Saudi credit crisis: What to watch out for

SAUDI WATCH: Saudi Arabia is facing a mounting bank lending crisis. (Getty Images)

Saudi Arabia is facing a mounting bank lending crisis, with domestic lending stalled in part over concerns that troubles at two key conglomerates will spread and with confidence faltering.

The Saudi Arabia Monetary Agency (SAMA) is expected to further cut interest rates or reserve requirements to kickstart lending, but analysts worry that may not be enough to restore bank confidence.

On Tuesday, it sought to boost lending by halving the rate it pays to commercial banks when they deposit money with the central bank by lowering its reverse repo rate from 50 basis points to 25. It left the benchmark repurchase rate unchanged at two percent.

Below are some of the key points to watch identified by Reuters correspondents in the region:

Problems at Saad Group and Ahmad Hamad al-Gosaibi & Bros Co (AHAB) have heightened bankers' cautiousness towards lending and raised concerns over the real impact of the global financial crisis on a large and secretive network of family businesses.

The outcome of any restructuring and any possible steps by the government toward helping family-owned business through the crisis will prove crucial for lending sentiment.

In the worst case scenario, the two firms would represent one of the biggest defaults to hit the region since the onset of the global financial crisis.

SAMA has not made any comment about the issue.

A newspaper reported on Tuesday both firms were looking to restructure some $10 billion in debt and would be talking to their creditors in Saudi Arabia, Bahrain and Britain. It was the first time a figure had been given for the size of the debt.

Central bank governors from Oman and United Arab Emirates said on Monday Gulf Arab banks had more exposure to the two firms than previously thought, the latest setback for lenders recovering from a regional liquidity crunch.

The Saudi central bank is due to release May's monthly money supply and credit growth data before the end of June.

Analysts do not expect the data to indicate any pickup from April.

"On a net basis, (Saudi) banks have not ... lent any new credit since September," says Caroline Grady, economist at Deutsche Bank.

The May data should indicate how urgent it is for SAMA to cut its benchmark lending rate.

As of the second week of July, listed Saudi banks will start announcing their second-quarter earnings. These should provide an idea about the amount of any provisions lenders have made for bad loans. But some lenders could delay this process to the fourth quarter of 2009.

A proposed new mortgage law, which has been in the works for almost a decade, could reverse the banking sector's fortunes if it was to be implemented this year, as the government expects. The law is now under final review by the cabinet.

Saudi Arabia has one of the lowest home ownership ratios among the oil-exporting Gulf Arab countries.

The government announced this month the launch of a market for bonds and Islamic bonds responding to a long-standing demand by some firms to diversify sources of financing amid tight credit conditions.

Analysts say the launch by the Saudi government of a maiden sovereign Islamic bond issue would be crucial to the success of the plan since it will provide a pricing measure for issues by firms. (Reuters)

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