Trade and Project Financing in Saudi Arabia

A Hot Tip about Foreign Exchange in Saudi Arabia

Posted on: 1 Jun 2010

How Do I Get Paid? (Methods of Payment)

An irrevocable letter of credit (L/C) is the instrument normally used for Saudi imports. Open account, cash in advance and documentary collections are also acceptable if both parties agree. Maximum or minimum credit terms are not required. Export Credit Insurance for political and commercial risk is available from the U.S. Export-Import Bank in Washington, D.C.

 

Through an initiative of the local banks, the Saudi Credit Bureau (SIMAH) is Saudi Arabia’s first comprehensive consumer credit bureau. Established in 2003, SCB will only extend its services to members in the banking industry. The current laws of Saudi Arabia do not allow sharing of financial information with non-banking institutions.

 

Debt collection is usually undertaken by a number of law firms. A representative list of lawyers is available through the U.S. Commercial Service.

 

How the Banking System Operates

An important development in the Saudi financial scene was the Royal Directive (May 9, 2006) that established the King Abdullah Financial District in Riyadh, which will house major financial institutions, the Capital Market Authority, the Stock Exchange, and other service providers. The Saudi banking system remains one of the strongest and most profitable in the region. Lacking financial information from two banks, net income registered $6.85 billion in 2009, relatively unchanged from $6.88 in 2008. In 2008, net income for the 12 banks was at $7.98 billion, and industry sources expect it to stay at that level in 2009. In contrast, total assets of the Saudi banking sector went up more than 5.2%, from $347.3 billion in 2008 to $365.4 billion in 2009. Similarly, consumer lending grew 3.6% during the first nine months of 2009, from $46.40 in 2008 to $48.10 billion in 2009. Aggregate private sector borrowing, however, contracted by about 1%, from $195.90 billion in 2008 to $194.16 billion in 2009.

 

The difficulty in obtaining a banking license to operate in Saudi means that only 12 Saudi and Saudi-foreign joint venture banks operate, dominated by Al-Rajhi bank, the country’s most profitable and one of the world’s largest Islamic banks, and the National Commercial Bank the largest by asset size in both Saudi Arabia and the whole GCC. A number of international banks have entered the market by taking stakes in domestic firms, such as HSBC’s 40 per cent stake in Saudi British Bank (SABB) and ABN Amro’s 40 per cent stake in Saudi Hollandi Bank, which could soon be up for sale. Five GCC banks are licensed to operate in Saudi Arabia, and licenses were also granted to Deutsche Bank, BNP-Paribas, State Bank of India, National Bank of Pakistan, and J.P. Morgan Chase.

 

Foreign banks are permitted to enter joint venture companies in Saudi Arabia with a previous foreign equity cap of 40% raised to 60%. Now, they can also open direct branches. As of the date of this report, the Capital Market Authority has licensed 108 foreign and local companies to provide financial services and brokerage services from dealing and managing portfolios to arranging and advisory services, including Morgan Stanley, KPMG, Ernst & Young, Merrill Lynch, J.P. Morgan, Credit Suisse, HSBC, and Goldman Sachs, among others. The Saudi Government has also opened up asset management, advisory and brokerage services to foreign institutions.

 

After suffering a major crash in 2008, the Kingdom’s stock market leveled out in 2009 and the Tadawul All-Share Index (TASI) closed at 6,121.76 compared to 4,802.99 in 2008. The total value of traded shares plummeted by more than 35% reaching $337 billion in 2009. Overall market capitalization, however, improved more than 29%, reaching $318.8 billion in 2009 compared to $246.5 billion in 2008. The total number of traded companies was 135 compared to 127 in 2008. The Kingdom’s stock market is the largest and the most attractive in the region; it is still larger than the combined worth of companies listed in Kuwait, UAE, and Qatar and many international bankers and asset managers have re-focused their advisory and research services on the Saudi market.

 

There were 244 operating funds with total assets at $23.88 billion, growing more than 19% in 2009. Foreign assets represented more than 17% of the funds’ assets composition. In an attempt to prevent the economy from sliding into recession, the Saudi Government estimates spending to reach $144 billion, the highest projected expenditure ever, with a projected deficit of $18.7 billion. The actual deficit in 2008 stood at $12 billion lower than the projected $17 billion due to higher oil prices.

 

The earlier projections of tighter bank financing in 2009 were stamped out by exorbitant liquidity, which crossed the $274 billion mark, reflecting the prudent monetary policy of the Saudi Arabian Monetary Agency (SAMA). The excess liquidity helped to enhance consumer lending and to stabilize aggregate borrowing by the private sector.

 

The current state of equity markets will likely allow more initial public offerings in 2010 as opposed to the number of IPOs in 2009, which was a busy year and saw the floatation of 11 new companies, with a combined total share capital of $2.08 billion. Saudi Arabia remained the driving force behind the region’s IPO market. Some of the heavyweight companies included National Petrochemical Company raised almost $640 million, Saudi Steel Pipe Company, which raised $107 million, Mouwasat Medical Services Company $880 million, and Etihad Atheeb Telecommunications Company $80 million.

