LIKE everybody else in business in Saudi Arabia, the banking community is waiting to see what this year will bring. The uncertain outlook for oil prices and the weakness of the Asian economies, the biggest customers for Saudi oil and petrochemicals, cast an inevitable shadow. What impact they will have on Saudi Arabia's domestic economy remains to be seen.

Certainly the banks got through the first quarter with flying colours. Profits were up across the board for the nine banks to have reported so far. Among the larger banks, Saudi British Bank, the local affiliate of the HSBC Group, posted the largest percentage gain, pushing profits up by 12 per cent to SR 138 million ($36.8 million). Confirming the pattern of recent years, Al-Rajhi Banking & Investment Corporation, the only local bank run solely on Islamic principles, recorded the highest profits, followed by Saudi American Bank (Samba) and National Commercial Bank (NCB).

Most bankers are quietly optimistic about the coming months. 'The market place will not materially change but it will get tighter,' says one general manager. 'Some additional borrowing will take place and there will be a small deterioration in credit quality.' Indeed, with the stretching out of payments to suppliers likely to increase, there should be increased opportunities to extend credit. This would reverse the trend of the last two years which has seen many companies paying down their bank borrowings as government payments have improved.

If the general outlook appears less favourable it is partly because the past two years have been especially positive. 'It looks worse because we had a couple of years of strong growth. You could say we have been set up well for the next downturn,' says one bank economist.

However, all the banks say there are no signs yet of customer distress. 'We are seeing nothing at the moment,' says one general manager. And the sector has huge resources to mobilise if business conditions should deteriorate this year. Says the economist, 'The banks are very highly capitalised and very liquid - you can see it as a buffer to fight off a downturn.' Capital adequacy ratios are

typically 21 per cent or higher, which is more than double the Cooke ratios adopted by the Bank for International Settlements.

A particular feature of Saudi banks is the high volume of interest-free deposits which have helped fund the growth of a sophisticated system. Banks have been able to use the low-cost funds to subsidise a level of customers services which is often more advanced than that generally available in more developed economies.

Now the banks are facing the steady erosion of this particular advantage. 'The growth in interest bearing accounts is far greater than in non-interest bearing accounts,' says a general manager. 'Consumers are being squeezed by economic conditions so they are making their money work harder for them.' Says another manager, 'The decline in the free deposit base is a long-term trend that Saudi banks will have to deal with.'

He expects there to be a proliferation in the range of products and services aimed at customers who eschew interest for religious reasons but still want to earn income from their deposits. 'Even if Islamic products become more widespread, in reality they are a method of structuring interest so that it's not paying for the use of money,' says the manager. 'The interest-free accounts will eventually roll into Islamically acceptable products.'

For an upper middle income developing country, the banking system is already highly automated, a process given maximum encouragement by the Saudi Arabian Monetary Agency (SAMA - central bank). The number of automated teller machines (ATMs) topped 1,600 in February and 3.14 million cards have been issued. Electronic transactions nearly doubled in 1997 to 75 million.

In a further effort to encourage electronic banking, five government ministries are piloting a scheme for two months to pay staff electronically instead of with cash or cheques. The scale of cheque use, already very modest by international standards, could be further reduced. 'It will make many more people use banks,' says a general manager. 'It's a cash society today, moving directly to an electronic society.'

Though profits remain high and the level of deposits is rising steadily, the sources of future growth are less certain. 'The Saudi market grew in the 1980s, organic growth in the 1990s is more difficult,' says Prince Alwaleed Bin Talal Bin Abdulaziz, chairman of United Saudi Bank (USB), the new bank created by the merger of United Saudi Commercial Bank (USCB) and Saudi Cairo Bank. Says the general manager of another bank, 'It's hard to talk about growth in an economy where per capita incomes are falling.'

