In the neighboring United ArabEmirates (UAE), the two of thelargest mortgage lenders – Amlakand Tamweel – already on track tomerge, will be brought under a

d are busy trying toesent downturn willnances. The trillion-in the US way backnd developed intowhen around 25cial break down.was the last nailt recession butdepression ofhis backdrop,fe are we?

ByIrfan Iqbal Khan

S

Annual volume ofsub-prime $bn

% share ofmortgage market

800

600

400

200

0

30

20

10

0

Loans

Share

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Source: Center for Responsible Lending include Mortgage Finance

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state-owned bank. This is the firstsign of government intervention inDubai’s troubled real estate sector.

In Kuwait, top bankers haveurged the government to buy up to10 percent of the shares in its lead-ing share index through a bailoutfund, a move worth $12.83 billion.Kuwait has also asked its sover-eign wealth fund, Kuwait Invest-ment Authority (KIA), to set up afund to invest in the batteredbourse.

Oman has planned to set up a$389.6 million market-maker fundwith the private sector to help sta-bilize its bourse.

Is the rate cut in Saudi Arabiaand similar steps across the regionto avert a liquidity crisis any indica-tion of the imminent credit slow-down?

The financial storm seems tohave hit the Gulf shores, thoughnot in a big way.

Will Saudi Arabia beaffected?The impact of the global financialcrisis on the economy and the

financial system in Saudi Arabiahas been minimal, according toSAMA Deputy Governor.

“The domestic financial systemhas maintained its strength; com-mercial banks have remained liq-uid, highly capitalized and prof-itable. They have not been materi-ally affected by the loss of confi-dence arising from subprime andstructured debts products. Thedomestic inter bank financial trans-

actions continue to function nor-mally, reflecting strong confidencein the Saudi banking system,” saidDr. Abdulrahman Al Hamidy.

Among underlying reasons forthese comfortable conditions,according to Dr. Al Hamidy, areavailability of adequate domesticliquidity, prudent and conservativepolicies followed by the Saudibanks under the guidance ofSAMA.

In addition, the domestic mar-ket is still an emerging market, inwhich there is no trading in sophis-ticated financial products andderivatives created by world tech-nology which have been the caus-es and catalysts for the currentfinancial turmoil in advanced mar-kets. For example, the credit deriv-ative products and securitizationmarkets in Saudi Arabia are still atan embryonic stage. There are lim-its and restrictions on banks forinvesting in such products; banksare expected to follow conserva-tive accounting policies.

“SAMA has reduced its reporate from 4 percent to 3 percentand the cash reserve requirementon demand deposits from 10 per-cent to 7 percent immediately.

US Foreclosures(Repossessions)“

”

The domesticinterbankfinancial

transactionscontinue to

functionnormally,reflecting

strongconfidence in

the Saudibanking system

$ MillionsEstimates

Loans in first stage of foreclosure

Loans in final stage of foreclosure

Source: New York Times

1.5

1.2

0.9

0.6

0.3

0.080 81 82 83 84 85 86 87 88 80 81 82 83 84 85 86 87 88

Years

P.O. Box 112, Dammam 31411Saudi Arabia, Tel.: 03 833 5555Fax: 03 833 6666E-Mail:[email protected]

Subsidiary of äÉcô°T ióMEG

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These measures are taken againstthe backdrop of receding inflation-ary pressures and for ensuring thatadequate system liquidity is avail-able to meet steady domesticdemand,” a statement on its web-site read.

Business Community here, toothink that Saudi economy will comeout of this turmoil unscathed.

Mr. Tariq Barlas, Vice Chair-man and CEO of Al-Khobar-basedAl-Tuwairqi Holding, strongly be-lieves that the financial mayhemshould not affect the Saudi econo-my. He attributes this to Kingdom’sstrong business model.

for the benefit of the future genera-tions. The growing local industrycan support nearby geographicmarkets like India, Pakistan,Bangladesh and Indonesia, whichhave a large population base ofaround 2 billion people, andassuming that their per capitaincome can be pushed to $5,000,then Saudi Arabia will have a $1trillion market for their industry, outof which $300 -$400 billion will befor the oil & gas.

“Saudi Arabia is blessed withnatural resources and, along with

the GCC states, is strategicallypositioned on the world map. Thecountry has potential to be a glob-al economic leader,” he said.

