A slump in oil demand during the coronavirus pandemic has only reinforced Saudi Arabia’s push to diversify its economy away from its vast crude deposits. The country’s new Exim bank, launched last year, is supposed to help fuel that transition. Jacob Atkins takes a look at its activities so far.
The first worldwide pandemic in over 100 years, an oil price below zero, and just about every global economic indicator plunging downward: 2020 was a forbidding year for Saudi Arabia to turn on the lights at its new export-import bank, Saudi Exim.
The bank is a new chapter in the kingdom’s long-running attempts to wean its economy – the world’s 18th largest – off the global oil trade, which it largely dominates thanks to its vast hydrocarbon deposits.
The bank, the country’s official export credit agency (ECA), was approved in February last year and has focused on settling in under interim CEO Naif Alshammari, a former senior manager at the Saudi Industrial Development Fund, with its website only launched in April this year.
But the bank has commenced lending from the SR30bn (US$8bn) of initial capital provided by the Saudi government.
Saudi Exim tells GTR it has approved 72 loans worth SR7.94bn up to April 2021. Another 62 loans totalling almost SR6bn have been committed. SR3.57bn has so far been disbursed to 47 companies and the bank says its loan pipeline numbers over 50 applications worth an additional SR1.2bn.
As of April, just six of the bank’s 17 slated products are live. All are in the direct financing category: pre-export finance, working capital finance, discounting, structured finance for overseas projects, letters of guarantee and buyer’s credit. Most of the loans are working capital and pre-export finance facilities.
None of the seven products classified as indirect financing (through local and international financial institutions) or insurance have yet been launched.
The pandemic “didn’t stop the bank from operating and serving clients; in fact, exporting helped factories during the time of lockdown and local market slowdown in addition to many other government efforts to support the private sector overcome the pandemic impact”, the bank tells GTR.
The bank’s loan book is so far evenly split between large firms, which have received 49% of the financing to date, and SMEs, which got 48%. Government recipients make up the remainder.
Throwing support at SMEs
Developing non-oil exports is crucial to Saudi Crown Prince Mohammed bin Salman’s Vision 2030 – a mammoth plan to transform the country from oil dependency into a trading and investment powerhouse and hub for the Islamic world.
Saudi Arabia is not alone in pursuing an all-encompassing roadmap to transform its economy from selling oil, with many of its close neighbours in the Gulf chasing similarly lofty ambitions.
It has further to go than most. Not only is it a bigger, less nimble economy, its non-oil related exports are low even when compared to its similarly oil or gas-rich neighbours, according to a January 2021 Brookings Institute analysis, although the diversification of its revenue base has improved.
But the task of stimulating SMEs and their contribution to trade may be less daunting for Saudi policymakers than their Gulf peers. SME contribution to total GDP is around 35%, according to October 2020 International Monetary Fund (IMF) analysis – much lower than most developed economies but the highest of the major Gulf countries.
The country’s economic growth is also expected to be at the top end of estimates. The IMF predicts real GDP growth in 2021 to hit 2.9%, also above the 2.1% average for the Gulf states.
Vision 2030, unveiled in 2016, has fuelled several initiatives designed to spur the country’s relatively small SME sector. Five years ago, the government created the General Authority for Small and Medium Enterprises in an attempt to create a culture of entrepreneurship and set standards on SME financing. In February, the government announced the launch of a digital-only SME bank which will take over existing state-backed financing programmes for SMEs, although details of its products have not been released.
Industry and resources minister Bandar Alkhorayef in March launched a ‘Made in Saudi’ programme to incentivise domestic consumption, non-oil exports and foreign investment that has so far attracted interest from 850 companies, according to the Saudi Gazette.
One of the specific goals of the vision is boosting the contribution of non-oil exports to non-oil gross domestic product (GDP) to 50%. The country’s non-oil exports have charted mostly gradual growth since 2009 but fell in 2019 and 2020, according to the country’s General Authority for Statistics. Month-on-month growth resumed in the first two months of this year.
The country’s total goods exports, including oil, were worth SR652bn last year, a drop of just over a third compared to 2019, mainly attributable to a slump in crude oil demand during the height of the pandemic.
Saudi Exim says its fledgling loan portfolio is already well-diversified. As of April, it has lent to the manufacturing, construction and agriculture sectors, including products such as plastics, rubber, pharmaceuticals and petroleum.
Exports to where?
But SMEs looking to export don’t just need financing – they need people who’ll buy their products.
Bankers in the region say exports to South Asia, Africa and developing economies in the Middle East will likely benefit from the higher risk appetite that an ECA can offer due to its government backing.
