Banks in Saudi Arabia are among the most defensive in the region, thanks to one of the more robust regulatory and supervisory frameworks in the region, according to Standard Chartered Report, released on Tuesday. “Despite some high profile defaults in 2009, the fundamentals for the banks are sound and asset quality has already been on an improving trajectory over the last year. This trend is expected to continue for the remainder of 2011,” the report added.
Standard Chartered Bank in its series Middle East Focus report authored by Shady Shaher and Victor Lohle, were of the view, the banks will be direct beneficiaries of the ongoing expansion in the economy and healthy credit growth. However, they said, because of their scarcity value, Saudi bank bonds are expensive on a relative basis. “We view Banque Saudi Fransi and Saudi British Bank as broadly comparable credits. At current levels we would own the BSFR 15 over the SABB 15.”
“The Saudi state oil producer announced a $20billion joint venture with a major US chemical company to build one of the largest petrochemical facilities in the world. It will be based in the industrial city of Jubail and should be fully operational by 2016, producing up to 3million tonnes of chemical products per annum. Several components of the project are already in the bidding phase.
“The downstream sector is seen as key to Saudi Arabia’s drive to diversify away from upstream production, which oes not create the jobs needed for the country’s rapidly growing population. The industrial cities of Jubail and Yanbu are the largest of their kind in the world.
“We believe three drivers support the downstream sector as the key to the country’s diversification plans first access to cheap feedstocks; two access to cheap energy; and three the relatively high labour intensity of these industries, both through direct employment and subsidiary industries. This latest joint venture in the downstream sector is expected to generate close to $10billion in annual sales and create thousands of new jobs,” the report said.
“With oil output in the kingdom at close to 9.5mbd as of June, and given our average Brent oil price forecast of $112/barrel this year, Saudi Arabia is still managing to build its reserves – even with government spending rising by up to 36% this year, according to our forecasts. Central bank data shows that holdings of foreign securities have risen by 11.7% year-to-date, reaching about $350billion; overall reserves have touched $496billion.”
“With domestic and regional bond markets too small to absorb bumper oil revenues, Saudi Arabia is likely to continue buying US Treasuries, which make up the largest portion of its reserves, despite recent concerns surrounding the US downgrade. Saudi Arabia does not have any significant sovereign wealth funds (SWFs). Almost all of its reserves are managed by the Saudi Arabian Monetary Agency (SAMA), which follows a more prudent investment strategy than some GCC states that have more diversified portfolios of holdings through their SWFs,” the report said.
“We have a positive outlook on the sovereign credit. Saudi Arabia has built up a strong foreign-asset cushion over the years, and is in a good position to withstand short-term shocks. The country has very low debt levels and is a strong net creditor. It has no sovereign debt, and there is no deliverable on the sovereign CDS contract. We view any significant spread widening on the sovereign CDS as an opportunity to add risk via selling sovereign CDS,” the economists said.
“At current levels, we do not see a lot of value in Saudi corporate paper. Unlike their peers in Qatar and the UAE, Saudi corporates are not big issuers in the Eurobond market. International investor involvement in the space is largely for diversification purposes. The two Saudi corporates that have reasonably liquid dollar paper outstanding are petrochemical giant SABIC lkj(rated A1/A+/A+) and real-estate developer Dar Al Arkan (rated NR/BB-/NR).”