On the other hand, Mr. Mutlaq

Tariq Barlas

UBPRIME is a financialterm popularized by themedia during the recent

credit crunch. It refers to a secu-rity for which a return above the“prime” rate is adhered. To makeit simpler it is a loan which ishigher-priced because of thecredit-worthiness of the borrowerrelative to the loan. The borrow-er’s credit, or the loan itself, isless than ideal, or sub-prime. The“prime” in “subprime” does notrefer to the prime interest rate (orteaser rates). These carry ahigher risk to the lender (andtherefore tend to be at higherinterest rates) because they areoffered to people who have hadfinancial problems or who havelow or unpredictable incomes.The subprime sector was oftenone of the most profitable.

In America many mortgagelending companies sold mort-gages to people, even though themortgages were often inappropri-ate. The mortgage salesmenwere getting commissions forselling products and issues likelow affordability were ignored.

To attract customers the

lending firms devised attractivepackages. Like no interest for thefirst year or very low interest forfirst two years then charginghigher rate. People, mainly immi-grants on low paying jobs, weresold these packages. These peo-ple couldn’t really afford highinterest rates. Thus, mortgagedefaults swelled.

Losses incurred due to mort-gage defaults compelled the sub-prime mortgage lenders to selltheir debts to the banks and getcapital for more subprime loans.Here is where all went wrong.The subprime industry wentbankrupt and the banks had towrite off their losses which col-lapsed the banking sector in theprocess.

Experts now claim that therewere signs of economic disastersince 2006 or even earlier butthen no one could decipher them.

From a budget surplus of$230 billion in the year 2000 to$455 billion deficit in 2008, froman unemployment rate of 3.9 per-cent doubling into 6.5 percent.This is the present financialdebacle the US is reeling under.

S

“The so-called financial tsuna-mi should not have any practicaleffect on business here. It mayhave psychological effect to a cer-tain extent,” he asserted.

Talking to Saudi Commerce,Mr. Barlas said even if oil dips to$40 a barrel it won’t have any neg-ative impact on Kingdom’s econo-my or business. “A country whichcan pump out 8 million barrels aday of oil, can earn $320 million aday at the rate of $40 what roughlygives $110 billion in a year. Thisamount is more than enough to runa country,” he said.

In fact the Government shouldinvest and promote Private PublicPartnership (PPP) initiatives in thelocal industry to further diversify itsincome sources. They should pro-mote this with local entrepreneursto develop local human resources

Mutlaq M. Naba Al Qahtani

“

”

The events ofSept. 2001brought on afundamentalshift in themindset of theUS consumerand, eventually,financialinstitutionsserving theseconsumers



What are Subprime Mortgages?

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M. Naba Al Qahtani, President andCEO of Jubail-based Naba Group,feels no one can escape from thecurrent turmoil. “No economy isimmune to the ongoing slow down.The effect of failure of prime mort-gages in the US and consequentlythe diminishing of the assets valueof some of the banks has resultedin thinning the value of invest-ments abroad,” he said.

Mr. Al Qahtani told SaudiCommerce that the market senti-ment is noticeable in the marketcapitalization on Tadawul All-Share Index (TASI) and else-where. A weak investor confidenceglobally has a far reaching effecton the investments within theTASI, he added.

The immediate impact that Mr.Qahtani sees is the loss of marketcapitalization of listed companies.The second could be the non-availability of the finances fromabroad to inject into the burgeon-ing developmental activities. Thedevaluation of investments over-seas can result in the loss of avail-able, returnable and re-investablefunds. The decrease in oil rev-enues may also effect in theincome and liquidity though in theshort run or at least till such time

the oil demand picks up and push-es the prices higher, he said.

According to him the Kingdomneeds to reinforce investor confi-dence, use oil revenues judiciouslyand develop suitable bankingnorms to safeguard the bankingsector from unproductive and highrisk lending’s and investments.

“Investments by institutionsand individuals in the foreign mar-kets need to be controlled on onehand and the foreign direct invest-ment increased on the other handby offering suitable investmentincentives to foreign investors.SAGIA should liberalize the joint

venture and business norms toattract maximum possible FDI,” hesaid.

