Saudi credit growth likely to stay sluggish, says CE

Saudi Arabia’s credit growth is expected to remain subdued in coming months, given a weak economic outlook and higher interest rates, London-based Capital Economics said in a note Monday.

“The recent rise in oil prices, coupled with an increasing appetite for international rather than domestic bond issuance, means that crowding out of private sector lending should ease,” said Jason Tuvey, Middle East economist at CE. The kingdom’s near-term economic outlook has also brightened, with little further austerity planned in 2017.

“Nonetheless, credit growth is unlikely to return to the rates of 10 percent-plus recorded over much of the past five years,” he noted.

The US Federal Reserve is widely anticipated to raise interest rates this week, following its December hike, with more rate increases expected over the next couple of years.

“The dollar peg and open capital account mean that Saudi Arabia will be forced to follow suit,” Tuvey said, adding that with fiscal austerity set to resume in 2018, economic growth is likely to remain relatively subdued going forward, the report said.

According to the latest data released by Saudi Arabian Monetary Authority (SAMA), commercial banks’ lending to the private sector expanded by 1.4 percent year-on-year (YoY) in January. This was down from growth of more than 10 percent YoY in early 2016 and the slowest rise since 2010.

The slowdown in the kingdom’s credit growth can be attributed to three main factors, CE said.

First, the onset of debt issuance by the Saudi government has crowded out lending to the private sector. Banks in the kingdom have been the main buyers of government debt, with holdings rising more than three-fold over the past year and a half.

Second, higher interest rates have weighed on lending to the private sector, given the steep increase in interbank interest rates between mid-2015 and the latter end of 2016.

This, in turn, is likely to have increased borrowing costs and dampened appetite for debt, Tuvey said, adding that some lenders could also have faced severe liquidity shortages resulting from SAMA’s foreign exchange sales.

In addition, the general economic slowdown is also likely to have contributed to a lower demand for credit, the note said.

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.

The Saudi Interbank Offered Rate (SAIBOR) hit 2.4 percent last October, reaching its highest level since January 2009. 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.