Saudi banks will cut their bad loan ratio to the lowest since the region’s biggest corporate default three years ago as lending grows on the back of government spending, Moody’s Investors Service said.

The ratio of non-performing loans at Saudi lenders will drop to about 2.5 percent this year, the lowest since at least 2009, Khalid Howladar, a vice-president at Moody’s, said recently.

That compares with forecasts of 8.5 percent this year in the United Arab Emirates and 4.2 percent in the US last year, according to Moody’s.

Banks in the world’s top oil exporter are lending at the fastest pace in more than three years as the government’s $ 514 billion spending program encourages companies including Saudi Arabian Mining Co. and Saudi Acrylic Monomer Co., to expand.

"One of the ways that banks are dealing with some of big borrowers is to insist on taking security for any loan so that there is something tangible backing that exposure. It’s the unsecured lenders that have tended to lose the most."

The Kingdom’s non-performing loan ratio peaked at 4.1 percent in 2009 and economic growth, set for the region’s second-highest rate in 2012, slowed to a 10-year low of 0.1 percent that year.

A pickup in loan growth to private businesses to 14 percent in June, the highest since March 2009, has driven up borrowing costs in the Kingdom. The yield on three- month Saudi treasury bills rose to 0.37598 percent, the highest in almost two months, at an auction last week, according to data compiled by Bloomberg. Yields on one-month, six-month and one- year securities sold at the Kingdom’s weekly auction were unchanged.

The three-month Saudi Interbank Offered Rate, the benchmark domestic banks use to lend to each other, has jumped 17 basis points this year to 0.95 percent Monday. The advance is the biggest in the six-nation Gulf Cooperation Council in 2012 and has led to a more than doubling of the spread between Saudi and US rates to 51 basis points, data compiled by Bloomberg show.

The Kingdom’s fiscal and current account positions will return large surpluses, Samba Financial Group said in its August Saudi "Macroeconomic Forecast Update 2012-13".

The fiscal position is expected to remain in a comfortable surplus. The anticipated reduction in government spending this year will help to offset the impact of slightly lower oil revenue (stemming from reduced prices).

Consequently, the fiscal balance is expected to be unchanged at 15 percent of GDP. In 2013 oil output is set to edge down, but with government spending picking up once more, the surplus is expected to fall back to around 8 percent of GDP.

The current account outlook for 2012-13 is comfortable. Oil export earnings are set to come in at about $ 340 billion, unchanged on 2011, with gains in output offsetting the slight price decline. Import spending is expected to contract slightly, helped by slightly weaker consumption and softer global commodities prices.

The resulting trade surplus will be comfortably large enough to offset the invisibles deficit (which will continue to grow) meaning that a current-account surplus of some 28 percent of GDP is in prospect for 2012.

Oil earnings are set to decline in 2013, and with imports responding to a pickup in government spending and somewhat higher commodity prices, the trade surplus will shrink. But, again, this will have no material impact on the overall current account and a comfortable surplus equivalent to around 18 percent of GDP is forecast.