Saudi Arabia should follow the example of the UAE and encourage its banks to issue bonds for the government to ensure enough liquidity to finance mega projects worth $400 billion (Dh1.46 trillion) in four years, according to a key Saudi bank.
The government should also fund projects directly to offset a sharp decline in foreign financing because of the global credit crisis, the Saudi British Bank (Saab) said in its monthly economic bulletin.
According to the bulletin, Saudi Arabia's 12 banks are not suffering from liquidity shortages but that official curbs on lending and their resources do not match the massive projects to be carried out in the Kingdom.
"There could be an encouragement for banks to issue bonds purchased by the government in support of their funding base. Creating a medium to long-term debt market and a secondary market should be the objective of such a step. Long-term debt creation would allow banks to restructure their lending facilities from short term to more long term ones," Saab said.
"Also, debt should be allowed to rise above paid-up capital. Growth is now a priority for everyone. The economic difficulties of the mid-1980s led to a significant increase in banks' capital, with the encouragement of Sama."
The report said such a move it needed given expectations that global financial turbulence and credit tightness will increase dependence on local financing.
"We do not expect that credit tightness in the international markets to unwind in 2009, resulting in project finance uncertainty for large infrastructure and development-related projects. Domestic banks do not have the capacity to withstand the financing needed for the $400bn projects the Kingdom has earmarked over the next four years," the bulletin said.
"What also needed is that the state should boost its role as a project financier (through institutions such as the Public Investment Fund). As sources of international funding are very limited, the state could invest in key strategic areas of the economy similar to investment projects planned in the US, Europe and China. Also the government can provide funding by issuing development bonds in order to fund many of the planned projects."
Saab said the Saudi banking system is not witnessing a liquidity problem, as there is surplus liquidity in the banking system.
But it noted that local banks are challenged to find long-term deposits to structure their balance sheets for optimal growth and have to rely on short-term ones. Helping banks increase their loan-to-deposit ratio so as to maintain their lending capacity to the private sector is also crucial, it said.
"The lack of long-term deposits (sticky deposits) needs to be addressed if the loan-to-deposit ratio is not to be damaged. Saudi Arabian Monetary Agency (Sama) has been quite creative in trying to address the issue of credit-capacity constraints in the banking system.
"We have noticed lately that government entities which have limited long-term deposit constraints have been placing deposits in the domestic banking sector. This is a welcome first step that allows Sama to manage liquidity quite well yet also generate long-term assets."
Saab also urged the government to pay contractors on time in order to push important "trickle-down payments to sub-contractors, as well as the rest of the economy, that feed into the contracting sector."
It noted that contractors play an important role in providing cash into the economy, adding that up-front deposits of nearly 20 per cent that are now paid by the government could increase.
"We have been calling for an expansionary budget since the outset of the last quarter of 2008, reflecting the negative messages we have been receiving via our business confidence surveys," the bulletin said. "Now it is up to the government to actually spend the money in 2009 and create the mechanisms for the private sector to benefit from the spending outlays of the state. Of particular importance is the SAR225bn in capital expenditure set out by the 2009 budget, of which the bulk should involve the private sector.
"Certainly, we are not out of the global economic recession and we cannot foretell what will happen in 2010. It could be another difficult year, which Saudi Arabia should be able to weather – albeit with anaemic growth."
It was the second Saudi bank to call on the government to inject funds into the banking system to offset the shortage in foreign funding and allow banks to meet lending commitments after a sharp growth in credits and a slowdown in deposits.
"Although the private credit growth will remain in an acceptable range that will attain a healthy growth in the non-oil private sector, the funding gap that had evolved in 2008 had to be addressed," the National Commercial Bank said.
"Our recommendations include the injection of medium-term deposits by the government, whether through the Sama or quasi-government agencies, which will provide fresh injection of deposits and immediate liquidity relief. We also propose the retirement of public debt held by the Public Pensions Agency and the General Organisation for Social Insurance, estimated at around SAR100 billion, that can trickle in the form of deposits."
Sama's figures showed credits extended by Saudi banks totalled SAR654.5bn at the end of November, including nearly SAR479.7bn as short term loans.
Deposits peaked at around SAR853.9 billion, including nearly SAR345bn as time deposits and savings and around SAR343b as demand deposits. Deposits by businesses and individuals stood at around SAR321bn and those by government entities at nearly SAR113bn.