Stricter regulation and supervision of Saudi banks' large loan exposures to big corporate groups are necessary despite decent overall capitalisation, the International Monetary Fund has said.     

Lenders in the world's top oil exporter are able to withstand severe temporary shocks, with the aggregate solvency ratio remaining above 8 percent for most scenarios, the IMF said in a study.     

"However, the system could be vulnerable to a prolonged and deep oil price decline, especially if it were accompanied by a slowdown in domestic economic activity," IMF staff said in the report.     

"Although this would leave the banking system insolvent, the cost of recapitalization would be modest in macroeconomic terms," it said.     

A concern cited by the IMF was bank lending to large corporate groups prominent in the Saudi economy.     "This calls for stronger regulation and supervision of large exposures and related party lending," the Fund said.

It recommends that large exposures of up to 50 percent of banks' own funds should be no longer allowed capping it at, for example, 25 percent. One such exposure currently stands at 38 percent of capital, the IMF said without giving details.     

The main impact of the 2008 global credit crunch on the Saudi financial system came through banks' exposure to defaults by two large family conglomerates in 2009, which caused widespread bank losses.     

That, the Fund said, highlighted the need for more transparency and disclosure by conglomerates and stricter accountability for auditors.     

Non-listed corporations, including the two conglomerates that defaulted, are estimated to receive about 50 percent of corporate credit but they publicly do not release any data, the report said.      

A strong supervision of bank lending to Saudi Arabia's small and medium size firms (SMEs) would be crucial as expansion of housing finance and SME lending advances, it added.     

Saudi Arabia's heavy dependency on oil has risen since announcing last year fiscal packages worth a combined $110 billion, or 19 percent of gross domestic product, in response to a wave of social unrest in the Middle East and North Africa.     

The kingdom's non-oil primary deficit was expected to reach 81 percent of non-oil GDP last year, up from 40 percent in 2004, while the price of crude needed to balance the government budget is projected to rise to $98 per barrel by 2016 from an estimated $80 in 2011, the report said.     

Oil prices tumbled by 76 percent in 2008 following the global financial crisis. Such a scenario does not seem to be on the cards now with industry analysts polled by Reuters in March expecting Brent crude to float between $95 and $127 per barrel this year compared to around $118 now.     

One of the shock scenarios the IMF considered was if crude prices fell to $40 per barrel, their inflation-adjusted average between 1960 and 2010, and the economy stagnated.     

If that was to last for five years, the Saudi banking system would become insolvent with the aggregate capital adequacy ratio declining to -1.9 percent, which would require new capital of about 6.6 percent of GDP to re-establish the 8 percent minimum.   - Reuters