Among the long term measureshe recommends development ofcore competencies within theKingdom and increasing productiv-ity at the grass root level. “Govern-ment interference in the marketforces needs to be augmented,especially, in areas where thingshave gone wrong particularly in thehousing sector.”

Commenting on the decliningoil prices, he said, low demand inenergy and related sectors wouldmean that the energy sector would

GCC Corporates (GCCI): Spread above LIBOR, HSBC/DIFX GBCI Index“

”

The devaluationof investments

overseas canresult in the

loss ofavailable,

returnable andre-investable

funds

“”

The Kingdomhas committed

to help alleviateglobal financial

stress bymaintaining

stable oilmarkets

Source: HSBC, DIFX

565

495

425

355

285

215

145

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct



World Economy Affected

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ITH the tumbling of the USthe world economy tooheaded south.

Between 2003 and 2006 theglobal economy boomed. Therewas an average rise of 5 percent ayear in global GDP. About three-fourth of this growth (measured ona purchasing-power-parity basis)was attributable to a broad-basedsurge in the emerging and devel-oping economies.

But last year the global econo-my got battered by deepening cri-sis in financial markets, major cor-rections in housing markets in anumber of advanced economies,and surges in commodity prices.

A recent International MonetaryFund (IMF) report said, the financialcrisis that erupted in August 2007after the collapse of the US sub-prime mortgage market entered atumultuous new phase in Sept.2008 that has badly shaken theconfidence in global financial insti-tutions and markets. Most dramati-cally, intensifying solvency con-cerns have triggered a cascadingseries of bankruptcies, forced merg-ers, and public interventions in theUS and Western Europe, which hasresulted in a drastic reshaping ofthe financial landscape. Moreover,interbank markets have virtuallylocked up as trust in counterpartiesevaporated.

Faced by increasingly difficultconditions, the global economyhas slowed markedly. The advan-ced economies grew at a collectiveannualized rate of only 1 percentduring the period from the fourthquarter of 2007 through the sec-ond quarter of 2008, down from 21/2

percent during the first three quar-ters of 2007, the report said.

Recently, fears that the creditcrisis will not be contained sparkedpanic selling across global stockmarkets and sent crude oil prices

plunging as investors rushed for thesafety of government bonds andgold.

Eurozone Under RecessionActivity in Western Europe has alsoslowed appreciably, dampened byhigh oil prices, tightening credit con-ditions, housing downturns in sever-al economies, the US slowdown, andthe appreciating euro.

Available data for the third quar-ter and forward-looking indicatorssuggest that the downturn in theadvanced economies is continuingto deepen. Indeed, business andconsumer confidence indicators forthe US and the euro area are nowclose to lows experienced during the2001-02 recession.

The European Union’s statisticsoffice (Eurostat) announced that theEurozone economy had slipped intorecession for the first time sinceinception in 1999, with GDP de-creasing for the second consecutivequarter by 0.2 percent Q/Q in 3Q08.According to National CommercialBank’s analysis, there are many fac-tors that contributed to this dismalperformance, mainly:1) A contraction by three of the

largest economies in the union,with Germany, Italy and Spainrecording declines of 0.5 per-cent, 0.5 percent, and 0.2 per-cent, respectively.

2) The EUR and oil prices apprecia-tion that had, until July 2008,been too strong, affected ex-ports, the main engine of growthover the past years.

3) An unprecedented surge in thecost of credit globally after thecollapse of Lehman Brothers, onSept. 15, that propelled banks tocut lending to businesses andhouseholds, thus, shatteringdemand for Eurozone exports,and

4) The fastest inflation in 16 years,currently at 3.2 percent in Oct.

2008, which eroded the pur-chasing power of consumers.Looking ahead, we can expect

further quarters of negative GDPgrowth especially that the creditcrisis intensified in global terms atthe end of the 3Q08.

Housing DownHousing prices have begun fallingthis year in several advancedeconomies, a sharp contrast fromthe increase in prices seen lastyear in almost all countries exceptthe US, where a housing correc-tion has been under way since2006. In real terms, and on a sea-sonally adjusted basis, houseprices fell in the first half of 2008 atan annual rate of 5 percent to 12percent in Canada, Denmark,Spain, New Zealand, and theUnited Kingdom.

