Moody’s lifts Saudi banking system outlook

Credit rating agency Moody’s Investors Service has raised its outlook for Saudi Arabia’s banking system to “stable” from “negative”, in a fresh sign that global investor confidence in the kingdom is recovering after plunging due to low oil prices.

“Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending,” Moody’s vice-president Olivier Panis said in a statement on Wednesday.

“As a result, Saudi banks’ liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss-absorption buffers compared with regional and international peers over the outlook horizon.”

Low oil prices have strained Saudi government finances, leading to a $98bn state budget deficit in 2015. This forced state spending cuts that slowed the economy, worsened loan quality and reduced banks’ access to fresh deposits. In the last several months, however, pressures have eased. The government replenished its coffers with a $17.5bn international bond issue in October and announced progress in cutting its deficit, while Brent crude oil rebounded above $50 a barrel from last year’s average of $45.

In December, the government detailed a plan to eliminate the deficit by 2020. Although questions remain over whether that target will be reached, International Monetary Fund officials have said it looks broadly feasible.

Measures of stress in the Saudi financial system have fallen sharply. This month the cost of insuring Saudi sovereign debt against default hit its lowest since September 2015.

One-year currency forwards show pressure for depreciation of the riyal near its lowest since late 2015, while three-month Saudi interbank money rates have dropped to their lowest since March 2016 as the modest improvement in state finances has allowed the government to spend more freely.

Moody’s predicted Saudi banks’ non-performing loans would increase to 2.5 per cent of gross loans over the next 18 months from around 1.4 per cent in September 2016, but the new level would not be in crisis territory.

“Although banks will also remain vulnerable to high single-party exposures and opacity in the corporate sector, banks will maintain the highest level of loan-loss provisioning coverage in the region,” the agency said.

Moody’s said the economy could technically fall into recession this year as Riyadh cut oil output in line with an agreement among global producers to prop up prices. It predicted gross domestic product would shrink 0.2 per cent in 2017.

But it forecast the economy’s non-oil sector – the area which most directly affects the majority of companies and banks – would grow 2 per cent this year, up from 0.2 per cent in 2016.