By Nadim Kawach Available at: http://www.zawya.com/story.cfm/sidZAWYA20090730050852/More%20Saudi%20Firms%20In%20Trouble%20-%20Jadwa

A severe debt problem involving two major Saudi family businesses has been caused by massive short-term borrowing and other similar groups could be suffering from such problems, said a Saudi investment centre yesterday. The defaults by Saad and Algosaibi has allied with the global credit tightness to dissuade banks from lending to the private sector and this has put further pressure on the domestic economy that is already reeling under lower oil prices, said the Riyadh-based Jadwa Investments Company.

The company said slackening bank credit has prompted it to cut down its forecast for the kingdom’s economic performance this year, expecting the real GDP to shrink by one per cent compared with earlier projection of 0.5 per cent. “The recovery of the kingdom’s economy has been hit by problems at one prominent local family business and an associated businessman. In addition to these two groups it seems that several other family groups are stressed financially,” said Jadwa in its monthly economic bulletin.

“The causes of these problems appear to be short-term borrowing for long-term assets, investment losses and the accumulation of large inventories of raw materials whose prices subsequently collapsed. Owing to concerns about the health of family business and their own exposures, banks have become more cautious in extending credit to the whole of the private sector.” It said there are links between the two families through marriage, but the extent of the business links is unclear with each side issuing conflicting statements. “The immediate causes of the recent problems are not unique to family groups. Companies worldwide that are heavily reliant on short-term borrowing have suffered from a drying up of credit from the banking sector.”

According to Jadwa, in Saudi Arabia only 22 per cent of total credit has a maturity of more than three years, while losses on investments have been widespread as the value of assets has plunged because of the global crisis. It noted that the Saad group has substantial holdings in the property and financial services sectors, which have been particularly hit. “Shortages in the first half of last year and expectations of a continuation of the economic boom encouraged some companies to stock pile, while prices were rising only for the value of these stocks to collapse as commodity prices plunged as the global financial crisis intensified,” said the report.

“Nonetheless, it seems probable that the dynamics within the two groups aggravated the problems. Both groups started based on a single business line; for Saad this was contracting and for Algosaibi it was trading. “Jadwa said over the years, the interests of those two group mushroomed and they became large conglomerates with diversified interests. It said many family businesses have followed a similar path in the kingdom, but it appears that the Saad and Algosaibi groups did not have sufficient internal controls to operate a diversified group of companies. “Due to the Algosaibi and Saad group defaults, banks have become increasingly wary about lending to all family businesses (family business account for a large part of the private sector). Other companies within the private sector are also finding it tougher to raise finance as a result,” said the study. “Availability of credit was already constrained for the private sector. Total commercial bank lending to the private sector has declined in five of the seven months to end-June and the total outstanding is over SR14 billion below its November peak. Credit to the private sector rose by 0.5 per cent in June, though the breakdown indicates that this was targeted to a few specific sectors.” Jadwa said none of the local banks have publically admitted to exposure to the Saad or Algosaibi groups, but it “seems that this runs into billions of dollars.”

“The Algosaibi group has acknowledged that it owes $9.2 billion to 120 banks across the world. Local banks have very large exposures to family businesses.” The report said second quarter results have shown that National Commercial Bank, Al Rajhi Bank, SABBS, Samba, Banque Saudi Fransiand Saudi Hollandi have increased their provisions for bad debts. “It is highly likely that other banks will do likewise in the third quarter and that provisions made during the second quarter will be raised. Nonetheless, we do not think problems at family businesses will pose a systemic threat to the banking sector owing to its strong fundamentals. Non-performing loans were just 1.3 per cent of total loans at the end of 2008 and provisions were sufficient to cover over 153 per cent of these loans,” said the study.”However, there is likely to be a reform of lending practices at commercial banks. In cases where there are long-term relationships between banks and large customers, lending standards have sometimes been less stringent than would otherwise be the case as a result of the level of trust between the parties.”

Best Regards
ZULKIFLI HASAN
DURHAM, UNITED KINGDOM

From left, Dr. Mehmet Asutay, Profesor Kosugi Yosushi, Zulkifli Hasan, Hylmun Izhar and Professor Dr. Abdul Ghafar Ismail. Kyoto, Japan.