According to IMF report as abasis for assessing the potentialfor house price declines, a firststep is to try to account for theincrease in house prices that hastaken place over the past decadein terms of important driving forces.To this end, real house pricegrowth is modeled as a function ofthe following variables: growth inper capita disposable income,working-age population, credit andequity prices, and the level of shortterm and long-term interest rates.

The dynamic effects of thesevariables are captured through theinclusion of lagged real houseprice growth and an affordabilityratio (the lagged ratio of houseprices to disposable incomes).This model is estimated for eachcountry using quarterly data for thetime period 1970 to 2007.

Japan’s economy initiallyshowed more resilience but hasrecently been affected by slowingexports and the impact of deterio-rating terms of trade on domesticdemand.

W



Commodity Funds

UAE Abu Dhabi 1976 600 Q2 Est.Investment Authority(ADIA)

UAE Mubadala 2002 25 2008 Est

UAE Abu Dhabi Investment 20 2008 EstCouncil

UAE Dubai International 2003-4 15 Q1 EstCapital (DIC)

UAE Istithmar Global Restructured in 2007 6 Q1 Est

UAE Istithmar Real Estate 2007 10 Q1 Est

31

Saudi Arabia Saudi Arabia Monitory 1952 380 May SAMAAgency (SAMA) Non Reserve Foreign Assets

Saudi Arabia Other Government 60 May SAMAInstitutions

Kuwait Kuwait Investment 1953 266 March Kuwait PressAuthority (KIA) Reserveand Future Funds

Qatar Qatar Investment 2004 65 Q2 EstAuthority (QIA)

Oman State General Reserve 1980 10 2008 EstFund (SGRF)

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get affected. Besides, low industri-al activity abroad and more partic-ularly in the GCC may affectexports of petroleum based prod-ucts. Failure in executing thedream economic projects due tonon-availability of adequate re-sources may hit the local construc-tion industry and those dependenton it down the line.

Credit crisis recently led toplunge in global stock markets. Toprevent this, he suggested that theCapital Market Authority (CMA)should infuse investor confidence.

Mr. Qahtani asserted thatbanking norms need to bestrengthened. Inflation needs to becurbed. Reduction in lending ratemay make credit cheaper andserve as an incentive for industryto increase activity. “Lesser depen-dence on oil revenues by econom-ic diversification, involvement ofcitizens in the growth process,opening up tourism sector, empha-sis on agricultural produce, foster-ing technological advancements,and avoiding huge imports byencouraging local productionshould be undertaken immediately.Saving habit should be instilled

among the masses to utilize andconserve local income,” he said.

Mr. Brad Bourland, Chief Eco-nomist of Riyadh-based JadwaInvestment is quite confident thatSaudi Arabia will be least affectedas the Kingdom has sufficientresources to weather the storm.

“The huge stock of moneyavailable to the government(SAMA net foreign assets alonecurrently stand at $433 billion) isone of the key reasons why SaudiArabia will be less affected byglobal economic meltdown thanmost other countries in the world,”he said.

Saudi Minister of Finance Dr.Ibrahim Bin Abdulaziz Al Assaf has reassured that the economicdevelopment projects in the King-dom would not be affected by thecurrent global financial crisis.

“We have built over the past

Soverign Wealth Funds and State-Funded/State-Controlled Entities in the GCC

Brad Bourland

“

”

The so calledfinancial

tsunami shouldnot have any

practical effecton businesshere. It may

havepsychological

effect to acertain extent

Country FundYear of

Inception

Assets(US$

Billion)

Date of Estimate/Reported Data

(2008 Unless Noted)

Source (RGEMonitor Estimate

Unless Noted)

Note: Some estimates for ADIA are Considerably higher and close to $900 billion.Source: RGE Monitor Estimates, Rachal Ziemba, Foreign Assets of selected Wealth Funds/Government Investment Vehicles, August - 2008.

Subsidiary of


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years our reserves and surplusesto finance economic developmentprojects in the Kingdom, therefore,the development projects will notbe affected by the current crisisand the oil revenues would coverthese projects in addition to thereserves. So, the development

plans and the plans for buildingprojects will not be affected by thecurrent crisis,” he said recently inan interview to Saudi TV.

