JEDDAH: Private sector credit growth continues to decline in the Kingdom, with the twelve-month rate falling to just over 10 percent in April from a high of almost 33 percent in June 2008. Lending growth is now lower than deposit growth — a trend that was last seen in February 2008.

Saudi Arabian Monetary Agency (SAMA) has cut its reverse repo rate in April in the hope that banks would be less content to park liquidity with the central bank and more inclined to lend to the private sector. So far, this has not occurred. Rather than channeling additional liquidity toward the private sector, banks have chosen to buy higher-yielding foreign assets, Samba Financial Group said in its Economic Monitor for June.

Aside from the good returns on foreign assets, there are a number of reasons why banks remain reluctant to increase lending to the private sector.

According to Samba report, the retrenchment of international banks has left local banks struggling to provide the necessary finance for large projects. Prior to the global financial crisis, international banks typically contributed around 60 percent of GCC (Gulf Cooperation Council) corporate finance, while local banks put forward around 25 percent. “The funding profile in Saudi Arabia was slightly more balanced in local banks’ favor given their greater resources, but international banks would still provide the bulk of the funds,” Howard Handy, chief economist at Samba, said.

He added: “With the effective withdrawal of international banks from the regional project finance market, it is no surprise that local banks — which also have to contend with a mainly short term deposit base — have struggled to provide financing for large petrochemicals or utilities projects that can often exceed $20 billion.”

The Samba report said Saudi banks remained cautious about corporate growth prospects, particularly for those firms that are dependent on export demand. The rapid decline of global industrial output has eroded demand for Saudi Arabia’s principal non-oil exports: Refined products, petrochemicals, steel and aluminum. This has fed through into worsening perceptions of credit-worthiness — a situation that has been amplified by a couple of recent high — profile corporate debt restructurings and defaults.

According to the report, the experience of the global financial crisis has encouraged all banks (not only Saudi Arabia’s) to refocus on risk management. As a proportion of banks’ deposit bases, the surge in credit during 2006-08 was not as excessive as in some other Gulf states; nevertheless, at its peak last September, the average loan-deposit ratio exceeded 95 percent, well above the SAMA-mandated limit of 85 percent.

Demand-side issues have also played a part as new private sector projects coming to the market have dwindled over the past six months as project sponsors, faced with deteriorating domestic and global demand conditions — as well as credit constraints — decide to put increasing numbers of projects on hold.

While private investment remains hemmed in, private consumption growth has stabilized somewhat following a precipitous decline during the fourth quarter of 2008. Data for April put the twelve-month increase in points of sale transactions holding at around 13 percent.

This is well down on the 38 percent peak registered in April 2008, but is something of a rebound from the 7 percent low recorded in December.

A similar trend is visible from data on private sector imports, which is a useful gauge of broader domestic demand. Import demand, as represented by the twelve-month percentage change in new letters of credit, collapsed in the third quarter of 2008, falling into negative territory in October, the Samba report said.