Saudi lending to remain subdued despite easing liquidity

Bank lending in Saudi Arabia is likely to remain subdued in 2017, despite improving liquidity in the kingdom following last year’s bond issuance and government payments to contractors, analysts told Argaam.

Softening economic activity, a thinner project pipeline, and weakening private sector capital expenditure point to weaker growth opportunities for Saudi lenders this year, said Suha Urgan, associate director – bank ratings at S&P Global Ratings.

“Additionally, part of the excess liquidity in the local market is absorbed by the sovereign issuances, which left a smaller liquidity pool available for the private sector. In turn, we see banks becoming more selective in their lending decisions in 2017 and expect gross loan growth of around mid-single digits.”

Other analysts shared the view that loan growth is unlikely to pick up soon.

“Against the backdrop of a weak economic outlook, we expect bank lending to remain sluggish over the next couple of years,” said Jason Tuvey, Middle East economist at Capital Economics.

Deposit growth might also be subdued this year, assuming that oil prices stabilize at $50 per barrel, Urgan said.

“In our base case, we expect 2 percent deposit growth in 2017,” he added.

The kingdom’s liquidity situation, meanwhile, should remain “broadly stable” going forward, following the $17.5 billion bond issue last October and higher oil prices.

“The economy is likely to stay in recession and this will dampen deposit growth, but the fiscal position should gradually improve,” said James Reeve, deputy chief economist at Samba Financial Group.

He expects bank lending to grow by around 2 percent this year.

Like other industry segments in the kingdom, Saudi Arabia’s banking sector has been hurt by the plunge in oil prices since 2014, which prompted the government to draw down banking sector deposits and borrow from local lenders in order to fund its deficit. Local contractors were squeezed by payment delays, adding more pressure on banks.

The Saudi Interbank Offered Rate (SAIBOR) hit 2.4 percent last October, reaching its highest level since January 2009, reflecting tougher funding conditions for banks, Moody’s Investors Service said in a recent report.

However, liquidity has improved since then, following the issuance of a record $17.5 billion sovereign bond in October, and the repayment of dues owed to contractors. The three-month SAIBOR fell below the central bank repurchase rate of 2 percent on Jan. 30, indicating improving liquidity.

“The impact of the Eurobond issue is very noticeable in the downward trend in SAIBOR rates since the issue,” said Jan Friederich, head of Middle East and Africa sovereign ratings at Fitch Ratings.

“We expect this greater reliance on external financing to continue for some time and this will continue to support liquidity in the Saudi economy.” 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com