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08 December 2023

Saudi domestic credit main victim of crisis

By Nadim Kawach

The global financial distress has hit most sectors of Saudi Arabia's economy but domestic credit was the main victim as it has dented investor confidence and resisted signs of global recovery, a key Saudi investment firm said yesterday.

While oil prices have largely recovered from their post-crisis lows and the kingdom's economy appears to be picking up, local bank lending activity has remained stifled to reflect the vulnerability of the Saudi financial sector, the Riyadh-based Jadwa Investment said in its January bulletin.

"Now that the global economy has begun to recover from the worst recession since the 1930s, what insights can we derive from the past year and a half for the Saudi economy… first, the high degree of interconnectedness between the Saudi economy and the rest of the world was made abundantly clear," it said.

"Impacts were felt not only through gyrations in the oil market, the dollar and global trade, but also in banks, stock market, inflation and consumer spending and saving habits within the kingdom… perhaps the most important unexpected impact is that the stress point for Saudi Arabia in this recession turned out to be more related to credit than oil."

Oil prices plummeted by nearly 80 per cent in the fourth quarter of 2008 after crude demand was hit. But recovery was rapid, with prices nearly doubling from their December lows in just around five months.

In early 2010, prices have traded with quite low volatility between $75 and $85 a barrel, nearly double their $40 level a year earlier.

Lower oil prices did not significantly harm Riyadh's finances, and the impact on the broader economy was muted by strong and consistent government spending.

The government built up a huge stock of foreign reserves at Sama during the very high oil prices of the previous few years and had embarked on a multi-year ramped up spending program before the financial crisis hit.

Drawing down these reserves allowed the government to maintain its near-term expenditure plans regardless of the downturn in oil prices. "In contrast, Saudi credit conditions were affected much more than we had thought would be the case as the crisis unfolded. Initially it appeared that Saudi banks were among the best positioned in the world to weather the storm. Saudi banks had minimal exposure to the toxic assets of the West," Jadwa said.

"They went into the downturn with strong capital adequacy, and the absence of local securitisations – the packaging and reselling of loans – meant Saudi banks were in direct touch with their borrowers and seemed better able to manage their credit risks. Islamic banking, a large segment of the market, by its nature had avoided high leverage, structured packages of conventional loans and investment in conventional financial institutions. Saudi banks, in common with those throughout the world, tightened credit standards and slowed lending in the final quarter of 2008 owing to concern about their exposures to plunging asset prices and the health of borrowers, notably other banks."

The report said aggressive action from Sama quickly allayed these concerns and with other global banks gradually on the mend, conditions seemed right for Saudi bank lending to bounce back during the second quarter of 2009.

"But in May 2009, two high-profile corporate defaults rattled the system, raised questions about the severity of write-offs needed, the quality of Saudi bank credit risk management, and the possibility of other major Saudi corporate defaults," it said, referring to the troubled Saad and Algosaibi family businesses.


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