Saudi Arabian corporate earnings shrank during the third quarter of this year as low oil prices began hurting the wider economy, and are unlikely to achieve anything more than modest growth while the energy market languishes.

The slowdown comes at an awkward time for the world's top crude exporter, which has so far made little headway in attracting more international money to the bourse since opening it to direct purchases by foreign institutions in June.

Combined net income at 166 listed companies for which data was available dropped 14.0 percent from a year earlier to SR27.6 billion ($7.4 billion) in the July-September quarter, Reuters calculated after the firms finished issuing earnings statements last week.

As expected, petrochemical producers' earnings, a big chunk of the stock market, fell sharply as cheap oil pushed down selling prices for their products, hurting profit margins.

But earnings in some other sectors such as construction and banking also shrank or rose only modestly, suggesting cheap oil is now making itself felt throughout the economy in the form of tighter monetary conditions and less generous state spending.

Standard & Poor's cut Saudi Arabia's long-term foreign and local currency sovereign credit rating last Friday, citing a "pronounced negative swing" in the government's budget balance. Riyadh criticised the one notch drop to 'A-plus/A-1' as unjustified.

While petrochemical product prices may have little room to fall further, pressure on other industries' earnings may grow next year as cheap oil forces further state spending cuts. Officials have indicated public sector wage growth may be curtailed and subsidised domestic fuel prices raised slightly, both of which could eat into consumers' disposable income.

The result, analysts and fund managers say, is likely to be a protracted period of slow earnings growth in Saudi Arabia unless oil prices recover sharply.

"We're not going to see the same 5-plus percent growth next year as we have in the last three to five years," said Fahad Alturki, chief economist at Jadwa Investment, an investment bank in Riyadh. "We're looking at 2 to 3 percent now."

Partly because of low oil prices, investors' response to the market opening in June has been sluggish. Foreigners now own about 1.1 percent of Saudi equities through direct and indirect means, according to exchange data - barely changed from the level before June.

DECLINE

The third-quarter drop in earnings follows a 10.1 percent fall for the first half of this year.

Combined earnings of the largest seven petrochemical companies shrank 32.5 percent in July-September to SR5.8 billion. That performance was better than many in the market had feared; the sector anticipated the oil price squeeze by cutting costs aggressively.

"Things got quite murky once oil prices dropped, but in terms of overall performance, especially the major companies have performed better than expected," said V Gowribalan, head of asset management of Ahli Bank Oman.

But other sectors fared poorly. Profits at the top three telecommunications firms tumbled 39.1 percent from a year earlier to SR1.9 billion, partly because of an earnings restatement scandal at Etihad Etisalat.

Earnings at the three big construction and real estate development firms dropped 15.0 percent to SR286 million. The government says it is delaying spending on "non-essential" building projects and has been pressing suppliers to cut costs.

Private consumption has been a bright spot for the Saudi economy, but there are signs that growth may be moderating here too as consumers anticipate tougher times ahead. Earnings at the kingdom's five major retail chains dropped 2.6 percent to SR409 million.

The nine largest Saudi banks saw their earnings rise 3.9 percent to SR9.8 billion. That was impressive, and some analysts think banks' profitability will be supported in coming quarters by their purchases of relatively high-yielding bonds that the government began issuing this year to fund a huge budget deficit.

On the other hand, the banks' core business looks likely to slow with weaker state spending. This process may already have begun; bank lending to the private sector grew 7.1 percent from a year earlier in September, the lowest rate since April 2011, the latest central bank data shows.

Meanwhile, slower profit growth at the banks' corporate customers may cause loan quality to deteriorate.

"Going forward, they'll need to readjust to the new reality, which is increasing systemic risk and diminishing liquidity," said Gowribalan.  - Reuters