 

The Saudi Arabian Monetary Agency (SAMA), the Saudi central bank, regulates the Saudi banking sector. Offshore banking and trust operations do not exist in Saudi Arabia, and there is no legislation to permit the establishment of these operations.

 

On October 11, 2005, the Council of Ministers instructed the CMA, the Capital Market Authority and SAMA to establish a secondary market for Government bonds. Banking sources expect that a secondary market will be also created for bank and corporate bonds.

 

Foreign-Exchange Controls

Saudi Arabia imposes no foreign exchange restrictions on capital receipts or payments by residents or nonresidents, beyond a prohibition against transactions with Israel. Although officially linked to the IMF’s Special Drawing Rights, Saudi Arabia in practice pegs its currency, the Saudi Riyal (SAR), to the U.S. Dollar.

 

Saudi Arabia last devalued the Riyal in June 1986 when it set the official selling rate at SAR 3.745 = $1. Residents of Saudi Arabia may freely and without license buy, hold, sell, import, and export gold, with the exception of gold of 14 karats or less.

 

In its latest Article IV consultation with Saudi Arabia, the International Monetary Fund (IMF) indicated that it “saw merit in the authorities’ decision to keep the current pegged exchange rate regime unchanged in the period leading up to the GCC monetary union in 2010, while keeping an open mind about the choice of the exchange rate regime under the prospective monetary union.”

 

U.S. Banks and Local Correspondent Banks

There are no American financial/lending institutions operating independently in Saudi Arabia. Nonetheless, the Saudi Arabian Monetary Agency (SAMA) granted licenses to JP Morgan, Morgan Stanley, Ernst & Young, Merrill Lynch, and Goldman Sachs to operate in Saudi Arabia as a foreign investment banking entity.

 

Currently, 12 majority Saudi-owned banks and five regional banks are licensed to operate in Saudi Arabia. The regional banks include Emirates Bank, Gulf International Bank, Muscat Bank, National Bank of Bahrain, and the National Bank of Kuwait.

 

The Saudi Arabian Monetary Agency (SAMA) also granted licenses to international investment banks, including, Deutsche Bank, BNP-Paribas, J.P. Morgan, the State Bank of India, and the National Bank of Pakistan to open a branch office.

 

Because of its ownership structure, Saudi Investment Bank (SIB) has direct correspondent relationships with its U.S. joint venture partner, J.P. Morgan Chase, which holds a 7.4% stake in SIB. Other Saudi banks also have correspondent relationships with American institutions, whether the home office in the United States or through the U.S. bank branches in Europe, Bahrain, or Dubai.

 

Project Financing

In spite of falling oil prices, the Saudi Government released an expansionary 2010 budget, which has alleviated fears among many contractors and investors in the region. Industry sources believe that the SAG commitment to carry on with its infrastructure projects will offset the slowdown in the private sector. The 2010 budget forecasts a 14% rise in spending, which will spur public spending, especially for expansion projects at the Grand Mosque in Mecca, military and security projects, transport, telecoms and water.

 

In 2009, the government awarded more than 2,300 contracts at a cost of $37 billion according to a latest report released by the Ministry of Finance. In the 2010 budget, the government has allocated $36.5 billion for the education sector to build and expand a number of university campuses, and another $16 billion for the healthcare sector.

 

Projects, especially in the oil, gas, petrochemical and energy sectors, are being re-evaluated of their costs in line with cheaper building and construction materials, credit crunch, and the cancellation of many projects in the whole region.

 

In 2010, a number of projects are expected to go forward pending better financing terms, namely the Yanbu refinery, PP 9 & 10 (Power plant in Riyadh), an aluminum smelter in Ras Az-Zour, and a refinery in Jizan.

 

For the past 6 years, oil prices have enabled the Kingdom to amass huge cash surpluses; by the same token, local banks are also awash with liquidity and will be expected to play a major role in financing projects, as one local banker was quoted “there is no liquidity shortage but surplus liquidity way above our needs”.

vIn February 2009, the Japan Bank for International Co-Operation (JBIC) provided $2.5 billion for the Ras Az-Zour IWPP in Saudi Arabia. Similarly, the Export-Import Bank of South Korea provided $500 million to the Saudi Kayan Petrochemicals Complex in November 2008. The U.S. Export-Import Bank (Ex-Im Bank) has also been very active in Saudi Arabia providing insurance guarantees to various clients in Saudi Arabia. In May 2009, Ex-Im approved close o $1 billion loan to the Saudi Electricity Company (SEC) to finance GE sale of 23 gas turbine generator sets. During the same timeframe, Hawker Beechcraft received a $60.5 million loan guarantee from Ex-Im Bank for the sale of six Hawker 750 corporate aircraft to the National Air Service Company (NAS) in Riyadh. Additionally, quasi-government loans from the Saudi Industrial Development Fund (SIDF), Rayadah Investment Company (Public Investment Fund), and Al-Hasana Investment Company (General Organization for Social Insurance) will also help support project financing schemes across Saudi Arabia. In January 2009, the PIF Board of Directors raised the lending ceiling from $1.06 billion to $1.30 billion for any project.

