–Saudi Bank: Euro Woes Could Trigger ‘Rethink’ Of Gulf Monetary Union
–‘Very Small’ Impact From EU Crisis On Saudi Arabia

By Brai Odion-Esene

WASHINGTON (MNI) – A prolonged weakening of the euro will have a
positive impact on inflation in Saudi Arabia, meaning a beneficial impact
on the kingdom from the sovereign debt crisis in Europe, according to
Saudi finance firm Jadwa Investment.

The investment bank does warn, however, that the struggles of the
Eurozone might prompt a “rethink” of plans by the oil-rich Gulf to form
a single currency.

In a research note published over the weekend, Jadwa believes the
direct economic impacts of weak economic performance in the affected
eurozone countries on Saudi Arabia “will be very small.”

Greece accounted for 0.7% of total Saudi exports in 2008 and just
0.2% of non-oil exports in 2009. Greece, Portugal, Spain and Ireland
combined were the destination for less than 3% of total exports and
below 1% of non-oil exports in the same years.

And the EU as a whole is the Kingdom’s largest trading partner —
supplying around 25% of imports into the Kingdom — “so a sustained and
prolonged weakening of the euro, which is near a 14-month low against
the dollar, would have a beneficial impact on inflation in Saudi
Arabia,” Jadwa said.

It does note that tougher market conditions means that investors
will demand higher interest rates on new bond and sukuk (Islamic bond)
issues and could compel companies in the process of issuing debt to hold
back until conditions improve.

However, Saudi banks have minimal exposure to Greece and to those
countries potentially next in line, so there is no reason for recent
events to impact their ability or willingness to lend, the investment
bank said.

“We continue to forecast a gradual increase in growth in local bank
lending to the private sector this year.”

The problems within the eurozone could have an impact on the
planned single currency by nations that make up the Gulf Cooperation
Council.

As Jadwa highlighted in a previous report, much of the preparatory
work in the GCC was based on what preceded the introduction of the euro
and technical support from the European Central Bank has been used
widely.

It warned therefore, that should stresses in Greece or elsewhere
prolong concern about the viability of the euro “then this could trigger
a rethink within the GCC.”

The GCC is a political and economic union made up of Bahrain,
Kuwait, Oman, Saudi Arabia, the United Arab Emirates and Qatar. Both
Oman and the UAE have said they will not be part of the monetary union.

Overall, Saudi Arabia is again caught up in global developments not
directly affecting economic fundamentals in the Kingdom. Once this storm
subsides, Jadwa expect the kingdom’s economy and markets will resume
their growth trajectory.

** Market News International Washington Bureau: 202-371-2121 **

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