Net foreign assets of Saudi banks fall

Saudi Arabia's bank net foreign assets dived to one of its lowest levels at the end of the first half of this year because of a surge in foreign liabilities and strong demand for foreign currency to finance soaring imports, Saudi figures showed yesterday.

The combined net foreign assets of the Gulf country's commercial banks plunged to SAR18.5 billion (Dh18.3bn) at the end of last June from as high as SAR89.6bn (Dh88.7bn) at the end of June 2007, the figures showed. The net assets had peaked at one of their highest levels of SAR97.8bn in August 2007 before they began their steady decline to hit their lowest level of around SAR2.6bn at the end of last March.

"With projects planned or underway approaching the $500bn mark, imports of capital goods surging by 48.2 per cent in 2007, and the total value of letters of credit opened growing by 57.2 per cent in the first half of 2008, the demand for foreign currency in general and dollars in specific merits a closer look," said the National Commercial Bank (NCB), the largest bank in Saudi Arabia in terms of assets.

"The strain on local banks to meet such growing demand for foreign currency (FX) financing is clearly revealed by delving into these positions and transactions.

"Most notable is the reduction in net foreign assets by 56.4 per cent in so far this year, mainly due to an increase in foreign liabilities by 27.9 per cent and an annual increase in net purchases (NP) of FX in 2007 and the first half of 2008, by 164.4 and 19.7 per cent, respectively. The total NP value of $22.5bn in the first half of this year is approaching the $22.6bn for the whole of 2007."

In its weekly bulletin sent to Emirates Business yesterday, NCB also cited a sharp growth in FX net purchases from overseas banks by 456 and 156.2 per cent in 2007 and the first half of this year, respectively.

"Another factor is the decline in FX net purchases between domestic banks by 48.4 and 72 per cent in 2007 and the first half of 2008 respectively...it is clear that the domestic banks are tapping into overseas sources of foreign exchange, while reducing their outflows to other local competitors," it said.

"We expect a steep demand for foreign exchange, especially as more projects enter advanced stages, with higher imports of specialised machines and equipment, and as local banks seek to join in by supplying a portion for a unique investment drive."

Figures by the Saudi Arabian Monetary Authority (central bank) showed foreign liabilities, mostly deposits by foreign banks with Saudi banks, more than doubled in one year, standing at around SAR134.5bn at the end of last June compared with SAR64.8bn at the end of June 2007.

The liabilities had remained almost stable during previous years before they started to swell in 2006.

The increase was accompanied with a surge in banks' borrowing in riyal rather than foreign currency apparently in anticipation of a revaluation. According to the Riyadh-based Jadwa Investment Company, a leading financial and investment consultancy firm in Saudi Arabia, the surge in foreign deposits with local banks indicated growing speculation about a revaluation of the Saudi riyal.

"It appears that some local banks are very actively raising finance in order to purchase assets underlying holdings of special investment vehicles that have been affected by the sub-prime crisis. Owing to concerns about a potential revaluation, banks are borrowing in riyals, rather than foreign currency," Jadwa said.

"Riyal funding is being sought from local and international banks and this, combined with foreign banks positioning themselves in the event of a revaluation, has caused commercial bank foreign liabilities to almost double since August."

Like other Gulf oil producers, Saudi Arabia is passing through an economic boom which has led to a sharp rise in banks' credits to the private sector, peaking at nearly SAR690bn at the end of last June compared with around SAR511bn at the end of June last year.

The numbers

48.2%: Imports of capital goods surged by this percentage in 2007

88.7bn: Foreign assets, in dirhams, of Saudi banks in August 2007

$22.5bn: The total value of forex purchases in H1

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