Government’s Capital Expenditure Drive Promoting Investment trend

by shariff mohammed | Dec 09, 2015
The moderation of private credit growth around 9.8 percent for two consecutive months might reflect a tendency to avoid cyclical risks by deficit financing the government at the expense of financing private projects. All data illustrates that moderation is gaining traction, and given the current dynamics a similar performance next year is the most likely scenario, according to NCB Monthly Views on Saudi Economic and Financial Developments.

The recent announcement to convert the government owned Real Estate Development Fund into a bank offers respite for housing appreciation. The bank is expected to offer more financing options in cooperation with the private sector, and also a larger funding base, allowing for economies of scale. Even though foreign institutional investment was permitted since June of this year, the fact that valuations remain high at 14x compared to international peers hovering around 10-11x have not increased capital inflows to Saudi equities. The bonds which were sold to local banks and institutions in three tranches of five, seven, and 10 year maturities are expected to crowd out credit for the private sector, the largest consumer of credit in the Kingdom. The surge in non-oil exports in the past years set a high base for growth where it becomes increasingly challenging to maintain the upward momentum.

The fact that the government’s capital expenditure drive is easing underscores this investment trend, with the Ministry of Finance signing construction contracts worth SR68.3 billion by the end of 1H2015, a significant 25.7 percent Y/Y decline. The moderation of private credit growth around 9.8 percent for two consecutive months might reflect a tendency to avoid cyclical risks by deficit financing the government at the expense of financing private projects.

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