Dubai: The spending cuts announced by Saudi Arabia in its 2016 budget is expected to impact credit growth in the country as non-oil activity continues to slow.
Countercyclical government spending has historically played a key role in the stability and dynamism of private-sector companies in Saudi Arabia, supporting banks’ credit growth.
Following the recent period of robust growth in public expenditure, the government in Saudi Arabia is now planning to moderate the pace of such spending expansion due to the persistent drop in oil revenues. Analysts said a combination of more expensive credit and more frugal governments will result in slow credit demand from the private sector.
Rating agency Moody’s anticipates that government spending growth will slow from 14 per cent on average between 2010 and 2014.
“We expect that this slowdown in government spending will be credit negative for Saudi banks as it will dampen credit growth and moderate deposit flows to the banks” says Olivier Panis, a vice-president senior credit officer at Moody’s.
The Saudi economy remains relatively undiversified, with oil revenues contributing an average 37 per cent to GDP in the last four years. Government spending represented an average 34 per cent of GDP over the same period. The non-oil sector, which receives the bulk of bank lending, has historically posted stable year-on-year growth rates, averaging 6.2 per cent over the same period.
The rating agency projects that credit growth will slow to around 8 per cent in 2015 and around 5 per cent in 2016, from 12 per cent in 2014. In addition, deposit flows will likely weaken as the government reduces balances placed with the banks.
While this would lead to tighter funding conditions, the rating agency notes that the overall impact will be partly offset by Saudi banks’ stable funding structure, based primarily on non-interest bearing deposits with a limited dependence on more costly capital market funds, as well as robust liquidity buffers.
“We also expect that lower public expenditure will trigger some weakening of banks’ loan performance, although this will be mitigated by lenders’ strong loss-absorption buffers and resilient profitability,” said Panis.
In Moody’s opinion, Saudi banks will remain resilient to a moderation in government spending growth in the next 18 months, but a further, or more prolonged slowdown in spending, would increase downside risks for the banking sector.
