Vote of Confidence

Moody’s revises Saudi banking outlook

Moody’s revises banking outlook for Saudi Arabia from negative to stable.

Logo of Saudi Aramco is seen at the 20th Middle East Oil & Gas Show and Conference in Manama, Bahrain

“Despite low oil prices, which we expect will fluctuate between USD40 and USD60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending. As a result, Saudi banks’ liquidity and funding conditions will improve,” stated Olivier Panis, Vice President and Senior Credit Officer at Moody’s in a press release.

The announcement was well received by local investors, with the Tadawul All Shares Index advancing by around 3% over the following two days. Among the companies which gained the most were Ryad Bank and Samba Financial Group whose values have grown by 3% and 5% respectively since May 15, when Moody’s revised its outlook for the sector. The American credit rating agency asserted that the operating environment for Saudi banks will recover, and forecasted that the financial institutions in the Kingdom will maintain a “solid” performance in the short run.

Moody’s also stated that banks will remain vulnerable to high single-party exposures and opacity in the corporate sector. The firm praised the steps that the government has taken to reduce the country’s dependency on oil. Saudi Arabia is implementing its Vision 2030 program, aiming to diversify the economy of the nation by boosting non-oil sectors such as banking, retail, health, and tourism, among others.

Although Moody’s estimates that real GDP growth in Saudi Arabia will contract -0.2% by 2017, increased government spending and ongoing projects to boost the non-oil economy will help the country surf the expected low commodity price wave in the years to come, while laying the foundations for a more heterogenous economic model in the long term.

“Saudi Arabia has known the importance of diversifying its economy for decades, but it never really took the challenge on seriously. Now it is happening for real, and things are changing for the better,” commented Mohammed Al Hussein, the Secretary General of the Council of Cooperative Health Insurance (CCHI) in a roundtable with TBY.

The dramatic fall that affected oil prices, which began two years ago, constrained Saudi public finances, creating a USD98 billion deficit in 2015. Consequently, the government had to carry out several budget cuts which resulted in reduced economic growth.

But the current low oil price scenario has sped up the government’s plans to transform the economy. Deputy Crown Prince Mohammad bin Salman Al Saud approved the Vision 2030 strategy in April, creating a roadmap for economic diversification by promoting public and private investment into other sectors.

As a result, Moody’s predicts that the non-oil economy will grow by 2% in 2017 versus 0.2% in 2016. “We sincerely believe that the Vision 2030 is one of the most significant milestones in the country’s contemporary history since the discovery of oil,” commented Ernst Jankulik, managing director at Siemens Healthineers.

As part of the plan to achieve this transformation, the Kingdom is planning to launch an initial public offering of about 5% of its shares in Saudi Aramco, the largest oil producer in the world. The company could be worth between USD2 trillion and USD3 trillion, according to S&P Global Market Intelligence. Selling a small percentage of the government’s prized state company would be the most significant step yet taken by the Kingdom. Saudi Arabia aims to become the 19th largest economy by 2030.

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