According to Mr. Saad AlHassosah, CEO of Arbah Capital,Saudi project finance will be mostaffected. Mr. Al Hassosah whiletalking to Oxford Business Groupsaid, “As most projects in theKingdom are being partiallyfinanced by international bankinginstitutions, the current financialcrisis will affect reserve require-ments, therefore reducing theamount of credit that will be avail-able for the market.”

The country is unlikely to face abanking crisis, currency weaknessor fiscal and budget deficits in theforeseeable future. Governmentdebt to GDP (all domesticallyraised) has fallen below 10 percentfrom a high of 105 percent in 1999,according to Mr. John Sfakianakis,Chief Economist of Saudi BritishBank.

Similar optimistic views areshared by Mr. Ghouth Bawazir,General Manager of Dammam-based Bitumat Company Limited.He believes the current financialcrisis will be tackled appropriatelyby the government of SaudiArabia. “Yes, there is a major issueof liquidity in the world and our ownimmediate neighbors are feelingthe pinch. But the Kingdom is wellbuffered and will tide over theproblem,” Mr. Bawazir said.

Gulf Construction Projects

Ibrahim Bin Abdulaziz Al Assaf

Ghouth Bawazir

“

”

Investments byinstitutions andindividuals inthe foreignmarkets need tobe controlled onone hand andthe foreigndirectinvestmentincreased onthe other handby offeringsuitableinvestmentincentives toforeigninvestors

GCC’s Export Destinations of Oil andRefined Products*

Asia Pacific69%

North America13%Latin America

1%West Europe

10%

Middle East4%

Africa3%

* 2006 Note: Excluding Non-OPEC GCC states Oman and BahrainSource: OPEC, Annual Statistical Bulletin 2007

Billion US$500

400

300

200

100

0UAE Saudi

ArabiaQatar Kuwait Bahrain Oman

Source: MEED

Planned Under Way

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Though there are chances thatthere will be hiccups in the comingdays, one must understand thatthere are multiple forces actingsimultaneously and the combinedeffect is what needs to be moni-tored, he added.

“Many of the investments madeby the Saudis in Europe and theUS went awry and this affectedthem personally. But since therewas a reasonable personal cush-ioning, this did not lead to a cas-cading effect. On the other hand,there is not very high amount ofForeign Direct Investment here, sothe withdrawal effect will not beseen,” he said.

The neighboring countrieswhere the impact of meltdown isvisible are those with substantialForeign Direct Investment. InDubai, for instance, the real estatesector has been hit and priceshave gone down.

Another factor, he said, is theprices of crude oil. The currentdecline will not have any major effectbut if the decline continues it may

have serious implications in 2009.So, sliding oil prices and withdrawalof funds by the foreign investors canhurt the GCC countries.

“Bitumat is currently on a majorexpansion and diversification planand we believe that the marketshould stabilize in due course oftime,” Mr. Bawazir stated.

Experts have their opinion, offi-cials their say. Before going intofurther details, let us first examinethe crisis itself.

Cause of CrisisSubprime mortgages in the US areprojected to be the fountainhead ofthe present mayhem. But Econo-mists like Mr. Stephen Poloz believethe US subprime crisis was not thestarting point of the current econom-ic collapse and it would be wrong forinvestors to lay the blame here ifthey want to understand where theglobal economy is headed.

The Canadian economist Mr.Poloz, who is senior vice president offinancing for Export DevelopmentCanada (EDC) asserts that 9/11 was

the real beginning of this financial cri-sis. “We need to understand theseries of events that have led up totoday. The events of September2001 brought on a fundamental shiftin the mindset of the US consumerand, eventually, financial institutionsserving these consumers,” said Mr. Poloz in a recent media interview.

He said following 9/11, US con-sumers were no longer interested insaving. Instead, they wanted tospend every cent they earned, aswell as any credit they could getaccess to. They wanted housing,irrespective of whether they earnedan income or could afford the repay-ments on a house of their own.

“With house prices consistentlyrising, US financial institutionsbegan to offer “subprime” mort-gages to consumers who wouldnot normally qualify for creditadvances. These lenders werebetting that house prices wouldcontinue to rise and homeownerswould be able to recapitalize theirmortgages against these pricerises,” Mr. Poloz added.

Unfortunately, a slowing globaleconomy put paid to these struc-tures and the subsequent meltdownin the sub-prime market as well asthe decrease in available credit inthe market led to a huge breakdownin global financial markets.