Prince Alwaleed notes the worldwide trend towards bank consolidation and anticipates a time when the Saudi banking sector will be less protected. 'Inevitably Saudi Arabia will be forced to look at letting other banks in,' he says. Since the merger last year, which propelled USCB from a bank with 17 branches into the fourth largest with a network of 78 branches, USB has been working on defining its future role. Alwaleed is clear that taking on the kingdom's largest banks in the mass retail market should not be the priority. 'We'll always be a niche bank,' he says. 'We'll be extremely strong in corporate, treasury and private banking. We'll never be an Al-Rajhi or NCB, we'll be upscale, a Samba of retail.'

NCB, the largest local bank with a market share of over 20 per cent, is responding to competitive pressures through an alliance with National Bank of Kuwait and the purchase of franchises in Jordan and Lebanon, developments which have significantly extended its regional reach.

Personal banking is widely seen as an area for growth through the expansion of credit cards and installment loans. Insurance products are also being developed with SAMA approval. There are hazards in some product areas, however, with credit card business proving profitable but suffering from a high level of write-offs. Mortgages would be another product with huge potential, but development is blocked for the time being by the banks inability to secure title to property.

One of the biggest innovations of last year, the introduction by Samba of the closed-end $250 million Saudi Arabia Investment Fund (SAIF) has yet to be followed by other banks. At least two banks - Saudi British Bank and Riyad Bank - have funds ready to launch when SAMA gives the go- ahead. But analysts do not expect to see any new funds launched soon because of the delicate state of investor sentiment in emerging markets. 'The timing is not right,' says a senior banker. 'Emerging markets are not flavour of the month.'

SAIF, the first fund to give foreigners access to the Saudi stock market, is currently trading at a 25 cent discount to its launch price of $10 a share. Analysts say the fund was affected by the Iraq crisis in February, lower oil prices and the need of some large emerging market investors for cash to service redemptions elsewhere.

The launch of mutual funds and other investment products is expected as the market matures, but there is a shortage of good investment opportunities. 'The problem is the supply side, there is no shortage of demand,' says an economist. 'The investors case for Saudi Arabia is not so straightforward as it is not a country that is desperately short of capital.' With no shortage of national capital held at home and abroad the challenge for the banks is to develop ways of mobilising it more efficiently.

Grassroots gas processing plant. The second round of bidding for the $2,000 million Hawiya project is due by mid-September. Three lump sum turnkey (LSTK) packages call for construction of the gas treatment plant, inlet and auxiliary facilities, and sulphur recovery facilities and utilities.

The work was re-tendered after bids to build the plant came in earlier this year well above Aramco's budget. The client is thought to have since increased its budget slightly. But contractors remain sceptical that the new bid round will throw up substantially lower prices than were tendered the first time. Construction of the 1,440 million-cubic-feet-a-day facility is expected to take three years from contract awards. The prequalifiers include companies from Japan, the US, Canada, Argentina and Europe.

Two other packages on the project, for downstream pipelines and telecommunications facilities, have already been awarded.

Oil refinery upgrade. The scope of the Rabigh refinery upgrade has been hit by Aramco's need to find savings on capital expenditure. The latest plans call for a reduction in investment to $800 million from the $2,000 million originally proposed. Following several months of delay, international contractors are now preparing to bid for packages covering the process units, and utilities and off-sites. Elements of the project that will most enhance Rabigh's profitability will be added in a second phase of work when Aramco's cashflow situation improves. The aim is to increase yields of gasoline and kerosine at the expense of the heavier fuel oil. UK-based Foster Wheeler is project manager.

Gas-oil separation plant. Four contracting groups are preparing bids for a LSTK contract to build a second gas-oil separation plant (GOSP) at Haradh. They are McConnell Dowell of New Zealand with US-based Petrocon; Bechtel of the US; AMEC-BKW of the UK; and Snamprogetti and Saipem, both of Italy. Three other international groups also attended a job explanation meeting, but declined to take any further part. The estimated $150 million- 200 million contract calls for installation of a new 300,000-b/d GOSP with associated gas gathering and seawater injection facilities. Bids were due to be submitted in early June.