 

Some of the projects that are expected to be funded in 2010 include:

• The Saudi Arabian Mining Company (Ma’aden) is spearheading a number of private-public partnership projects, namely, Al-Jalamid Phosphate project and Ras Az-Zour project, which is a spin-off of the Al-Jalamid project, whereby the raw material will be transported by rail from Al-Jalamid to Ras Az-Zour for further processing and then shipping overseas. The Ras Az-Zour project will also include a smelter, which will involve long-term financing, around $8 billion, from local and international sources.

• In the water and power sector, the Saudi government is moving fast forward with the privatization of this vital sector. Four major power IPPs should be forthcoming in line with the Saudi Electricity Company’s plan to increase the country’s power generation capacity to 60,000 by 2020. Major among the projects include Shoqaiq, Ras Az-Zour Phase 1 & 2, Jeddah Phase 1, Ogair/Salwa Phase 1 & 2.

• The largest private investment in Saudi Arabia will center on the Economic Cities that will be built in some remote sites of Saudi Arabia to enhance the region’s economy and to create jobs in that area. These economic cities are expected to attract close to $80 billion in investments. The frontrunner is the King Abdullah Economic City at Rabigh, which will focus on promoting energy and transportation related industries. The Prince Abdulaziz bin Mousaed Economic City in Hail will be designed around transportation and related logistical services. The Knowledge Economic City in Medina will include a Technology and Knowledge-Based Industries zone, an advanced IT studies institute, an interactive museum on the life of Prophet Muhammad (PBUH), a center for Islamic civilization studies, a campus for medical research and biosciences, an integrated medical services zone, a retail zone, a business district, and residential zones. The fourth economic city in the southern city of Jizan will have an industrial zone, a logistics service center, an energy/desalination plant, a residential zone and a seaport.

 

“Soft” term financing is available from specialized credit institutions: the Saudi Agricultural Bank, the Saudi Credit Bank, the Public Investment Fund, the Saudi Industrial Development Fund (SIDF), and the Real Estate Development Fund.

 

The Saudi banking system is well capitalized and well provisioned. SIDF loans are available to finance foreign-owned businesses in Saudi Arabia under the Foreign Investment Law. The Embassy is not aware of any “cross-shareholding” or “stable shareholder” arrangements being used by private firms to restrict foreign investment through mergers and acquisitions. Nor is the Embassy aware of any laws or regulations that specifically authorize private firms to adopt articles of incorporation/association, which limit or prohibit foreign investment, participation, or control. GSM credit guarantees are not available in Saudi Arabia. The U.S. Export-Import Bank is involved in Saudi Arabia supporting trade with private Saudi companies. OPIC does not provide coverage in Saudi Arabia. The Government of Saudi Arabia may use the facilities of International Financial Institutions to support major infrastructure and projects.

 

Project financing is also available for longer-term loans by the local commercial banks and Saudi specialized credit institutions such as the Saudi Industrial Development Fund or the Public Investment Fund.

 

The International Finance Corporation (IFC), which finances and provides advice for private sector ventures and projects, has been quite active in the Saudi market. IFC has been active in Saudi Arabia since 1999 when it took $2.4 million equity in the Saudi Orix Leasing Corporation, helping SMEs get access to asset-backed financing and help develop the Saudi non-bank financial institutions. Since then, IFC has made a number of investments and/or provided advisory and technical assistance to Saudi entities. The IFC’s website lists the organizations’ commitments and projects in Saudi Arabia.

 

The Islamic Development Bank fosters the economic development and social progress of member countries and Muslim communities. It participates in equity capital and grants loans for productive projects and enterprises, besides providing financial assistance to member countries in other forms for economic and social development.

 

In addition, the Council of Saudi Chambers of Commerce and Industry is assisting with the set up of a Saudi-Japanese company to finance small and medium-sized companies in Saudi Arabia. Recently, the Saudi Fund for Development began to offer financing for Saudi exports to countries where there is no commercial bank coverage, no correspondent banks and/or high-risk country/bank. The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) provides Export Credit guarantees on exports to member states and to companies owned/partly owned by member states. In addition, the corporation provides investment insurance and guarantees against country risks to member states.

 

Other regional organizations that also provide for project and trade financing to promote investments and social development in the Arab world include:

• Arab Fund for Economic and Social Development, which is an autonomous regional Pan-Arab development finance organization. Members include all Arab states in the League of Arab Nations.

• Arab Industrial Development and Mining Organization, which is also a Pan-Arab organization for the encouragement of industrial and mining investments.

• Arab Monetary Fund, a 21-member regional Arab organization aiming to improve the balance of payments of member states, to promote Arab monetary cooperation as well as trade among member states. The organization also advises member countries on policies with respect to their foreign investments.

• Inter-Arab Investment Guarantee Corporation, which aims to promote and facilitate inter-Arab investments and trade.

 

 

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Posted: 01 June 2010