Saudi Arabia’s Tadawul All-Share Index (TASI) has posted impressive returns YTD (up over 16%), but last week’s correction, coupled with a recent report issued by Riyadh-based Samba Bank–which warned that the recovery of oil prices to above $60/barrel and a forecasted 24% increase in government spending will not be adequate to offset a sharp slowdown in private sector activity–raises concern.

The Bank asserted that while public spending in both oil and non-oil sectors has been robust, private investment, in contrast, remained tepid, constrained by lingering tougher lending standards due at least in part to poor export prospects, especially in petrochemicals (polyethylene prices are still down roughly 50% from their mid-2008 highs) and refined products, the country’s main exports after oil and natural gas. It added that the country’s GDP would contract by 1.2% in 2009 (following 4.5% growth last year), but predicted that growth would climb to 4.4%

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Reports surfaced this past week that Kuwait’s Mobile Telecommunications Co. (Zain)–the leading African and Middle Eastern mobile operator–is close to rescheduling a $2.5 billion two-year “murabaha” loan agreement on behalf of its subsidiary, Zain Saudi Arabia, that it signed in 2007 in order to finance the development of its infrastructure and the expansion of its subscribers’ base.  Commitments will likely come from Saudi Arabia’s Al-Rajhi Bank and Banque Saudi Fransi, as well as France’s Calyon.

Under murabaha, a intermediary financier buys a property or commodity and sells it to the buyer at a higher price (retaining free and clear title/ownership until the loan is paid in full), thus complying with Islam’s ban on interest.  The theory under murabaha is that the transaction is not an interest-bearing loan, which is considered “riba” (excess).  To prevent riba, the intermediary cannot be compensated above the agreed

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The commencement in Saudi Arabia earlier this week of both a regulated bond and sukuk (Islamic bond) market is “a very sensible approach” to the problems facing many Saudi banks–namely the fact their loan-to-deposit ratios already exceed the central bank’s imposed ceilings–and will help to create “deeper and wider” financial markets, according to Rajiv Shukla, regional head of debt markets at HSBC Saudi Arabia. “No market should depend on one pool of liquidity,” he added.

The Saudi Capital Market Authority hopes to give potential issuers enough forms of finance to ease pressure on banks and add another layer to the nation’s capital markets. In April, for instance, it announced it was considering the introduction of options, short-selling and futures onto its exchange (Tadawul) in addition to ETFs. It also underscored the need for holders of more than 5% of a company to disclose ownership

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Financial Times noted today that international institutional demand for swaps in Saudi Arabian stocks–introduced by the country’s Capital Markets Authority last August as a method to furnish overseas investors the economic but not the voting rights of a stock–has rapidly increased of late based on the positive earnings outlook for many Saudi companies, as well as myriad signs that rate of decline for the global recession is tempering.  Sectors of particular interest, not surprisingly, are areas in which the Saudi kingdom has a comparative advantage, i.e. petrochemicals. Per the Tadawul, the country’s stock exchange, overseas-based investors bought SR1.23bn ($328m) worth of swaps last month, up more than three-fold from March, while only SR269m of them were sold.

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A recent report issued by Fitch Ratings concludes that the more challenging operating environment has negatively affected prospects for retail banking in the Gulf Cooperation Council (GCC, consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), although the degree of severity will vary.  Fitch views the potential risks from retail lending as high in the UAE (particularly Dubai) and Oman, moderate in Bahrain, Kuwait and Qatar, and low in Saudi Arabia.

The report notes further that the most negative impact could be realized in the UAE, particularly in Dubai, because the UAE retail sector is the largest in size and UAE retail loans grew the quickest in the GCC.  Dubai’s economy has been hit especially hard by the global recession, as the UAE has an exceptionally high proportion of expatriates, at more than 80% of the population (90% in Dubai).  Expatriate residence visas are nearly always linked

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Canada may not be a frontier market, but it could quickly grow into an important source of forage not only for Asian markets, which it current supplies, but also for Middle Eastern ones.

The Saudi Gazette reported today, for instance, that water scarcity in Middle Eastern countries may open up good export opportunities for Canadian forage exporters in the coming years:

Whereas Asian markets purchase mainly timothy hay, a high-energy, low-protein grass preferred by animals for its sweet taste, Middle Eastern markets would present opportunities for exports of alfalfa, a protein-rich, high-energy, low-fiber legume.  Due to vast land and water availability, Canada is a leader in alfalfa production.

That said, one problem facing exporters has been an inability to secure adequate rail containers to carry forage, and “some companies are anticipating a return of transportation headaches once the economy picks up again and are fighting to change rail policies.”  At present,

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Saudi Telecom Co. (STC), the Arab world’s largest telecom company by market value, posted a worse-than-expected 62% fall in fourth-quarter profit this past week, which it blamed on foreign currency fluctuations.  The news caused STC shares to drop 10%, bringing this year’s total decline to 6.5%.  The company’s fourth-quarter operating profit fell 20% to 2.38 billion riyals, which Ibrahim al-Alwan, deputy chief executive at KSB Capital Group, chalks up to growing competition.  In fact, Saudi Telecom is said to be under “intense pressure to improve profitability as a regional telecom war heats up, with rivals like Kuwait’s Zain and Emirates Telecommunications competing within Saudi Arabia.” However, the future looks bright.  STC won a bid for Bahrain’s third mobile- phone license as the company continues to seek to expand its global operations in countries like Malaysia, India, Indonesia, South Africa ...

The last global recession the world had was in 2001. Nymex crude oil prices, which had gone above $35 a barrel in September and October 2000, fell briefly below $20 a barrel in late 2001 before recovering in April 2002 to above $26 a barrel.

The oil price required for a marginal cost player to return its cost of capital is $65-75 per barrel.

Economic necessity is often cited as important in the price level. The lowest breakeven oil price that would bring the 2008- 2009 budget into balance in Saudi Arabia is $30 per barrel. The level in the UAE is $40 and in Qatar it is $55. The average breakeven for GCC is $50 per barrel.

We've discussed this many times in the past [Jan 21: A Tour Through the Middle East] and as I wrote in January While we wring our collective hands about how the infrastructure companies are going to lose all their business as crude drops from $100 to $75, and projects will be cancelled due to their rich customers actually giving a rat's behind if crude is $100 or $75 let's take a look at reality. I noticed a story in the NY Times this weekend on Saudi Arabia - so I'd like to overlay that with just a snapshot of what is going on in some of the other countries in this part of the world - the Kuwaits, the Oman's, the Abu Dhabi's, the Qatar's.... ... because perhaps I think most of us still are very inward looking as Americans and do not realize ...

Sometimes your worst fears come back to bite you in the rear. Case in point: In the New York Times, on October 14, 2001 the managing director of an oil consulting firm warned: "If Bin Laden takes over and becomes king of Saudi Arabia, he'd turn off the tap ... he wants oil to be $144 a barrel." At the time, oil traded at $23, and $144 a barrel seemed downright impossible. Well, terror mastermind Osama Bin Laden, safe in his undisclosed rat hole, must be grinning like a Cheshire cat, because last week oil soared past $144 a barrel. Indeed, if Bin Laden's aim was to hurt the U.S. through higher oil prices, he's probably thinking "Mission Accomplished." Soaring oil prices are fueling inflation and sowing the seeds of recession at the same time....