Interpreting Middle East Economic News and Analyzing Market Trends

Category: Saudi Arabia

Saudi Arabia’s water problems stink

Saudi Arabia needs to act quickly to come up with new water supplies.  The country has been known to turn dessert into farmland, which made the country a net exporter of wheat for many years.  This policy consumed valuable water supplies and is now being wound down as the country faces increasing pressure on its water resources.  This, however, is not the country’s only water problem.  Years of poor sewage planning have lead to contamination of underground water supplies, making the need to for desalination plants even more urgent and putting additional pressure on the country’s energy sector.

  

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Saudi Arabian economy expected to grow 3% in 2013, larger issues loom on the horizon

Twenty-twelve was a good year for the Saudi economy.  The final number on the GDP is expected to come in at 6.8% for the year.  This year, the economy is expected to grow 3% according to a report in Arab News.  However, the country faces large hurdles in the coming years.

 

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Saudi Tadawul set to open up to foreign investors… in time!

The Middle East’s largest stock exchange, with a market capitalization of $387 billion according to Bloomberg, is planning on opening up to foreign investors.  Currently, foreigners are only allowed to invest through equity swaps and exchange-traded funds.  This is not ideal if for foreign institutional investors and international money managers.  The Saudi stock market, known as Tadawul, is dominated by local retail investors and some local institutional investors.  Bringing international investors into the Saudi market will greatly improve the market’s liquidity.  Some institutional investors have become optimistic lately that Tadawul will soon open up to them.  Here’s more from Bloomberg BusinessWeek:

Deutsche Bank AG, Europe’s biggest bank by assets, expects Saudi Arabia will soon allow foreigners to invest directly in local company shares, joining hedge fund Passport Capital LLC in predicting the market is set to open.

“I am convinced that the market will open up to foreign investors and part of me is very optimistic it’s going to be soon,” Jamal Alkishi, chief executive officer of Deutsche Securities Saudi Arabia, said in an interview in his Riyadh office Feb. 11. “I think the leadership sees the benefits of doing so, but they just want to make sure that every facet is examined and thoroughly understood before plunging into this.”

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Saudi Arabia and the UAE handle bad debts differently, yet both come to the same wrong conclusion

Consumer finance has been on the rise in Gulf countries over the past decade.  Banks have been too eager to give out auto loans, unsecured loans, credit cards and other forms of credit.  This has been a good source of income for banks.  Since the financial crisis, banks have been refocusing on expanding their consumer finance business as they look to reduce their dependence on governments for business (see older post).

 

With interest rates so low (a typical savings account pays 0.5% per year), consumer loans are still on the high end in the Gulf.  A low annual interest rate on credit cards in the region is 24%, regardless of your credit history with the bank.  Some banks, such as Citibank offer credit cards with annual interest rates as high as 36% (is this legal in any other part of the world?).  Auto loans are on the cheaper side ranging from 4%-9% or above depending on the bank.  Interest rates on personal unsecured loans range from 6% to well above 10% depending on the borrower’s income.  It’s no wonder then that consumer loan defaults have been rising.

 

Both Saudi Arabia and the United Arab Emirates (UAE) have seen rising bad debts on bank balance sheets over the past few years.  Though their approach to handling these bad loans were different, they both arrived at the same wrong conclusion.  First, here’s a report from Arab News on Saudi Arabia:

 

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