Co-generation unit and aromatics complex. Five international engineering companies have been prequalified to bid on the estimated $100 million co-generation project in Jubail for Saudi Petrochemical Company (Sadaf). The project is designed to generate electric power and also provide steam to Sadaf's styrene monomer-2 plant, which is being built under a contract awarded earlier this year to Daelim of South Korea. Work on the co-generation unit will initially involve installation of two 80-90-MW gas turbines and infrastructure for a third. An invitation to bid was expected to be issued by early June. Start-up is scheduled for 2001.

The same client is also shortlisting main contractors for construction of a world-scale Cyclar aromatics complex. A preliminary list of 11 US, European, Japanese and South Korean companies is expected to be reduced to five, who will be invited to bid for an estimated $400 million-600 million contract. Sadaf will not make a final decision about proceeding with the aromatics project until the summer. Industry sources say the client's owners are still debating the viability of the investment, with particular regard to uncertain demand from East Asia. Current plans call for start-up in 2001. Milan-based Foster Wheeler Italiana is carrying out basic engineering and designs for both schemes.

Ethylene plant. A contract to build the 800,000-tonne-a-year (t/y) facility in Jubail for Arabian Petrochemical Company (Petrokemya) is expected to be let to a local contractor later this year. Capacity will also include 275,000 t/y of propylene. Engineering, procurement and construction management (EPCM) is being carried out by Japan's Mitsui Engineering & Shipbuilding Company.

The project also entails construction of a 70-kilometre feedstock pipeline from Saudi Aramco facilities in Ju'aymah. The local Zamel & Turbag Engineering won a contract for detailed designs and procurement assistance after Petrokemya decided against an EPCM option. A tender for construction of the 24-inch diameter pipeline is expected to be issued later this year. Petrokemya's total ethylene capacity will rise to 2.3 million t/y when the scheme comes on stream in 2000.

Phthalic anhydride plant. Three bidders remain in contention for a LSTK contract to build the 50,000-t/y unit for Al-Jubail Fertiliser Company (Samad). They include Germany's Lurgi, which carried out basic engineering and designs for the project, and Japan's Mitsubishi Kakoki Kaisha, which last year completed construction of a di-octyl phthalate plant for Samad. The plant was scheduled to be on stream by late 1999.

Off-gas ammonia plant. Four contracting groups submitted bids in mid- March for the 1,500-tonne-a-day project for United Jubail Fertiliser Company. They were: Toyo Engineering Corporation of Japan and SNC Lavalin International of Canada, both proposing technology licensed from The MW Kellogg Company of the US; Italy's Tecnimont, using technology from Brown & Root of the US; and Germany's Krupp Uhde with The Parsons Corporation using Uhde technology. An estimated $150 million LSTK contract is expected to be awarded by July.

Methyl tertiary butyl ether (MTBE) plant. Tahseen, a new venture planning a $415 million MTBE plant in Yanbu, will be registered by the end of the fourth quarter, according to the largest partner in the project, the local Alujain Corporation. Alujain will own 30 per cent of the company with two foreign partners, Ecofuel of Italy and Finland's Neste, taking stakes of 15 per cent. Arab Petroleum Investments Corporation (Apicorp) will have a further 10 per cent and 30 per cent is being offered to other investors. US-based ABB Lummus Global, Snamprogetti of Italy and Stone & Webster Engineering Corporation of the US submitted turnkey bids for the plant in mid-1996. An award has yet to be made.

Polypropylene plant. International companies are expecting invitations to bid in June for an engineering, procurement and construction (EPC) contract on the 250,000-t/y project planned for Yanbu. Basic engineering and designs were carried out by Italy's Tecnimont. The client is Teldene, a 50:50 joint venture between Montell Arabia and Natpet, a group of local investors led by Xenel Industries.

