Saudi Arabian government providing expanded financial services to manufacturing development

In its drive to diversify the economy and reduce its reliance on oil export revenues, Saudi Arabia is backing soft loans for industry using significant state allowances. In December 2016 Khalid Al Falih, the minister of energy, industry and mineral resources, announced a substantial boost in capital provided to the Saudi Industrial Development Fund (SIDF), which offers loans with comparatively favourable terms and conditions to finance the development of new industries in the Kingdom.

Al Falih, who also serves as chairman of the SIDF’s board of directors, announced the fund would receive an additional $1.6bn on top of the previous $3bn allocation of capital. The increasing financial resources would be used to develop various segments, such as renewable energy, automotive, petrochemicals conversion, pharmaceuticals and domestic defence manufacturing.

Loan History

The SIDF was established in 1974 to provide financial services for the development of construction, petroleum and petrochemicals industries by subsidising up to 75% of a project’s cost with a 20-year repayment period. More recently, its assets have been used to develop an increasingly broad range of promising industries and to support job creation in all regions of the Kingdom. From the time of its inception until 2016, the fund has supported 717 industrial joint ventures and provided out SR53bn ($14.1bn) worth of loans.

According to records from the Saudi Arabian Monetary Authority (SAMA), the SIDF disbursed SR9.4bn ($2.5bn) in 2015 and received SR5.8bn ($1.5bn) in repayments, an increase of 65.6% and 29.1%, respectively, on 2014. Total outstanding loans at the end of 2015 stood at SR33.4bn ($8.9bn), rising 8.1%. Over that same period, the Saudi Public Investment Fund (PIF) lent SR18.6bn ($5bn), up 16.4% on 2014, and took in SR5.1bn ($1.4bn) in repayments, leaving it with SR103.9bn ($27.7bn) in outstanding loans.

New Projects

By November 2016 the SIDF announced its cumulative funding disbursement during the year had been SR5.9bn ($1.6bn), which was being used to support investments worth SR10.5bn ($2.8bn). In the first six months of that same year, 73 loans worth SR1.2bn ($319.9m) to support investments totalling SR2.6bn ($693.2m) were approved. Financing was provided for 68 new projects as well as to five existing recipients. Of those, 51 payouts with a total value of SR313m ($83.4m) were made to small and medium-sized enterprises. At the end of November 2016 the SIDF announced another round of financing had seen SR4.7bn ($1.3bn) disbursed to support investment projects with a combined value of SR7.6bn ($2bn).

The largest part of the 47 loans agreed upon at the SIDF’s November 2016 meeting supported engineering businesses, four of which were industrial loans worth a total of SR3.7bn ($986.4m), and were provided to support an aggregate investment of SR5.5bn ($1.5bn) to set up a maritime yard joint venture for the creation of an integrated complex of marine industries and services in Ras Al Khair.

In addition, the board approved a loan of SR130m ($34.7m) for a new SR228m ($60.8m) pharmaceuticals production project in Sudair City, and SR83m ($22.1m) was given for the SR183m ($48.8m) expansion of a polymers production company in Al Kharj. The SIDF lent SR66m ($17.6m) to help fund the SR138m ($36.8m) expansion of a food manufacturing company in Riyadh and SR55m ($14.7m) in credit to enable the SR204m ($54.4m) expansion of a cardboard packaging facility in Dammam.

Furthermore, a company producing non-woven medical fabrics received a SR33m ($8.8m) loan to support a SR68m ($18.1m) investment to build a new factory. In Najran Industrial City, a SR85m ($22.7m) project to develop a new marble and granite production facility was granted SR46m ($12.3m).

Cluster Picks

In addition to responding to requests for finance, the SIDF identifies potential growth areas and supports investment from both foreign and domestic companies that encourage import substitution. In January 2017 the fund identified opportunities for the production of tyres for passenger cars and trucks, as well as the manufacture of iron valves, lenses for prescription spectacles, vaccines and glassware as gaps that the local market could potentially fill.

The opening of the Saudi Arabia Basic Industries Corporation and ExxonMobil synthetic rubber works joint venture in Jubail will provide the raw material that is necessary for tyre manufacturing. There is also land available for a business with the technical expertise to become the Kingdom’s first tyre maker. In 2014, six Asian countries – including Thailand, China, Taiwan, South Korea, Japan and Indonesia – supplied 85% of the imports to 50 different brands used on vehicles in the Kingdom.

Additionally, according to the SIDF, some 32,200 tonnes of iron valves were used in 2015 with 20% of demand met by local supply. This number is expected to reach 35,000 tonnes in the years leading up to 2020. In the glass tableware market, more than 60,000 tonnes were bought in 2016, a figure expected to grow to almost 80,000 tonnes by 2021. The energy-intensive process of making glassware could be conducted economically in the Kingdom, where 78% of glassware was imported in 2016.

