Easing of mortgage requirements could help Saudi Arabian lenders

Pressure from lower oil prices, which has led a drop in disposable incomes after Saudi Arabia reduced energy subsidies, may prevent a repeat of the high growth in mortgages from 2011 to 2014, EFG-Hermes says.

Saudi Arabian banks, languishing amid the steepest drop in oil prices since the financial crisis of 2008, might get a boost if the government makes it easier for consumers to get mortgages, according the Egyptian investment bank EFG-Hermes.

Local news reports in Saudi Arabia, the world’s biggest oil exporter, are suggesting that the Saudi Arabian Monetary Agency, the country’s central bank, is considering raising the loan-to-value ratio on mortgages to 85 per cent from 70 per cent. The agency had previously slashed the ratio to 70 per cent in November 2014 to prevent overheating in the real estate market.

“Revival of mortgage demand could be a glimmer in an otherwise dull year for credit growth in 2016,” said Murad Ansari, an analyst EFG-Hermes said. “After a year of sluggish growth, mortgage demand could be significantly revived if the loans-to-value ratio on mortgages is raised.”

Pressure from lower oil prices, which has led to a drop in disposable incomes after Saudi Arabia reduced energy subsidies, may prevent a repeat of the high growth in mortgages from 2011 to 2014, EFG-Hermes said. During those boom years, mortgage books at banks grew at an annualised rate of 37 per cent and accounted for 6.5 per cent of total loans as of June last year, the investment bank said.

The price of oil, revenue from which funds about 90 per cent of Saudi Arabia’s budget, has tumbled more than 75 per cent since mid-2014.

As a result of that drop, the Saudi Arabian budget unveiled in late December set deep cuts in capital spending for next year and reduced utility subsidies in an effort to deal with the shrinking oil revenue.

The Saudi government said it planned to cut spending this year by 20 billion riyals (Dh19.5bn) to 840bn riyals, which would bring the deficit down to 326bn riyals from 367bn riyals last year.

With a slowing economy, that would still mean the deficit would rise to 16 per cent of GDP from 15 per cent last year, although it would remain well below the IMF’s forecast of a 21 per cent budget shortfall.

Saudi Arabia’s economy is expected to have slowed to 2.8 per cent last year and 2.7 per cent this year after growing 3.5 per cent in 2014, the rating agency Moody’s said.

But Moody’s said that government spending should continue to mitigate the fallout from the drop in oil. EFG-Hermes is also not negative on Saudi Arabian banks overall.

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