23 December 2008
The IPO and sukuk business in Saudi Arabia has become the latest victim of the global financial crisis and falling oil prices that could plunge the Gulf Kingdom back into fiscal deficits, according to a key Saudi financial consultants firm.
After a surge in initial public offerings (IPO) in the first nine months of 2008, the activity has come to a standstill as nearly 80 Saudi companies have decided to delay the issue of around $19 billion (Dh70bn) worth of IPOs, Jadwa Investment said.
The decline in general business confidence in the Kingdom has also allied with a sharp drop in the stock market to hit the local debt market, including sukuk, Jadwa said in a study sent to Emirates Business.
"The financial crisis and ensuing recession has significant implications for Saudi Arabia... Growth will be lower, projects delayed and the budget will fall into deficit. It also raises some longer-term policy issues concerning the role of the state in the banking sector, financial regulation and the introduction of a mortgage market that government will need to ponder," it said.
"Raising finance through the equity market has lost its attractiveness. The Saudi stock market, along with many others in the world, has gone into freefall since the intensification of the global financial crisis."
Its figures showed TadawulTadawulSaudi Stock Market Company
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, the largest and busiest bourse in the Middle East, has plunged by nearly 48 per cent since end-June and hit its lowest point in nearly five years on November 23. "While we believe this is attractive for investors, there is little incentive for companies to try to raise capital through the market when shares are undervalued as they will not be able to raise as much as funds as under normal market conditions... Approximately 80 Saudi companies postponed their IPOs. These have a collective value of nearly $19bn," the study said.
"The outlook for those companies that need to raise funds is clearly bleak. However, many companies and investors in Saudi Arabia are cash-rich and, therefore, in a position to meet their funding requirements without borrowing."
According to estimates by the Abu Dhabi-based Gulf Capital, a key private investment firm, Saudi Arabia dominated IPO activity in the six-nation Gulf Co-operation Council (GCC) in the first nine months of 2008 because of strong economic performance due to a surge in oil prices.
From around $3.68bn in the first nine months of 2007, the total value of IPOs in the Kingdom nearly tripled to about $9.7bn in the first nine months of 2008. The value in 2008 accounted for nearly 83 per cent of the total IPOs in the GCC of around $11.7bn, according to Gulf Capital.Like other Gulf oil producers, Saudi Arabia has felt the heat of the global financial crisis in the form of tumbling oil prices, credit crunch and a rapid decline in their stock markets mainly because of investors' fears.
Jadwa said the liquidity shortage, mainly in the US dollar, could hamper the implementation of many of the planned projects worth nearly $600bn.
It noted that recent measures by the Saudi Arabian Monetary Agency (Sama)Saudi Arabian Monetary Agency (Sama), the Kingdom's Central Bank, to cut rates and ease reserve requirements have free massive funds for the banks but added most of them have become more careful in providing credit and lending has become costlier. "This does not mean the banks have stopped lending entirely. Commercial bank loans to private sector corporation increased by SR38.9bn (7.6 per cent) over the third quarter. The bulk of this was short-term lending to the commercial sector, short-term financing for local corporations with strong relationships with their banks should still be readily available," it said.
By Nadim Kawach
© Emirates Business 24/7 2008