Propane dehydrogenation plant. National Industrialisation Company plans to build a 400,000-t/y facility in Jubail by 2001. The total cost of the project is estimated at $300 million. Technology proposals from five US and European companies are still being evaluated. Invitations to bid for a project management contract are expected in the third quarter.

The client says the bulk of the propylene product will be exported initially, but it is also considering setting up its own downstream plants in the future. Di-ethyl hexanol (2EH) is one of the products under consideration.

Shuaiba power station. Technical evaluation of turnkey bids for the construction of the 1,750-MW plant is understood to have been completed, but there have been few recent signs of progress on the project. The client, Saudi Consolidated Electricity Company for the Western Region (EWR), also considered executing the project on a build-own-operate (BOO) basis. But time now appears to have run out for the BOO option, and EWR is likely to concentrate on the turnkey approach, which would involve cash or deferred payment.

For the turnkey option, the bidders still in contention are: ABB Energy Ventures with the local Kingdom Holding Company; Mitsubishi Heavy Industries (MHI) of Japan with AES of the US; Enron Corporation of the US with Saudi Binladin Group and Italy's Ansaldo Energia; and the Anglo/French GEC Alsthom with National Power of the UK and Saudi Oger. The lowest 'headline' price submitted at the April 1997 bid opening came from the Enron consortium at about $1,350 million, narrowly ahead of ABB, with MHI in third place. However, the rankings may have changed in light of the technical evaluation. The ranking would also be affected if EWR decided to take the option of contracting for just three of the proposed five 350-MW units.

Power plant expansion. Companies have been invited to prequalify for a project to add 130-MW of power generating capacity in Yanbu. The client is the Royal Commission for Jubail & Yanbu. Plans call for installation of a fourth steam turbine generator to complement existing facilities, which include eight 56.2-MW gas turbine generators. The tender calls for engineering, procurement and construction of the additional unit with associated switchgear and controls.

Power controls upgrade. Two groups submitted bids in May for a contract to carry out a comprehensive upgrade of the load dispatch centre and unified controls system in the Yanbu industrial area. The bidders were Honeywell of the US with Parsons Power and local companies Al-Yusr Townsend & Bottum and Fafco; and a consortium led by the US' Bailey Controls Company. Technical evaluations are expected to be completed by early June, following which commercial offers will be opened. Completion of the first phase of the project is scheduled for July 1999.

The scheme is being financed by the Saudi-Yanbu Petrochemical Company (Yanpet) and programme managed by a committee of Yanpet, the Royal Commission for Jubail & Yanbu and Epcon - the joint venture of US companies Bechtel and The Parsons Corporation in Jubail and Yanbu.

Yanbu-EWR intertie. Bids to install a high-voltage intertie between a new substation planned for the Yanbu industrial area and the country's western region network were submitted in mid-February. The estimated $30 million contract has yet to be awarded. The scheme is part of the programme being financed by Yanpet and managed by Yanpet, the Royal Commission and Epcon.

Yanbu upgrade. Bids are being evaluated for an estimated $50 million contract to upgrade the King Fahd Industrial Port in Yanbu. The tender calls for engineering, design and construction of a new berth and renovation of an existing one. Work will also include new piping and control systems. The bidders are understood to include: the local Al-Yusr Townsend & Bottum with The Parsons Corporation of the US; the local Abdullah al-Shuwayer Trading & Contracting Company; Saudi Binladin Group; and Lebanon's CAT. The project is designed to increase handling capacity for liquid chemical products and is being carried out under an agreement signed last year between Sabic and the Saudi Seaports Authority. The client is Sabic Terminal Services Company (SabTank).

