Saudi bank lending to private companies shrank for an 11th month in January, the longest stretch in at least two decades, underscoring the challenge facing officials trying to boost growth in the largest Arab economy.
Data released last week by the Saudi Arabian Monetary Authority showed total credit issued to private companies fell 1% from a year earlier, compared with a 41% jump in lending to the public sector—the most in 11 months. That’s a problem for authorities looking to bolster non-oil private industries to overhaul an economy long reliant on oil revenue and state spending, Bloomberg reported.
It also illustrates how the government is caught between competing desires to stimulate the economy while shoring up public finances, after the plunge in oil prices in 2014 caused the budget deficit to surge. The kingdom has introduced value-added tax and removed some fuel subsidies, but also rolled out a package of handouts to offset the impact.
Last week’s data indicate the new levies hit retail activity, with sales transactions plunging by almost a fifth from December.
Both declining credit and wary shoppers are likely to concern a government expecting a 2.7% expansion this year—well above the 1.5% median estimate in a Bloomberg survey of economists. The economy shrank 0.5% in 2017, the government said in its December budget statement.
“The current state of credit activity is probably a reflection of a longer term economic cycle, and creates a headwind for the economy,” said Duygu Akkoca, a Middle East and North Africa economist at Ziraat Bank in Istanbul, adding that her own estimate for 2018 growth is 1.7%. “The economic reaction to the introduction of VAT is also understandable.”
The Saudi Arabia Monetary Authority data shows its total net foreign assets fell 2.1% to $486 billion, the first monthly decline since September, led by a drop in the value of investments in foreign securities.
Inflation Rises
Saudi economy had a mixed start to the year, with retail sales down and inflation up, according to a report released Sunday from Jadwa Investment, Arabian Business reported.
The data, based on official Saudi figures released by the government, revealed that point-of-sale transactions dropped 19% month-on-month in January, after a 20% increase in December, prior to VAT implementation at the beginning of the year. Most malls are also deserted these days. On a year-on-year basis, POS transactions rose by 4.3%.
Meanwhile, inflation rose in January 2018 by 3% year-on-year, and 3.9% month-on-month, which the report attributed to the implementation of VAT and utility and fuel price reform.
On January 1st the price of Octane 91 increased by 82% while 95 Octane rose 126%, while the imposition of VAT saw 5% added to the majority of goods and services. The moves were part of a government drive to reduce subsidies and tackle a predicted deficit of $52 billion for 2018.
The report also showed that housing and utilities prices rose by 1.3% year-on-year, while food and beverages prices increased 6.8% year-on-year in January.
Loan Refinancing
Saudi Arabia is working with HSBC, JPMorgan and Mitsubishi UFJ Financial Group on the refinancing of its existing $10 billion syndicated loan, said banking sources familiar with the matter.
The three lenders have a leading role in the refinancing, which will involve a much larger group of banks. Loan syndication is expected to be completed by mid-February, said the sources.
A spokesman for the Saudi debt management office said: “The Debt Management Office is coordinating this transaction directly with all financial institutions and it would be inappropriate to comment further whilst discussions are still ongoing.”
HSBC declined to comment, while JPMorgan and MUFG did not immediately respond to requests for comment.
Saudi Arabia approached the said banks last month with requests for proposals to refinance its $10 billion loan, and also for further US dollar-denominated bond issuance and potential financing backed by foreign export credit agencies.
The loan refinancing will include a repricing of the debt facility and a maturity extension, to 2023 from 2021.
The sources said the size of the loan refinancing had not been determined yet and would depend on how much Saudi Arabia planned to raise in each of the fund-raising exercises on which it was working, including its international bond issuance and domestic sales of local currency sukuk.
