Saudis Squirm at Growing Debtor Image
Historically flush with oil revenues, the kingdom has become a borrower to sustain deficit spending and Gulf war costs
THE once-financially invincible Saudi Arabia has hired a public relations firm to combat claims that the kingdom has become a poor credit risk.
Saudi officials, who are accustomed to mulling over their money matters in secret, are agitated by the ongoing public debate over whether their country, once awash in petro-dollars, is destined to join a host of debt-distressed nations.
They claim that although the Gulf state has racked up more than a decade of deficits, what set the country back was its $55-billion share of Gulf war costs.
``That represents one half of our gross domestic product [GDP],'' says Adel al-Jubeir, special assistant to Prince Bandar ibn Sultan, Saudi Ambassador to the United States. ``But even now our total debt - both domestic and external - is just 55 percent of our GDP. That's nothing. America's is 70 percent of its GDP.''
Saudi economists assert that the government is gradually whittling down the deficit problem. They expect this year's deficit to total roughly $12 billion, and to decline by about $3 billion next year. They project a balanced budget for the late 1990s.
The financial squeeze became public in 1991, when the Desert Storm allies called on the kingdom to ante up. With hundreds of thousands of American troops deployed on Saudi soil, the United States Congress demanded quick payment for the kingdom's portion of the war costs. To help bridge the financing gap, the oil-rich nation became a substantial borrower in 1991. Led by Morgan Guaranty, a syndication of banks put together a $4.5 billion loan. Financial problems grow
An international banker, whose institution is part of the syndicate, is concerned about the kingdom's financial difficulties. In order to avert deeper problems, he says, the government ``will have to do something,'' about cutting extravagant costs and raising needed revenues, by paring down its subsidies, imposing taxes, and scaling back its appetite for arms.
One Saudi official retorts that the infamous farm subsidies, which produce wheat and other grains at many times the world price, were necessary to develop self-sufficiency. On raising revenues, he says, ``bankers don't like a government that doesn't tax its people. But why should we tax people if we produce 8 million barrels per day?'' The official sees the defense buildup as an investment in Gulf security.
``They clearly do face fiscal and financial strains,'' says Charles Dallara, managing director of the Institute of International Finance, a group representing the world's top commercial banks and government financing institutions.
Mr. Dallara worked with the Saudi finance team during the Gulf war when he was US Treasury assistant secretary for international affairs. He continued the relationship when he entered private banking as a managing director of J. P. Morgan in 1991. The ``Saudis have a demonstrated track record,'' he says. Dallara describes the Saudis as ``extremely restrained as borrowers.'' The country's borrowing abroad should be put into context, he says. ``The kingdom still ranks right up there as the more creditworthy in capital markets. Other governments tap any market that they can gain access to,'' he says, ``and they are without the natural resources underpinning the Saudi economy.''
But others point to the government's unbridled spending as a continuing problem. According to international finance officials, the International Monetary Fund was critical of the kingdom's budget deficits in its 1993 staff report on Saudi Arabia. The IMF questioned enormous expenditures on defense and domestic subsidies, both of which are largely nonproductive investments.
Former IMF economist Patrick Clawson, now a senior fellow at the National Defense University in Washington, says the kingdom ``is no longer a financial heavyweight.'' Among other analysts who track the kingdom's strong appetite for imports, he worries about the Saudis' ability to pay. ``I don't think it's in their interest to get easy credit,'' he says.
In June, the US Interagency Country Exposure Review Committee (ICERC) performed an annual review of Saudi Arabia's creditworthiness. Although the ICERC meetings are conducted in confidence, the June meeting became grist for a news media rumor mill, according to one participant. There were allegations that Treasury Department officials put regulators under pressure not to change the kingdom's high ratings. ``It was a normal, healthy discussion,'' the participant says. ``There was no strong-arming by Treasury.'' Saudi Arabia retained a high rating, he says, because of ICERC's continuing faith in the country's creditworthiness. A former Treasury official who attended the meeting says that ``a rating change would have been triggered by payments problems to commercial banks, of which there have been none to date.''
In an Aug. 23, 1993, letter to the editor of the New York Times, Mohamed Abalkhail, Saudi's minister of national economy and finance, defended his government's path of financing budgets by borrowing through domestic bond issues. He said that ``borrowing by a government to finance its developmental program is in my view better than imposing taxes and fees.''
The minister says his government is doing less to shore up the private sector in order to let it develop on its own. Saudis also deflect criticism that the government borrows heavily from private banks and enterprises, weakening their financial base.
Analysts are wary about the general lack of transparency not only with Saudi Arabia's government coffers, but also in the Saudi commercial banking sector. Nonperforming loans have been a substantial drain on the economy since oil prices collapsed in the 1980s. Speculation is also growing over the declining value of Saudi Arabia's overseas assets.
The spotlight has been on the kingdom's sole privately owned bank, National Commercial Bank (NCB). Its loan portfolio is bogged down in bad debts, largely to members of the Saudi royal family. NCB has not publicly released an audit of its condition since 1990, when its nefarious practices drew attention.
Saudis insist that NCB is a special case and point to the impressive capital-to-assets ratio of Saudi commercial banks, which Mr. Abalkhail puts at 17 percent. By year's end, Abalkhail projects that these institutions will exceed the $1 billion in profits they registered in 1992. Loans from the commercial banks posted an 11 percent decline in 1990, according to official Saudi tabulations, but they rose to $26.9 billion by the end of June. Healthy fundamentals
Investor confidence should not be shaken, Mr. al-Jubeir says. Capital inflows are exceeding capital outflows. There was a run on the riyal and capital flight in August 1990, when Iraq invaded Kuwait. But by the middle of October, al-Jubeir says, the money had returned to the kingdom.
Critics should consider what the kingdom has done with its $900 billion in domestic investments, al-Jubeir says. ``In the 1930s our country was a sandbox. Today it boasts infrastructure that rivals, even exceeds, that of Europe.'' He defends his government's accounting, and insists that the various ministries - from planning to finance - publish data available for review.
``The Saudis today are playing a big role,'' comments a US Treasury official, pointing to the kingdom's underwriting of the war, overseas investments, continuing contributions as an aid donor, and sizable borrowing in global capital markets: ``Now they must learn to play by the rules of accountability and disclosure.''