KSA mortgage lending up 9% in Q4 of 2012

Activity in the Saudi project market appears to be slowing somewhat. However, the most recent PMI suggests firms in the nonoil sector are continuing to expand, and retail sales have continued to hold up well. There are signs that the Ministry of Housing is preparing to involve private developers more closely in the bid to address the country's housing deficit, according to Samba Financial Group’s Economic Monitor for June.
Quarterly data from SAMA (Saudi Arabian Monetary Agency) sheds light on the direction of bank lending. The most striking feature of the data is the five percent quarter-on-quarter contraction in lending to the construction sector in the first quarter. The data are not seasonally adjusted, but the first quarter contraction is much larger than that registered in the same period of 2012.
This suggests that nonoil investment has slowed significantly so far this year-supported by anecdotal evidence of a fairly stagnant projects market. There are two likely explanations: First, banks are refocusing on retail lending, where margins are much more lucrative. Second, and more importantly, the flow of projects appears to have slowed. Samba had expected delayed projects from 2012 to be released in the first half of this year, but this does not seem to have happened, and it might be that the lower oil price environment has begun to crimp the pace of investment activity.
The subdued state of bank lending to construction is in contrast to the strong pace of consumer lending. The Samba report said lending to consumers accelerated markedly in 2012, averaging around 5.5 percent quarter-on-quarter growth in the past two years. An increasingly important element of consumer lending is mortgages. The passage of the mortgage law in July last year has not sparked a surge in lending — final elements of the accompanying legislation are still awaited—but there has still been a notable uptick, with a quarter-on-quarter gain of nearly 9 percent in the final quarter of 2012.
For the moment, banks are continuing to focus on lending to upper- and upper-middle income Saudis.
Affordability also reflects the scarcity of supply, an issue that the Ministry of Housing is struggling to resolve. The ministry was set up in 2011 with a brief to oversee the delivery of 500,000 new housing units in five years. Two years on, and progress has been slow. A recent statement from the housing minister indicated that his ministry is working on a regulatory framework to encourage a greater role for the private sector in meeting the Kingdom's housing needs.
One key issue is the scarcity of buildable land. Private developers have long complained that the thinly traded and expensive land market is a major constraint: currently land constitutes about half the cost of building a house, compared to 25 percent in Japan, for example, which is a much more densely populated country than Saudi Arabia.
While the housing market clearly has structural rigidities, the bank report said broader fundamentals underpinning consumer lending remain firm. Population growth has averaged around 3.1 percent over the past decade, with the Saudi population (which consumes more than expatriates) growing at around 2.4 percent a year.
Despite this, GDP per capita has surged, growing by an annual average of almost 12 percent over the past decade, according to Samba estimates, reaching just shy of $ 25,000 in 2012, compared with less than $ 10,000 a decade earlier (per capita GDP has been volatile, reflecting changes in nominal oil sector GDP).
Meanwhile, the slowdown in the projects market has not yet been transmitted to the purchasing managers' index (PMI) though the pace of activity appears to have slowed. The overall PMI eased to 58 from 58.9 in March. Given that any number above 50 denotes expansion, the Saudi nonoil economy is clearly still in good shape, certainly when judged against global PMIs, most of which are struggling to break 50. Output in April continued at a good pace, even increasing compared to March, though new orders cooled a little. The latter is an important leading indicator and warrants close monitoring. The slowdown seems largely to have been registered on the employment index, with the index dipping to just 50.2 compared to 53.4 the previous month. This may well reflect the impact of tougher government policies toward illegal workers, as well as the closely related impact of a more assertive Saudiization policy. The net effect has been that many firms, especially in the construction sector, have been obliged to shed staff, which has clearly weighed on the index.
The report said consumer price inflation appears contained. The index has recently been rebased to 2007, resulting in a sharply lower headline figure. The April CPI increased by 4 percent compared to a year earlier, up from 3.6 percent at the end of 2012.
According to Samba, inflationary pressures to remain broadly contained, thanks to a strong dollar, though a mild increase is likely in the next couple of years as global commodities prices gain strength with the general recovery in economic activity.