Rating agency Moody’s has downgraded Saudi Arabia’s banking system from ‘stable’ to ‘negative’ stating it feared the 
falling oil prices would adversely impact the country’s banking system
Credit risks across Saudi Arabia’s financial system are rising, the US rating agency Moody’s has warned recently even as low oil prices are continuing to impact the country’s economy rather harshly.
CNBC published an article quoting Moody’s that the agony is downgrading Saudi Arabia’s banking system from ‘stable’ to ‘negative’ stating its “revised outlook reflected the expectation that the persistently low oil prices and resultant government spending declines will ultimately weight on the Saudi banking sector”. Olivier Panis, vice president and senior credit officer at Moody’s said Moody’s expected the operating environment for Saudi banks to weaken over the next 12-18 months.
“With the prospect of lower oil prices for longer and a 14% reduction in public spending in 2016, we believe that the credit risks across the system are rising,” he added.
The price of benchmark Brent crude has fallen from $114 per barrel in June 2014 to $38 per barrel in March 2016. Saudi Arabia is among the world’s largest oil exporters and its economy is dependent on oil revenues. One can just assume the impact this has on the country.
GDP GROWTH
Moody’s said it expects the real GDP growth in the country to slow to 1.5% for 2016 and 2% for 2017 – against the 3.4% growth of 2015. It also predicted that the average oil prices would remain at $33 a barrel in 2016 and $38 in 2017.
This would result in a slowdown in loan growth to between 3% and 5% for 2016, (against 8% in 2015 and 12% in 2014), said Moody’s highlighting that asset risk would rise as a result of the deteriorating operating environment.
Panis said the agency expected non-performing loans to increase to around 2.5% of total loans over the outlook horizon, from a very low average 1.4% in September 2015 – still lower than for most other Gulf countries. “Banks will also continue to remain exposed to event risks stemming from persistently high single-party exposures – although we estimate that around 10-25% of banks’ top 20 loans are either to the government or wider public sector,” he added.
PROFITABILITY
In spite of this scenario, Moody’s was of the view that profitability among the country’s banking sector was likely to ‘remain strong’ due to the low cost of funding and the banks’ ‘lean cost structure and zero corporate tax rate’.
The agency felt the government support for the country’s banking system would remain high, but “there are signs that authorities’ policy stance may evolve in line with global practices”.
“… government support assumptions could be further challenged on the basis of fiscal pressure for the Saudi government, signaling a potential reduction of government capacity to support banks in case of need,” the agency said.
Meanwhile, Standard & Poor’s too has lowered its long term counter-party credit ratings on several Saudi banks, including Al Rajhi Bank, National Commercial Bank and Riyad Bank because of the heightened risks these banks faced in the wake of the oil crisis. S& P in October 2015 downgraded Saudi Arabia’s long-term rating from AA minus to A plus with a negative outlook, and again by two levels to A minus in February. The rating agency in defense of its latest downgrade, said more than a year and a half of lower oil prices will start to take its toll on the earnings of banks.
There are reports that the country’s forex reserves dropped for the 13th consecutive month in February. The reserves stood at $593 billion in February, a month-on-month drop of $9.4 billion. While this decline was modest, it takes the total outflow of central bank foreign assets since oil prices began to decline in late 2014, to $150 billion. Saudi Arabia’s foreign reserves now sit at their lowest level since mid-2012.
