Saudi Arabia's interbank market remains placid, notwithstanding the travails of the euro zone's financial markets. The Saudi Arabia Interbank Offered Rate (SAIBOR) has moved higher in recent months, reaching 0.83 in late February from a recent trough of 0.6 in September. However, this basically reflects stresses in international markets: US dollar London Interbank Offered Rate (LIBOR) also moved up over the same period in line with uncertainty over Greece and the broader euro zone debt situation. Indeed, the spread between LIBOR and SAIBOR narrowed somewhat during this period, reflecting the more liquid relative position of the Saudi banking system. However, since December LIBOR has eased somewhat as the European Central Bank began offering longer-term borrowing facilities to the zone's banks. SAIBOR has yet to come off its recent highs and the spread has therefore widened slightly again.
This pattern has been replicated in the currency markets. The one year forward rate for the riyal came under quite sharp, but short-lived, downward pressure as the so-called Arab Spring gathered momentum in the early part of 2011, a trend that was reversed in the final quarter as the euro zone crisis intensified. Since then, pressures have abated and the rate was not far off parity in late December, the report said.
Notwithstanding the uptick in SAIBOR, the Saudi banking system is well protected against euro zone stresses. Saudi banks are well capitalized: The average capital adequacy ratio is 17, which compares with a Basel II minimum of 8, and Basel III's capital conservation buffer, which will push the effective minimum capital ratio up to 10.5 by 2019. Banks' foreign liabilities have fallen steadily in recent years, and at end-2011 were worth some SR75 billion, or $20 billion, equivalent to around 35 percent of foreign assets, down from around 75 percent in 2008 (foreign liabilities fell by 20 percent in 2011 mainly reflecting the ongoing deleveraging process by European banks and other institutions). SAMA (Saudi Arabian Monetary Agency), the central bank, has shown itself willing to take decisive action in times of uncertainty, such as in 2008-09 when it increased liquidity sharply and placed deposits within the banking system.
Banks are also liquid: The end-2011 loan-deposit ratio was just over 80, compared to 100 plus in other parts of the Gulf. In the EU the average loan-deposit ratio was 138 at end-2011, up from 124 at the end of the second half, the increase reflecting the rapid withdrawal of deposits from the European banking system, which has outstripped the pace of deleveraging. In addition, the Islamic nature of banking in Saudi Arabia means that a good deal of deposits are non-interest bearing, which keeps the cost of funds comparatively low.
The deleveraging process among European banks means that there are only one or two still actively involved in the Gulf project finance market. In Saudi Arabia, this is not a problem and abundant local liquidity has seen pricing trending downwards. Sectors in vogue include manufacturing, real estate, transport and health care. Large deals expected to be closed in the next few months include an SR4.5 billion ($1.2 billion) loan for the power and water utility Marafiq, and an SR10 billion loan for mobile operator Mobily.
As expected, the Samba report said buoyant project market has fed through into the corporate sector. The Markit/HSBC PMI for January was up to 60 in January, the highest reading since July last year and marks a recovery from a second-half dip. Both new orders and new export orders posted a strong rebound, helping to lift the output index to an eight-month high.
Despite the increased workloads, there are signs that margins remain slim for many firms. The input price index showed another expansion in January, to 58.4, far outstripping the pace of increase in output prices, which have remained comparatively modest, with the index reaching just 52.5 in the same month. This suggests that while corporate activity-and the nonoil economy more generally - is expanding, competition remains keen. Nevertheless, reports of newly-emergent financial distress among some firms appear somewhat wide of the mark. While it is true that some firms have been struggling, this has been going on for some time, and there has certainly been no widespread deterioration in corporate performance (quite the reverse as the PMI new orders data testify). Rather, the recent press attention reflects the fact that banks are now actively engaging with all their clients, and restructuring debt profiles where necessary, rather than simply rolling over loans as in the past.
While the PMI data are generally upbeat, the impact on employment has so far been muted. In September the employment PMI dipped below 50, indicating that more firms had shed labor than added it during the month. Since then, the index has moved back into expansionary mode, and in January was at 53.2, though this indicates that only a net 5.5 percent of firms had added staff-some way below the rate one might expect given the upbeat nature of the new orders data. The reluctance of firms to add to payrolls may reflect overcapacity built up during the 2005-08 boom, as well as a backdrop of political uncertainty in the MENA region. The new Nitaqat system of Saudization might have weighed on hirings in the second half of 2011 as the new system bedded in. Once Nitaqat becomes more established then the employment index might begin to move more substantially higher.
Latest data from the Central Department of Statistics and Information (CDSI) confirm that the economy grew by 6.8 percent in real terms in 2011. However, the economy's dominant sector, crude oil and natural gas, grew by just 4.3 percent according to the CDSI, which is difficult to square with a 13 percent gain in crude production output last year, the Samba report said.