“From a diversification perspective, if you look at the types of markets that they’re exporting to, there’s a very big supply/demand gap to be filled by Exim,” says David Leslie, general manager for global trade and receivables finance at Saudi British Bank (SABB).
“Some of the markets are developing markets, where banks may have some appetite, but not an unlimited appetite. Take Bangladesh, Pakistan, or parts of Africa, for example – there’s really good business there for some of the Saudi exporters. But equally, banks would benefit from an Exim programme like that to expand the scale of their solutions to exporters. So there’s certainly a need.”
The bank hasn’t announced any specific targeted markets or priority sectors, but says it will not finance crude oil deals and is focusing on non-oil exports in other sectors.
Minister Alkhorayef said in April that the deals struck by the bank so far involve exports to 45 countries, but did not name them.
A study published last year by Abdessalem Gouider, of Riyadh’s Imam Mohammad Ibn Saud Islamic University, found “Saudi Arabia must orient its exports mainly to emerging countries that represent the highest potential market rather than to exhausted potential markets”.
It said China (already the country’s largest export recipient courtesy of its appetite for crude oil), Vietnam, Poland, Algeria, Turkey, Malaysia, Brazil, Chile, UAE, Togo, Portugal and Bangladesh all presented “immense” export potential for goods.
Yusuf Ali Khan, Citi’s trade head for Middle East, North Africa and Pakistan, says Saudi companies could also leverage Saudi Exim to provide goods and services into riskier markets and especially in the energy space.
“There have been government-to-government talks around greater Saudi investment into Pakistan in the energy and power sector… as Pakistan looks to open up some of its sectors towards privatisation to attract more foreign investment,” Khan tells GTR. Citi provides trade finance services to Saudi clients through branches outside the country.
“Similarly, Iraq has been in the rebuilding phase for a long time. And again, the power and energy sectors will be at the forefront in attracting medium and long-term support from Saudi Exim.”
Sub-Saharan Africa also beckons as a promising market for Saudi exports. With the exception of South Africa, none of the kingdom’s current top trading partners are in the region, although it is a major beneficiary of financing provided through the Saudi Fund for Development.
Khan says he expects Exim financing to complement, not replace, existing development financing made through the fund and multilateral Islamic finance sources, such as the International Islamic Trade Finance Corporation, which is strongly influenced by Riyadh.
Ahmad Alalawi, SABB’s head of global trade and receivables finance origination, told the GTR Mena 2021 Virtual event in February that Africa is “a very difficult market to enter” but that with “the Saudi Exim bank on our end and with Afreximbank, it will be successful for both sides when it comes to Africa”.
The Exim bank has also said it will work closely with Saudi and foreign banks on financing. Asked if it has yet co-financed any deals with private institutions, the bank’s spokesperson says “it’s part of our operational model and will be activated soon”.
Anjum Mirza, head of trade finance at National Commercial Bank – AlahliNCB, told the February conference that there is an expectation that Saudi Exim will use local institutions to distribute its products.
“All banks were involved in developing the products, so it was a joint effort and engagement,” he said. “They have a good product suite and I think all their clients cannot only engage Exim bank directly but also through Saudi banks.”
Not a technology desert
Two of Saudi Arabia’s neighbours – Bahrain and Abu Dhabi – have adopted the UNCITRAL Model Law on Electronic Transferable Records, which allows the use of digital versions of some trade documentation, such as bills of lading.
There has been no indication yet that authorities in Riyadh are set to join the two jurisdictions, but SABB’s Leslie says the Saudi market is still “progressive” on the digitisation of trade.
“One of the good things about Saudi Arabia is the government is actually quite advanced in their thinking on digital,” he says. “The government is putting in a lot of solutions that will allow us to digitise and have more of an extended ecosystem, not just the banking bit but also the ports, logistics guys, etc. This will serve to ultimately increase the velocity of trade.”
Digital transformation, including overhauling government services and communications, is one of the priorities of Vision 2030. Existing trade digitisation tools include Fasah, a digital trade documentation platform provided by Saudi firm Tabadul, which seeks to incorporate all the government authorities involved in importing and exporting. The system includes Fasah Pay, which digitises the payment process.
According to Leslie, SABB is exploring the use of e-guarantees with Tabadul, which GTR has previously reported is developing a scheme with input from the Saudi Arabian Monetary Authority, the financial regulator.
Leslie says international firms wanting to pilot digitisation should consider Saudi Arabia as a first port of call: “if you’re a large bank or corporate, and you’re thinking of which corridors do I start to digitise first – actually Saudi is quite a good one”.