Moody’s outlook for Saudi Arabian banks held at ‘stable’

While the kingdom’s forex reserves still provide an ample buffer they have been falling fast in the past year, Bank of America Merrill Lynch said. Reuters

Moody’s on Monday maintained its “stable” outlook for Saudi Arabian banks despite oil prices declining by more than half in the past 18 months.

That is because the rating agency is forecasting that government spending will help to mitigate the declining price of oil. And while non-performing loans at banks in the kingdom, the world’s biggest oil exporter, may increase, overall Moody’s is forecasting that the banks will continue to generate strong profits.

“The stable outlook reflects our expectation that the banks will remain resilient over the next 12 to 18 months, despite the economic slowdown driven by low oil prices,” analysts led by Olivier Panis, senior credit officer at Moody’s in Dubai, wrote.

Saudi Arabia’s economy is expected to slow to 2.8 per cent this year and 2.7 per cent in 2016 after growing 3.5 per cent in 2014, the rating agency said

Last December, Saudi Arabia kept to its pledge to maintain spending this year.

After the plunge in oil prices, officials said that its revenue was projected to fall to 715 billion Saudi riyals (Dh700.2bn) this year, from 1.04 trillion riyals last year. Riyadh projects this year’s expenditure to be about 860bn riyals.

Those commitments came a month after the kingdom shied away from reducing oil production to prop up the price of the commodity, a risky move as revenues from oil sales make up about 85 per cent of the country’s budget.

Saudi Arabia’s willingness to defend its market share comes partly because its economy – the largest in the region – has become resilient enough to weather a drop in oil prices.

Despite the oil price fall, economists say the region will survive because spending is not being reduced and steady oil prices over the past couple of years have boosted cash reserves.

The net current account surplus of the region stands at about $2.4tn, according to economist estimates. Some analysts, such as those at Bank of America Merrill Lynch, are not as sanguine. They speculate that Saudi Arabia may be forced to choose between cutting oil supply to bolster the price of crude or depeg the overvalued Saudi riyal from the ever-strengthening US dollar that is depleting its forex reserves.

“In short, a depeg of the Saudi riyal is our No 1 black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk,” BOAML said in a note to clients last week.

While the kingdom’s forex reserves still provide an ample buffer they have been falling fast in the past year, the bank said.

Should Brent crude prices drop to $30 per barrel the forex reserve drain could accelerate to $18bn per month, adding pressure on the currency, according to the note.

Brent was trading at $44.73 per barrel late Monday.

Follow The National's Business section on Twitter