A view of the offices of Alinma Bank in Riyadh, Saudi Arabia (file). Central bank data shows Saudi Arabian banks are scaling back lending as the withdrawal of domestic stimulus has slowed economic growth.

Saudi Arabian banks are scaling back lending as the withdrawal of domestic stimulus has slowed economic growth.

Bank loan growth to the private sector was 13% in October, or 1.1tn riyals ($293bn), the slowest rate of expansion since May last year, central bank data showed November 28. While it was the sixth straight monthly drop, credit expansion in the Arab world’s biggest economy remains faster than in the United Arab Emirates and Kuwait.

The winding down of almost $800bn in stimulus measures introduced since 2008 and restrictions on foreign workers are forecast to trim economic growth this year to 4.2%, from 5.1% in 2012, according to a Bloomberg survey of 20 analysts.

The Al Saud ruling family unveiled plans to create jobs and build roads, ports and industrial cities to ward off the global financial crisis, and then in 2011 announced extra spending to spur employment and salaries as protests toppled leaders across the Middle East.

“The strong comeback of the credit market since 2009 is decelerating to more sustainable and healthy levels,” John Sfakianakis, chief investment strategist at MASIC in Saudi Arabia, said by phone from Riyadh on November 26. “The economy and the private sector are expanding but at a slower pace compared to last year.”

Economic growth that accelerated to 8.6% in 2011, the fastest in at least six years, is now cooling, Paul Gamble, a London-based analyst at Fitch Ratings, said in response to e-mailed questions.

“The moderation of non-oil growth reflects the unwinding of both the substantial stimulus and the boost to consumer spending provided by the introduction of unemployment benefit in early 2012,” he said.

“Banks may have held back because of a rise in the loan-to-deposit ratio, which was around a four-year high in August, but availability of credit remains supportive for the economy.”

Growth in the economy in the third quarter was 3.1%, compared with 5.7% a year earlier, according to official data released on Thursday.

Before the slowdown, the three-month Saudi interbank offered rate, the benchmark for lending among Saudi banks, was rising. It climbed 22 basis points in 2012 to 0.995%. This year, it has fallen 3.9 basis points to 0.956% yesterday.

Saudi Arabia finances spending largely through oil sales, which account for 90% of government revenue. Brent crude oil averaged about $112 a barrel last year, helping the central bank boost net foreign reserves to a record 2.7tn riyals in October, according to central bank data. Public debt has dropped to 3.6% of gross domestic product.

Credit grew 17% in 2012, according to the central bank. That compared with a drop of 0.3% in 2009 when the kingdom’s banks tightened lending after two businesses owned by prominent Saudi families defaulted on at least $15.7bn of loans.

“Encouragingly, Saudi credit growth has eased a little in recent months,” Jason Tuvey, an economist at London-based Capital Economics, wrote in a November 25 report. “The rapid expansion of credit in Saudi Arabia is beginning to look like a cause for concern. If sustained, it could be followed by a rise in non-performing loans.”

In the UAE bank loans grew 6.8% in September, while Kuwait expanded 7.8% a month later, according to the nations’ central banks.

The Saudi government is easing back spending because of its concerns over oil prices and new production competition, James Reeve, an economist at Samba Financial Group in London, said in a response to e-mailed questions.

The Saudis “are well aware of the challenge to oil prices posed by US shale,” he said. “They are trying to husband their resources a bit better.”

Bank lending may be slowing also in response to “the government’s crackdown on illegal workers,” Abdulwahid al- Matar, Riyadh-based head of trading at Saudi Hollandi Bank, said by phone. “The measures have impacted construction companies, which have slowed work because of fewer workers.”

The world’s largest oil exporter in April started deporting and arresting undocumented workers as part of a push to create more jobs for its citizens. After two amnesties, which allowed migrants to change their status to work in the kingdom or leave, the measures resumed on Nov 4. At least three foreign nationals were killed last month in the crackdown in the Riyadh neighborhood of Manfouha, according to the Saudi Press Agency.

“Leading private sector indicators like retail, wholesale, construction and services are impacted by the enforcement of the new labour market regulations,” Sfakianakis said. “The second half of the year should reflect the labour impact on private sector growth numbers.”

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