ECONOMIC SPOTLIGHT - SAUDI CORPORATE DEBT
Bankers in Saudi Arabia are negotiating
a delicate balance between western business practice and
oriental justice as they try to restructure the troubled
corporate sector's debt.
    The problem lies in reconciling Saudi Arabia's
western-style banking system and an Islamic, "Sharia" legal
system in which interest payments may be viewed as usury and
illegal.
    So Saudi Arabia's 11 commercial banks have pinned hopes on
negotiated settlements rather than enforced ones, and are
resigned to not being able to recoup loans in full.
    And they have become highly selective over enterprises
eligible for new credit after a run of failures that forced
heavy loan loss provisions and ate relentlessly into profits.
    As a result, they have attracted complaints from a business
community that says it is starved of funds while the government
is criticising it for not playing a larger role in the economy.
    The private sector's downturn began in earnest in 1983 as
oil prices slid and some companies were slow to react,
businessmen said. Bloated inventories and in some cases poor
management created problems. Some also blamed the government
for not paying for public sector contracts promptly.
    Long negotiations to reschedule some debt are now producing
results. One banker said, "Banks are agreeing reschedulings, but
often at a high price... They are resigned to the fact that
full recovery (of loans) is not always possible."
    In a few cases private sector firms have been stripped of
assets during or prior to debt renegotiations, leaving banks
virtually no hope of repayment in full.
    The first major rescheduling was not sealed until
mid-February this year when <Arabian Auto Agency>, known as
AAA, reached agreement to stretch out repayments of 700 mln
riyals of debt to some 50 Saudi and international banks.
    Bankers said the deal for the Jeddah-based heavy equipment
importer is likely to set a precedent for the private sector.
It was greeted with relief after 18 months of negotiations.
    AAA's rescheduling has been followed in the last few days
by a draft accord on the 1.3 billion riyal debt of one of the
Kingdom's most publicised companies, <Saudi Research and
Development Corp>, REDEC. These two cases have raised hopes
that other companies will also reach agreement soon.
    Bankers said the cement importer <Arabian Bulk Trade>, and
the construction and trading firm <Ali and Fahd Shobokshi
Group> are still negotiating with creditor banks.
    They are increasingly resigned to there being little legal
recourse in Saudi Arabia, and that rescheduling with payments
geared to a company's cash-flow -- often very low -- is the
only way to recover at least a portion of outstanding loans.
    Though bankers feel they generally have the tacit backing
of the Saudi Arabian Monetary Agency (SAMA), the Kingdom's
central bank, some say it should take a more active role.
    However, bankers said it is encouraging SAMA has not
blocked a "black list" of borrowers banks have drawn up and
circulated for over a year.
    Bankers said the AAA accord, negotiated by a committee led
by <Saudi British Bank>, is a likely model in that banks have
not insisted on full repayment of all obligations.
    Sixty pct of the debt will be repaid in monthly instalments
over seven years at 1/4 point over Bahrain interbank offered
rates (BIBOR). The remaining 40 pct is only to be paid after
completion of the first tranche, also at 1/4 over BIBOR. And
accrued interest on the 40 pct will be waived as long as the
first tranche is met in full.
    As one banker put it, "Many banks took the view it was
better to get some money back rather than none at all."
 REUTER
