May 26 2010 |
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Saudi Arabia banks: Lending perks up
FROM THE ECONOMIST INTELLIGENCE UNIT
The IMF has identified a slowdown in bank credit as one of the main barriers to economic recovery in the MENA region. The latest monetary data released by Saudi Arabia's central bank suggest that the tide may be turning in the Gulf's largest economy.
In common with most of its regional peers, Saudi Arabia witnessed a borrowing boom between 2006 and 2008, with credit to the private sector growing by 54% during this period. Last year, lending to the private sector declined slightly as a result of both the general economic downturn and the specific factor of the massive defaults of two family conglomerates, the Saad and Algosaibi groups. Business activity has been sustained by companies drawing on their cash deposits and by the government assuming a more active role in financing projects.
There are now signs of a cautious recovery in lending to the private sector, which has risen in each of the first four months of 2010, according to figures released by the Saudi Arabian Monetary Agency ( SAMA ; the central bank). The year-on-year increase in April was 3.2%.
Several major project finance deals are currently being put together—for power stations, refineries, petrochemical plants and an aluminium smelter—which should be reflected in further increases in overall credit to the private sector in the second half of 2010 and in the course of next year (although a number of these schemes face delays owing to the hesitancy of the foreign partners involved, notably ConocoPhillips, which has pulled out of a refinery venture).
The IMF suggests that the experience of the Saad/Algosaibi defaults and the debt crises in Dubai and Kuwait will lead banks and regulatory authorities to adopt more rigorous standards of disclosure and risk management, in particular through eradicating the prevalent practice of "name lending". It is too early to tell whether such a change in credit culture is taking place.
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