RECENT SIGNS ON SAUDI ECONOMY MIXED

C O N F I D E N T I A L RIYADH 000577 SIPDIS DEPT FOR NEA/ARP, EEB E.O. 12958: DECL: 04/15/2019 TAGS: ECON EINV ETRD SA SUBJECT: RECENT SIGNS ON SAUDI ECONOMY MIXED Classified By: Acting DCM Sandy Muench for reasons 1.4 (b) and (d) ¶1. (U) Key points: -- (U) All four Saudi banks that have reported their first quarter earnings to date were profitable, three at higher levels than in the same period last year. -- (SBU) Despite this, it is clear banks still are not lending money and project finance has not recovered. -- (C) Inflation is down according to official figures, but Saudi officials are concerned about a possible resurgence. ¶2. (C) Comment: While there is some positive news on the financial front, relatively low oil prices and tight international credit markets are still making Saudi banks skittish about lending funds. Although the central bank is taking steps to encourage more bank lending, their loosening of monetary policy could backfire if SAG fears of a return to double-digit inflation prove well-founded. End comment. Bank profits up, but still not lending -------------- ¶3. (U) Recent news from the Saudi financial sector has been generally positive. Since April 11, four Saudi banks (out of the country's 12) have announced their first quarter earnings (Al Bilad, Al Rajhi, Arab National, and Samba Financial Group),with all four making a profit, and three surpassing their 1Q 2008 profits. On the project finance front, Saudi Aramco and ConocoPhillips announced April 6 their intention to issue tender for bids on their joint venture refinery at Yanbu by the middle of 2009. ¶4. (SBU) Despite these encouraging signs, there are still reasons for concern. The Saudi Arabian Monetary Agency (SAMA) recently lowered their reverse repo rate by 25 basis points to 0.5 percent. Most Embassy contacts agree this was an effort to dislodge some of the burgeoning non-statutory bank deposits resting in their coffers and get the banks to lend this money to the private sector. As of April 14, these deposits totaled the equivalent of $19.7 billion -- up from $240 million six months ago. In addition, many bankers have told us private loan rates are significantly higher than the published interbank rate, and banks are only making short-term loans rather than providing long-term financing. ¶5. (SBU) In an April 12 meeting, the Deputy Governor of SAMA told Econoff that although Saudi banks were healthy and had suffered only very limited effects from the international financial crisis, they were "worried" about the real economy. A combination of relatively low oil prices, tight international credit markets, and lower consumer spending is hurting the economy, requiring the government to spend its savings to keep up the appearance of normality. SAMA's reserves fell two percent in February alone, dropping to $422.6 billion. Officially inflation lower, but still a threat -------------- - ¶6. (SBU) According to figures published April 14, inflation fell to six percent in March, a decline of 0.9 percent from February. Key contributors to last year's spike in inflation, food and rent, were at 2.8 percent and 20 percent, respectively. However, the perception on the street is that these figures, particularly for food, are lowballed, and that actual prices are still increasing at a faster rate. ¶7. (C) In a April 14 meeting with Charge, Commerce Minister Abdullah Zainal Alireza identified the possible return of high inflation as his greatest challenge over the next year. He said he hoped to reduce inflationary pressure by improving the supply chain for staples and fighting monopolistic practices. He noted pointedly however, that he would resort to price controls if conditions warrant it. RUNDELL