Saudi Arabia, whose economy has taken a beating in recent months thanks to the crash in oil prices
, just got some more bad news, and this time its related to the country’s banking sector.
Credit rating agency Moody’s announced on Wednesday morning that it is cutting the outlook for the Saudi banking sector from “stable” to “negative,” citing continued weakness in the price of oil, along with lower forecasts for GDP growth in the country, and falling public spending.
In a statement Olivier Panis, a Moody’s Vice President and Senior Credit Officer, said: “We expect the operating environment for Saudi banks to weaken over the next 12-18 months.” He added: “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.”
Here’s more from Moody’s on their outlook for the banking sector in Saudi Arabia:
“The outlook reflects the rating agency’s expectation that the persistently low oil prices and resultant government spending declines will ultimately weigh on the Saudi banking sector.
“Moody’s forecasts real GDP growth to slow to 1.5% for 2016 and 2% for 2017 (well below the 3.4% growth of 2015) and for average oil prices to stay at $33 a barrel in 2016 and $38 in 2017. As a result, the rating agency expects loan growth to slow down to between 3% and 5% for 2016, from 8% in 2015 (and 12% in 2014). Moody’s also expects asset risk to rise as a result of the deteriorating operating environment.”
And here’s a little more from Panis (emphasis ours):
“We expect non-performing loans to increase to around 2.5% of total loans over our 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.”
The ratings agency isn’t totally negative on Saudi Arabia however, arguing that capital buffers in Saudi Arabia’s banking system will stay solid, and that profitability will “remain strong.”
Many of the problems in the Saudi banking system, along with the country’s finances as a whole, stem from the crash in the price of oil, which has in part been driven by strong resistance to calls for a cut in the amount of oil it produces, though it did recently agree to a freeze in production. The move was designed to try to stop the slump in the oil price, and it seems to be working, with some traders suggesting oil has bottomed and will start to see a price increase soon. Oil is up 40% from its January lows, but after passing $40 for the first time this year last week it has started to slip again.
The country is now running a massive budget deficit, just shy of $100 billion (£72.2 billion), as it refuses to cut spending. This led to Business Insider’s Lianna Brinded arguing that the country’s refusal to cut production of oil is effectively “killing” its economy. It has also seen the amount held in foreign exchange reserves plunge.
That led, last week, to the Saudi government seeking loans of between $6-8 billion from banks, the first significant attempts at borrowing from the kingdom in more than a decade, according to Reuters.