LONDON, 18 July 2005 — The allocation by Saudi Arabia of SR15 billion to help finance the Kingdom’s non-oil exports over the next few years has no doubt been welcomed by Saudi exporters. The export credit facility offered through the Saudi Export Program (SEP) of the Saudi Fund for Development (SFD) was introduced some four years ago, with the result that non-oil exports were boosted by 10 percent. These included petrochemicals, plastics, agricultural equipment, construction products and equipment, metals and food products.
No doubt too the Kingdom’s trade rivals will cry foul and accuse Riyadh of subsidizing Saudi exporters. It is just as well that the Kingdom is not yet a member of the World Trade Organization (WTO), for the SEP could technically be in contravention of the world trade body’s rules. But then, many other countries blatantly contravene these rules including the European Union with its Common Agricultural Policy (CAP) and the United States with its Export Enhancement Policy (EEP).
Saudi Arabia, of course, is currently experiencing an export boom. This has been fueled largely by demand for oil and oil products especially from the high-growth economies in East Asia including China, Taiwan, South Korea and Japan. This despite the current high oil prices which has seen Brent Crude topping $60 per barrel in recent months.
The subsequent high liquidity in the Kingdom has had a knock-on effect on other sectors of the economy especially the non-oil sector, long the target by the government in its economic diversification policy away from oil and gas.
In 2003 Saudi exports, according to IMF figures, totaled $93.4 billion. In 2004 total exports are estimated by various analysts at $123.4 billion — a year-on-year increase of over just under 35 percent or $30 billion. The forecast for 2005 is even bigger at a peak of $130.8 billion, before settling down to a projected $99.7 billion in 2006.
Export financing should not be confused with export credit insurance, which guarantees payment to exporters in the case of non-payment or default. It is unusual to combine both under one umbrella.
Export financing is a commercial trade finance operation; while export credit insurance is what it says it is. The latter is very under-developed in the Gulf states, for instance, where there is no national or regional export import bank (Eximbank) to date. There is the Inter-Arab Investment Guarantee Corporation, but this covers mainly investment flows between member countries.
The Islamic Development Bank has an affiliate in Jeddah called the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), but which is constrained by its low capital of $150 million; limited resources and the fact that it is a pan-Islamic entity serving — technically — 34 member countries. ICIEC, for instance, approved insurance commitments for 2004/2005 of only $287 million, of which only $147 million of trade, project and investment insurance has actually been underwritten. Saudi Finance Minister Ibrahim Al-Assaf, who is also the chairman of the board of SFD, has confirmed that since the introduction of the SEP in 2002, some 300 Saudi exporters have so far registered with the program, which has approved finances and guarantees worth SR2 billion to Saudi exporters to more than 30 countries in Asia, Africa, North America, Europe and Australia.
The Saudi approach to export finance and insurance has hitherto been piecemeal, and in the case of wheat and barley, counter-productive.
This is partly because the country’s trade base has been relatively modest and therefore largely done on a cash basis. However, with the massive increase in the economic base and export market especially for petrochemicals and related products, the government has been restructuring its policy to educate and aid Saudi exporters; to increase their competitiveness; and to build “a soft infrastructure” to facilitate a policy of economic diversification.
Exporting also carries specific risks, which many small-to-medium-sized Saudi companies are not in a financial position to mitigate with their own resources. There is a suggestion that the government may eventually “privatize” the SEP. In the EU for instance, most of the short term export credit insurance providers are private with government agencies such as the UK’s ECGD; France’s Coface; and Germany’s Hermes concentrating on guaranteeing the financing of capital goods provided by their respective companies usually for large infrastructure and other such projects.
GCC states did commission the Indian Eximbank more than a decade ago to do a feasibility study on the establishment of a GCC export credit insurance entity, but nothing materialized from the exercise. The Saudi Ministry of Finance a few years ago also asked Kuwait-based The International Investor (TII) to do a feasibility study for an SEP based on Islamic financing modes such as Ijara (leasing), Isitisna (construction financing), Murabaha (cost-plus financing) and Installment Sale.
There is some good news for Saudi exporters on the horizon. The IDB at the 30th annual meeting of its board of governors in Kuala Lumpur in June approved the establishment in Jeddah of the Islamic Trade Finance Corporation (ITFC), which effectively separates the trade financing function from the project financing function of the IDB. The ITFC, which will effectively combine the assets of the IDB’s existing Export Financing Scheme and its Islamic Banks’ Portfolio, will have an authorized capital of $3 billion, of which $500 million will be paid up. Since the Kingdom is the largest equity subscriber of both the IDB and ITFC, its exporters will be in a pole position to access export financing from the entities.