De-coupling Theory Mr. Poloz also believes the eventsof the last few days have put paidto the “de-coupling theory”.

Stephen Poloz

“

”

The huge stockof money

available to thegovernment

(SAMA netforeign assets

alone currentlystand at $433billion) is one

of the keyreasons whySaudi Arabia

will be lessaffected



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F September 2001 is con-sidered a turning point inworld politics, September2008 may sure be recordedas a defining moment inworld financial sector. The

United States sub-prime crisisslowly but malignantly catapultedinto a global financial crisis thatwas never seen in the history sincethe Great Depression of 1930s.The covertly manipulated financialratings coupled with allured mort-gage incentives not in sync withprudential norms of investmentbanking resulted in the growth ofmassive toxic assets that led toinsolvency and premature death ofnumerous financial giants in theUS. As the largest economy in theworld is on the verge of recession,repercussions are bound to be feltacross the globe. Despite rhetoricabout decoupling, emerging mar-ket economies such as Asia andthe Gulf region are increasinglyexposed to the global financialthreat. Importantly, the negativespillovers are not confined to thefinancial sector alone, as theimpacts on the real economy areclearly evident. However, given thesound macro fundamentals anddeveloping banking and financialsector, the impact would be limitedon the emerging markets depend-ing on the durability and spread ofthe crisis.

While Saudi Arabia like other Gulfoil exporting countries was thrivingon record oil revenues and conse-quent economic boom till mid-September 2008; the current sce-nario has juxtaposed with subduedconfidence and moderate econom-ic outlook. The primary factor hasbeen the continuing downsliding ofoil prices as a result of globalrecession. This is aptly reflected inthe continuous declining of shareprices and overall stock marketindex. While it seems that there isno acute problem of liquidity, panicselling has become a major worryfor the government to restore con-fidence in the stock market.Moreover, despite ample surplusand consequent government

expenditure, project financingwould be difficult given the globalcredit squeeze and increasing costof borrowing. Therefore, amidstglobal gloomy scenario, there aredefinite concerns that need to beaddressed in order to assess thereal impact of financial crisis on theSaudi economy.

Contagion ChannelsAs of now, the contagion effects ofglobal financial crisis seem to befast spilling over to all economiesin the world. The key channels tospread the contagion can be iden-tified as: (i) direct exposure ofSaudi commercial banks to globaltoxic assets, (ii) reversal in FDI andFII inflows, (iii) global credit

ByDr. Samir Pradhan*

* The writer is a Senior Researcher, GCC Economics Program, Gulf Research Center, Dubai. Can be contacted at, [email protected]

I

Commercial Banks’ Foreign Assets/Total Assets (Ratio)

20

15

10

5

02002

Year

2003 2004 2005 2006 2007 2008Q1 2008Q2 2008Q3

Source: SAMA Quarterly Bulletin, 3rd Quarter, 2008

%

äÉcô°T ióMEGSubsidiary of

P.O. Box 112, Dammam 31411Saudi Arabia, Tel.: 03 833 5555 Fax: 03 833 6666E-Mail:[email protected]

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squeeze and limited inter-bankleverage, (iv) declining oil prices,and (v) weaker growth of energy-intensive industrial product ex-ports. Let us see how these affectSaudi economy.

Till date no Saudi commercialbank has announced their linkagewith toxic assets, so exposure islimited. But it is widely believedthat high net worth individuals musthave suffered loss with continuousdecline in asset prices that wasprobably invested in riskier debtstructures like CDOs (Collate-ralized Debt Obligation). Moreover,it has been estimated that theassets of Gulf SWFs in the US andEurope have dropped by 30 per-cent during the past year, whichtranslates to an estimated bookloss of $30 billion resulting fromthe on-going global financial crisis.Unlike the UAE and Bahrain, for-eign assets of Saudi commercialbanks are overwhelmingly govern-ment instruments which are not bigin comparison to total foreignassets of the Saudi government.The ratio of foreign assets to totalassets of commercial banks inSaudi Arabia is only 11 percent asper SAMA 3rd quarter 2008review.

Given the limited size of foreigninflows in Saudi Arabia, the reper-cussions have been so far limited.Importantly, third quarter resultsreleased so far by Saudi banks do

expensive than a few months agoand, in many cases, it may not beavailable at all. More expensivemoney means that floating rateloans begin to get more and moreexpensive.

