Saudi Banks’ Outlook Dropped to Negative at Moody’s

Analysts at Moody’s Investors Service today announced that the firm has lowered its outlook for Saudi Arabia’s banking system was dropped from ‘stable’ to ‘negative’ to reflect persistently low oil prices and concomitant government spending declines which Moody’s said will “ultimately weigh on the banking sector.” The firm noted that this is an update to the markets and not a rating action.

The ratings agency said:

We expect 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.

[nativounit]

Moody’s expects real GDP growth to slow to 1.5% for 2016 and 2% for 2017 (compared with 3.4% growth in 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 fall between 3% and 5% for 2016, from 8% in 2015.

Moody’s expects added asset risk as a result of the deteriorating operating environment, and non-performing loan levels are expected to rise to around 2.5% from just 1.4% in September of last year.

The ratings agency also expects government support of the banking industry to remain high but noted that there are signs that policy may evolve more in line with global practices.

What Moody’s is most cautious about is the ability of Saudi banks to maintain liquidity now that petrodollar flows have reversed. The government has been drawing on reserves and cash deposits to fund the shortfall in oil revenues.

The Saudis may also be preparing to issue their first-ever international sovereign bond, according to a report two weeks ago at Bloomberg News.

Moody’s has already put the Kingdom’s ‘Aa3’ rating on review for possible downgrade.