There is also potential for development of other sectors, facilitated by increased efficiency through strategic clusters. “Speed to market can be applied to the services sector, and not just in the traditional fast-moving consumer goods,” Samir Ahmed, general manager at Intertek, told OBG.

Given the scarcity of local manufacturers, opportunities for production in the bio-pharmaceuticals segment are also needed for Saudi Arabia’s large and growing population. In 2014, SR335m ($89.3m) of insulin, SR1.6bn ($426.6m) of vaccines and SR2bn ($533.2m) in oncology medicines were imported into the country. Vaccines are being produced by one domestic manufacturer, but none of the oncology medicine or insulin used in the Kingdom is made locally. Demand for insulin and vaccines is growing by 10% per year, while there is a 6% annual increase in the need for oncology medicines. The information provided by the SIDF demonstrates that the government is determined to see the growth of particular types of industry and manufacturing. “We have highlighted strategic sectors that we wish to see developed, such as pharmaceuticals, mining, logistics and military manufacturing, and these are priority areas for promoting job creation and the goals of Vision 2030,” Saud Khaled Al Sabhan, marketing department manager at SIDF, told OBG.

Public Investment

In November 2016 SAMA announced that SR100bn ($26.7bn) from its reserves was being transferred to the PIF, increasing the fund’s assets by 17% and allowing it to diversify its investments at home and overseas. As head of the Saudi Council of Economic and Development Affairs, Crown Prince Mohammed bin Salman bin Abdulaziz al Saud became chairman of the PIF’s board in March 2015. According to Bloomberg, the fund holds $100bn in shares in 20 listed Saudi companies among a portfolio of 200 investments. It is understood ownership of Saudi Aramco will be transferred to the PIF prior to the initial public offering anticipated for 2018, which would make it the world’s largest sovereign wealth fund.

The PIF made some high-profile international investments, purchasing a $3.5bn stake in the ride-sourcing app Uber in 2016, while in May 2017 it announced it was putting $20bn into a $40bn investment vehicle with asset management company Blackstone Group to drive infrastructure development in the US. Two days after that announcement, the fund entered into an agreement to invest in global technology with the world’s largest private equity fund backed by Japan’s SoftBank Group.

Although there have been no equivalent high-profile announcements about domestic investments, in May 2017 the Crown Prince Mohammed bin Salman declared half of the PIF’s assets would remain in the Kingdom, and that they would be used to drive the economic diversification aims of Vision 2030.

Bank Credit

Analysis of bank credit to the private sector produced by SAMA shows that manufacturing is the second-largest recipient after the commercial sector, receiving 13% of all bank loans to business in 2013-15. In 2015 the manufacturing sector received SR172.5bn ($46bn) in bank credit, an increase of 8.9% over the previous year.

However, these figures reflect not only the banks’ willingness to lend, but also the customers’ demand for borrowing. In 2015 the largest growth in lending by sector was to construction, which was up 27.1%. At the time the government had been freezing payments to contractors due to liquidity issues that were caused by lower global oil prices.

In March 2017 year-on-year growth in bank credit to the private sector fell for the first time in over a decade, according to research by Jadwa Investment. The decline was partly a result of the release of government funds into the economy, which eased some the pressure for private companies to borrow. An additional factor apparently dampening the appetite for credit and investment on the part of borrowers was the ongoing impact of austerity measures on public spending.

Saudi Investors

In addition to commercial lenders and government funds, many of Saudi Arabia’s larger conglomerates see advantages in investing in new manufacturing opportunities. The 12-sq-km PlasChem Park, adjacent to the $20bn Sadara Petrochemicals Complex, was built as a joint venture by Saudi Aramco and Dow Chemical to host emerging chemicals conversion companies.

The park’s feedstock will be composed of specialised chemicals produced for the first time in the Middle East at the mixed-feed cracker in the Sadara complex, which houses 12 furnaces to crack naphtha and ethane. In December 2016 Rufayah Chemicals Company also signed an agreement to buy pyrolysis gasoline and oil from Sadara Chemical Company in order to manufacture a number of products including hydrocarbon resin, isoprene, pure dicyclopentadiene and aromatic solvents.

The development of chemicals industries can help not only the sector, but also the larger local and national economy. “The resiliency of the petrochemicals segment is sustaining linkage industries and creating knock-on effects in the economy of the Jubail area,” Kevin Hudson, president and CEO of AYTB, told OBG. “We are confident the economy will realise strong growth in the medium to long run.”