It is estimated that over $260billion worth of projects are cur-rently underway in the Kingdom.Many are being financed by majorfinancial institutions, both local and international. The ministry offinance has made reassurancesthat the projects will not be affect-ed by the turmoil, stating theywould continue to be funded by

not point to any serious problems.Saudi Hollandi Bank, Bank Al Biladand Banque Saudi Fransi all re-ported double digit profits growth,though profits fell by 8 percent atSamba and by 28 percent at RiyadBank. Thus, global financial conta-gion has not direct impact on Saudifinancial sector.

However, inter-bank activityand arbitrage may have an impacton Saudi Arabia as can be seenfrom problems in project financingaffected by the rising costs of bor-rowing and declining availability oflarge credit facilities and increasingspreads of corporate borrowing.Interbank lending has been slowglobally. This means that banksare lending to each other at highrates which further implies moreexpensive credit. In short, capitalhas suddenly become more



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reserves and oil receipts.

However, as most projects inthe Kingdom are being partiallyfinanced by international bankinginstitutions, the current financialcrisis will affect reserve require-ments and, thereby, reducing theamount of credit that will be avail-able for the market. In fact, SaudiAramco has delayed a refinery pro-ject with ConocoPhillips due to dif-ficulties in raising finance.

The credit crunch in SaudiArabia like its neighbors is due tobanks’ balance sheet limitations.Demand for credit outstrips supplywith negative real interest rates.While banks vie to attract deposits,central monetary authority, SAMAis trying to control liquidity by issuing bonds in order to containinflation. This has led to a surge in financing costs, especially formedium- and long-term maturitiesat a time when the Kingdom strivesto make the most of the oil boomand provide jobs for a rapidly-growing population through giantinfrastructure and industrial pro-jects.

However, the real estate bluesof the UAE is not seen in SaudiArabia. Until recently, there is nomarket based mortgage market in

Saudi Arabia and real estatefinance has been dominated by theReal Estate Development Fund, aGovernment-owned specializedcredit institution that functions on anon-commercial basis.

Moreover, the turmoil in stockmarket has shaken investor confi-dence to the hilt. Saudi sharesplunged 9.2 percent on 23rdNovember with most blue chipsposting across-the-board declines.Worried investors resorted to panicselling as oil fell below $50 leveland on growing uncertainty aboutthe future of Citi Group. The Saudi

index fell 448.87 points to end at4,264.52; it’s lowest since early2004.

It’s widely felt that if the currentfinancial crisis continue, therewould be sentiment of “flight tosafety” that may impede flow of

Ratio of Foreign Liabilities and Total Liabilities of Commercial Banks

Saudi General Index

14

12

10

8

6

4

2

02002

Year

2003 2004 2005 2006 2007 2008Q1 2008Q2 2008Q3

Source: SAMA Quarterly Bulletin, 3rd Quarter, 2008

6500

6000

5500

5000

4500

4000

6500

6000

5500

5000

4500

400026-Oct 31-Oct 5-Nov 10-Nov 15-Nov 20-Nov

Latest (Nov 23)4,264.52

Highest (Nov 23)6,083.87

Lowest (Nov 23)4,264.52

Source: http://www.menafn.com/qn_country.asp?country=SA

1 Month

%



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NO

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in September 2008 profits fell 2%year-on-year to SR 7.24 billion($1.93 billion) from SR 7.39 billionin the same period last year. Thisis happening in the environment ofexcess capacity and increasinginventories.

Impacts and ReprisalThus as can seen from the above,Saudi Arabia is not immune toglobal financial crisis, though thereis no direct impact on the financialsector, yet, the impact on realeconomy is slowly emerging. Thismay drag the growth rate in themedium term. Though there is nomajor concerns about financingongoing big projects, yet the in-creasing cost of borrowing have anegative impact on new projectsand the government as well asindustry may scrutinize and priori-tize financing for urgent projectsinstead of going for new greenfieldprojects for economic diversifica-

new equityinvestments as afavored asset class andpossible shift of new invest-ment flows to sovereign bonds. Italso leads to slowdown in issuanceof new corporate bonds includingsukuks.