Kingdom Centre. Bids are being evaluated for package four, comprising main construction work, on the SR 1,600 million ($427 million) Kingdom Centre project in Riyadh. The client is Prince Alwaleed Bin Talal Bin Abdulaziz's Kingdom Holding Company. The tender calls for construction of a 300-metre-high tower block with 30 occupable floors and adjacent facilities including a three-level shopping centre, a conference and banqueting centre and leisure facilities. The complex will house the headquarters of Kingdom Holding, a Four Seasons hotel, luxury apartments, the headquarters of United Saudi Bank and other offices. The development will provide an overall area of 3.3 million square feet.

The six contracting groups that quoted for the construction are: the local Saudi Binladin Group; Dumez of France with the local/

Lebanese Almabani General Contractors Company; SAE of France; the local Saudi Oger in association with Italy's Impregilo and Turner Steiner International of the US; the local El-Seif Engineering Contracting; and Ballast Nedam of the Netherlands. The project is due for completion by the end of September 2000. Bechtel of the US is construction manager.

Office complex. Bids have been submitted for construction of a new headquarters for Sabic in Riyadh. The estimated SR 450 million ($120 million) complex will be built on a 29-hectare site in northeast Riyadh off the King Khalid International Airport expressway. Based around a 16-storey tower, it will provide 55,000 square metres of office space and support and recreational facilities. Construction is expected to take about two-and-a-half years. The bidders are Philipp Holzmann of Germany, Athens-based Joannou & Paraskevaides (Overseas - J&P), Korea Heavy Industries & Construction Company (Hanjung), Ballast Nedam of the Netherlands, Thinet of France and the local Saudi Binladin Group, Saad Contracting, El-Seif Engineering Contracting, Redwan Holding and Saudi Constructioneers Establishment. The architect and consultant is the local Zuhair Fayez & Associates.

Racecourse construction. Invitations to bid are expected soon for main construction work on the estimated SR 600 million ($160 million) project to build a racecourse in the Janadriya area of Riyadh. The client is the Equestrian Club. Consultants on the project are Dar al-Riyadh and Hong Kong-based Lee & Orange.

Kingdom Academy. Kingdom Holding Company is evaluating three bids for construction work on the $70 million project. The school, to be built over an area of 66,000 square metres, is designed to accommodate 4,000 students. The consultant is the local Omrania Architects, Engineers & Planners.

Prince Sultan medical city. The Prince Sultan Welfare Foundation is evaluating bids for two packages on the medical city project planned for Banban in Riyadh province. The SR 780 million ($208 million) Prince Sultan City for Humanitarian Services involves construction of rehabilitation and healthcare centres to treat low-income nationals. The complex will have 400 patient beds.

Bids for packages seven and eight, comprising external enclosures for main hospital buildings and building finishes, were submitted by Philipp Holzmann of Germany and local companies Nesma Alfadl, Saudi Constructioneers Establishment, Bin Dayel for Industry & Contracting, International Engineering & Contracting Company, First Saudi Construction Company, and Al-Redwan Engineering &

Contracting Company. The work is valued at an estimated SR 180 million ($48 million). The last of 14 packages on the scheme are due to be completed by late next year. CRSS International, part of the US' Jacobs Engineering Group, is working as overall project manager with the local SIA Engineering & Construction.

Al-Ahsa hospital. The Al-Ahsa Medical Services Company is expected to award a contract in June for construction of a 180-bed hospital in the Eastern Province. Total investment in the project is estimated at SR 200 million ($53 million).

Mobile network O&M. Bids to operate and maintain the country's mobile telephone and pager networks were due to be opened in early June. Participation in the tender was restricted to local firms.

TEP-7. A tender for the country's next major telephone expansion project (TEP) is expected to be launched later this year. It is likely to involve installation of 500,000-1 million land lines, including infrastructure and cables.

Satellite ground stations. The Posts, Telegraphs & Telephones Ministry invited bids by 22 June for operation and maintenance of the country's satellite ground stations.

Bauxite exploration. The Deputy Ministry for Mineral Resources has invited applications for an exploration licence for the Az Zabirah bauxite deposit, 180 kilometres north of Burayda. The closing date for applications is 30 November.