Saudi Arabia is facing a 'squeeze'

Saudi Arabia has a new problem to worry about: borrowing costs.

A bunch of ugly warning signs have been bubbling up in Saudi Arabia lately.

The economy grew at just a 1.5% clip in the first quarter, its slowest rate in 13 years. The non-oil private sector was up just 0.2% year-over-year, making for its smallest increase in about 25 years.

Output in the construction sector shrank by 1.9% YoY, and the weakness has begun to spill over into other parts of the economy. Things have gotten so bad Saudi Arabia is thinking about tapping the international bond market for the first time in its history.

Even more worrying for the kingdom is that all of this comes at a time when it is trying to diversify its economy away from solely relying on oil. Back in April, Deputy Crown Prince Mohammed bin Salman unveiled the
Vision 2030 plan to end Saudi Arabia’s “addiction” to oil.

Something that has gone unnoticed amid all of this is that the Saudi Inter Bank Offer Rate (SAIBOR) has tripled from less than 0.8% to about 2.3% over the past year, and is facing a “liquidity squeeze in the market,” according to a note published on Wednesday by Al Rajhi Capital.

According to Pritish Devassy, a senior research analyst at Saudi-based Al Rajhi Capital, it is “only a matter of time before the borrowing costs start increasing unless the benchmark rates comes down in the medium term, which is unlikely given the liquidity situation and expected upward trajectory of US Fed rates, even at a lower pace.”

The companies that will be hit hard hardest by increased borrowing costs will be those with low profit margins and high leverage.

“We believe the impact is noteworthy given the challenging operating environment and as companies are still trying to adjust to lower subsides and higher energy costs announced by the Government early this year,” Devassy says.

Companies most likely to be impacted are in the industrial, building & construction, and agricultural & food sectors while it appears cement and telecom names will be spared.

However, “the impact on the individual companies on the above and other sectors might vary significantly based on their respective debt profiles and cost structure,” Devassy warns.

An increase in borrowing costs is the last thing that Saudi Arabian companies need these days. Many are already facing challenges due to weaker consumer demand causing them to cut prices. Additionally, the government has reduced its spending, and has lowered the amount of energy subsidies which in turn has put pressure on corporate margins.

At least Saudi Arabia is pumping out oil at a record pace. So there’s that.

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