The most visible impact offinancial crisis can be seen fromthe continuous declining oil pricesdue to demand destruction basedon the apprehensions of globalrecession as well as seasonalweak demand. Spot Dubai crudeoil prices have plummeted byalmost $100/barrel from a recordhigh of $140.77/b on July 4 2008 to$46.62/b on November 18 2008,the lowest level on record for threeand a half years.

However, given the comfort-able current account surplus, it isnot expected to have a big nega-tive impact on government rev-enues in the medium term.

The majorimpact of finan-

cial crisis on Saudieconomy as of now

can be identified as thedeclining demand for petrochemi-cals and other energy intensiveproducts in which Saudi Arabiahave comparative export advan-tages. This may lead to intensepressure on Saudi production dueto intense price competition. Someproducts such as plastics and met-als, sold under short-term con-tracts, had been affected by theprice slump while products soldunder long-term contracts withlocked-in prices were less affected.Saudi Iron and Steel Co (Hadeed),a subsidiary of industrial giantSabic, had slashed the price of itssteel rebar products by SR1,245/ mt ($320/mt) in October 20 2008,the third price cut since (a massive43 percent) early September.Moreover, net profits of Sabic isprojected to fall in the last quarter-



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tion and job creation. Moreover,with continuous decline in oil pricesand consequent drop in revenueflows, there would not be muchflexibility in government expendi-ture to increase liquidity for all projects in the medium term.Importantly, with liquidity becominga concern with the commercialbanks, SME sector would begrossly affected as small andmedium investors in the privatesector largely depend on commer-cial bank lending.

Sensing the urgency, Saudigovernment has taken few con-structive steps to absorb and man-age the impact from percolating to the real economy. On 20thOctober 2008, SAMA injected up

to $3billion into local banks to meeta shortfall of dollar funding in the domestic banking sector, asdemand for loans from the privatesector to finance lined up projectsincreased. On 24th November2008, SAMA reduced its key repur-chase rate by 100 basis points to 3percent to keep credit marketsmoving and boost domestic liquidi-ty. It also lowered reserve require-ments to 7 percent from 10 percenton the apprehension of slowdownin the private sector. SAMA hasstated that bank deposits are safeand there are no liquidity problemsin Saudi Arabia and that it wouldprovide addition liquidity if needed(the three-month interbank rate iscurrently 4.59 percent compared to2.16 percent in early May). Though

there is no formal deposit insur-ance in Saudi Arabia, but it isbelieved that there is a strongimplicit government guarantee andthe government has stepped in thepast when banks have been introuble. So there are no circum-stances in which a Saudi bankwould be unable to fully honor cus-tomer deposits

Thus so far the governmenthas been successful in managingthe impulses. But one doubts thatup to what extent SAMA can helpbanks overcome tightness in localcurrency money markets andfrozen international debt markets.Such a consistent step would fur-ther stoke up inflation as a result ofpetrodollar recycling into the econ-omy. Thus in a sense it is prema-ture to assess the impact of theglobal financial crisis on the Saudieconomy.

ConclusionsTo sum up, the Kingdom like otheremerging economies find itself inthe midst of a serious global finan-cial crisis, while at the same time,experiencing the best conditionsfor augmenting economic growth.This might seem paradoxical, butthe macro fundamentals of theKingdom are loosely interlinkedwith the global market and hencethere is a cushion in the form of conservative financial marketand record oil revenues that may help smooth sailing. Nevertheless,there are issues of liquidity andproject financing and their impacton economic diversification thatneed to be managed pragmatical-ly. Thus it seems there is no eco-nomic recession in Saudi Arabiadue to the global financial turmoil,but definitely an economic slow-down may be on the horizon.Hence at this stage it is prudent to“wait and watch” and adopt strate-gies that can absorb cataclysmswithout hampering growth. �

Middle Eastern Crude Slumps Almost $100/barrelPlatts Dubai Assessments, July 4-November 18, 2008 ($/barrel)

140

120

100

80

60

4004/07/2008 04/08/2008 04/09/2008 04/10/2008 04/11/2008

Source: Platts

200.0

180.0

160.0

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.02004 2005 2006 2007 2008 2009 2010

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Per

cen

t

Bill

ion

Do

llars

Current account balance (left) CAC as % of GDP (Right)

Source: IMF WEO Database, November 2008

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