Saudi looks for ways to diversify sources of financing (page 1 of 2)

How can Saudi Arabia diversify its sources of financing? This was the topic of the Euromoney Saudi Arabia conference 2011 held in Riyadh recently. Although not the main focus, the Arab Spring was an invisible guest at the forum.

In mid-March some young Saudis aimed to copy the civil unrest in Tunisia, Egypt, Bahrain, Oman and Syria by demonstrating on the streets of Riyadh. In order to calm the situation, HH Saudi King Abdullah Bin Abdul-Aziz Al Saud Custodian of the Two Holy Mosques in Makkah and Madina, ordered an additional off-budget $130bn spending package for private house construction, social purposes and infrastructure financing. Based on these measures, the IMF expects the Saudi economy to grow by 7.5% in 2011.

Foreign investments become increasingly important in Saudi Arabia

As oil prices declined sharply in May, the government knows that it must rely on foreign investments, too. "Saudi Arabia will possibly overspend another 10% to 15% in 2011 above what we announced in December last year," KSA finance minister Ibrahim Al-Assaf says. Home of the two Holy Mosques, KSA has never been mistaken as a travel destination for mass tourism.

Nevertheless, the Kingdom is open for investors. "We can confirm that Saudi Arabia really wants to attract foreign investors," Tobias Müller-Deku, a German lawyer at Freshfields Bruckhaus Deringer which operates in Riyadh in a jointventure with local law firm Salah Al-Hejailan, tells AMEinfo.com.

"Since 2000, the Saudi Arabian General Investment Authority (SAGIA) has provided a well-organised platform, a non-stop-shops for potential investors. However, in reality foreigners certainly face hurdles, such as contract execution delays and a lack of financing sources," Müller-Deku explains. The financial turmoil of the past 18 months has affected the oil-rich Kingdom, where a fifth of the world's proven oil reserves are located.

At a first glance, bilateral trade and investments seem to flourish. "In 2010, UNCTAD ranked Saudi Arabia among the top ten recipients of FDI wordwide (ranked 8th) and 17th in terms of the performance returns on inward FDI," Dr Muhammed Al-Jasser, the governor of the central bank Saudi Arabian Monetary Agency (SAMA), reveals. Recent news confirms the trend. In mid-May Bombardier Transportation signed a $96m contract with Saudi Binladin Group to build an automated people mover system at King Abdulaziz International Airport in Jeddah. On May 17th, Saudi Telecom CO., known as STC, signed an alliance with Microsoft for exchange of expertise of Microsoft software for its clients. On May 22, a joint venture between Saudi Arabian Mining Co. and Sahara awarded South Korea's engineering firm Daelim a contract to build a $750m petrochemical plant for Sahara Petrochemicals Co.

"Corporate bonds stand for only 3% of KSA's GDP," explains Mohieddine Kronfol, managing director of asset management at Algebra Capital. Even encouraging figures such as the 8.35% increase in corporate loans during the first quarter 2011 must be judged with caution. "The problem in Saudi Arabia is that if you are not one of the blue chip companies it is very difficult for you to get credit," Kronfol adds.

Alternative ways of financing such as the issuance of Islamic bonds are also facing hurdles. Muhammed Iqbal, CFO at Alinma Bank, one of KSA's three Islamic banks, says: "Every Saudi bank, whether Islamic or conventional with an Islamic window, has its own Sharia board. The result is a fragmented universe of different fatwas," Iqbal tells AMEinfo.com.