Involving the private sector in the development plan has been a key government priority for years as part of efforts to strengthen the nonoil economy to reduce reliance on oil exports and create jobs.
But with private investors on their guard, bank credit touching new lows and the cost of private sector credit still sharply higher than it was prior to the global financial crisis, the government has been compelled to take the lead role in paying for project work. In the past year, the state became the principal financier behind strategic projects across many core sectors, and it looks likely to bolster rather than undercut this strategy during 2010. As the principal investor in the economy, the state is shouldering the recovery effort, after succeeding in keeping the economy from slowing down more than it did in 2009.
In much of the world, including developed countries, governments are trying to better integrate themselves in the economy. Saudi Arabia had already carefully woven the state's role through a variety of institutional mechanisms over a long period of time. Now it is using its economic prowess to ensure funds continue pouring into expansion projects. The intention is not to crowd out the private sector but to maintain momentum when private sector participation and credit are not as close at hand as they used to be.
Even private firms are turning to government investment agencies for financing as banks - trying to clean out their balance sheets following some debt troubles suffered by family conglomerates - sidestep new credit requests.
In February, the Council of Ministers asked the Public Investment Fund (PIF), an arm of the Finance Ministry, to extend interest-free loans from its revenues to contracts that would expedite the completion of the 450-km Haramain high speed railway project. The estimated SR26 billion railway will connect Jeddah with the holy cities of Makkah and Madinah. In return for its credit extensions, PIF would be compensated in future budget allocations.
Aside from transportation, the state-run PIF has moved into a number of crucial economic sectors in Saudi Arabia, announcing in January it would take a 20 percent stake in Real Estate Financing Co. (Refco), which plans to offer home loans in conjunction with the anticipated passage of a mortgage law this year.
PIF's active role follows revisions to its mandate in January 2009, when the state project lender announced it would provide more project financing to address an imbalance between funding supply and demand. The fund raised the cap on project lending to 40 percent from 30 percent of its value and extended loan duration to 20 years from 15 years (including a five-year grace period). An increase in the lending tenor allowed PIF to participate more actively in the power and water sector, where tenors typically extend longer than 15 years. More importantly, the PIF raised by 57 percent the lending limit on each project to SR5.88 billion from about SR3.75 billion.
Petrochemicals giant Saudi Basic Industries Corp (SABIC) turned to PIF - its 70 percent shareholder - in late December for a SR10 billion private bond placement. SABIC, which plans to use the funds for expansion, had sold bonds to the public in recent years. But risk perception of global markets for all issuers in the Gulf region worsened substantially after conglomerate Dubai World announced in late November it would seek a debt standstill, quashing expectations its liabilities would be backed by a sovereign guarantee.
Not surprisingly, credit default swaps (CDS) of all Gulf countries suffered. Saudi issuers are perceived as the least likely among their Gulf counterparts to default on their debts with CDS Saudi debt a full 59 basis points lower than Abu Dhabi and 11 basis points lower than Qatar by mid-February. Saudi CDS have declined 74 percent since a February 2009 peak, but are still 19 percent more expensive than October last year. Markets are naturally pricing a slightly higher risk even for a very solid country like Saudi Arabia. Still, there is wide differentiation of risk in the region and corporate borrowers in less-hit countries like the Kingdom should consider tapping the funding market. Companies in countries perceived as more risky will face a tough funding scenario in 2010.
Early indications are that a five-year Islamic bond issued by Saudi Arabia's largest property developer, Dar Al-Arkan Real Estate Development Co, could be priced at a steep 10-11 percent yield. These scenarios underpin the crucial role the PIF and other state agencies can play in filling a funding gap created by the risk aversion of banks and difficult credit conditions regionally.
(John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh.)
