Credit risk eases for Sabic debt

Saudi Basic Industries Corporation's credit risk is poised for the biggest monthly drop in almost a year as the company benefits from higher Saudi economic growth expectations.

Saudi Basic Industries Corporation's (Sabic) credit risk is poised for the biggest monthly drop in almost a year as the world's biggest petrochemicals maker by market value benefits from higher Saudi economic growth expectations.

Five-year credit default swaps for the state-owned company have decreased 10 basis points this month, the most since February, to 102 on Monday, according to the data provider CMA.

That compares with 116 for Dow Chemical Company, the world's third-biggest publicly traded chemicals maker.

Saudi Arabia's economy has expanded 5.6 per cent this year, the second-fastest pace in almost a decade. That's up from an earlier forecast of 5.1 per cent as the world's top oil exporter pursues more than US$500 billion (Dh1.8 trillion) of investments in areas including industry and petrochemicals. The kingdom's credit risk almost halved this year to 69 basis points, the lowest in the Middle East and below Japan.

"International companies are comfortable with the current risk in the Saudi market and don't have to buy insurance for their investments, which is what is pushing the credit default swaps lower," said Abdulwahid Al Matar, the head of trading at Saudi Hollandi Bank in Riyadh.

"Sabic is the closest thing to sovereign debt that we have."

Saudi Arabia has built up its reserves this year as the price of Brent crude, the benchmark for more than half the world's oil, averaged $112 a barrel, almost unchanged from 2011.

Net foreign assets held by the central bank jumped 21 per cent in the year to October to 2.3tn riyals (Dh2.3tn).

"The kingdom has strong foreign currency reserves around 100 per cent of GDP, a fiscal surplus and low debt levels that are domestically held," said Monica Malik, the chief economist at EFG-Hermes in Dubai.

Lending rates advanced in the six-nation Gulf Cooperation Council in 2012 as government spending spurred annual loan growth to businesses to a rate of 15 per cent in October, the highest in almost four years.

Sabic, 75 per cent owned by the Saudi government, is building a $3.4bn speciality-elastomer plant with ExxonMobil on the Arabian Gulf coast that is to produce 400,000 tons of rubber product a year when it starts in 2015.

Still, Sabic's 2012 profit is set to decline 13 per cent, the first retreat since 2009, to 25.3bn riyals.

"Weak demand for polymers and key derivatives, mainly on a structural slowdown in China, and strong volatility in oil and feedstock prices" are behind the decline, said Ahmed Shams El Din, the director of equity research at EFG-Hermes in Cairo.

But the outlook for Saudi Arabia remains positive.

"The situation in Egypt doesn't look good, nor does it look good in Syria," Mr Al Matar said. "The Saudi economy is doing really well. Multinationals are establishing businesses here and placing money into the economy."

* Bloomberg News