RIYADH: Liquidity conditions in Saudi Arabia have eased since the third quarter of 2016 after significant tightening because of falling oil prices, thus hinting at a credit positive for the funding costs of the kingdom’s banks, according to leading ratings agency Moodys. The three-month Saudi Interbank Offered Rate (Saibor) fell below the central bank repo rate of two per cent, its lowest level since April 2016, stated Moodys in its review. We expect liquidity pressures to moderate in 2017 compared to last year, primarily as a result of subdued credit growth, which will, however, reduce banks’ profits, it added. In October 2016, the Saibor reached its highest level since January 2009 at 2.4 per cent, reflecting tougher funding conditions for banks because of Saudi government spending cuts and payment delays, which in turn put pressure on corporate cash flows and profits.
This translated into a two per cent year-on-year decline in customer deposits as of September 2016, which, combined with sustained credit growth of a seven per cent year-on-year increase as of September 2016, pushed up banks’ net loan/deposit ratio to 86 per cent as of September 2016 from 77 per cent at year-end 2014. However, this trend has reversed since the third quarter of 2016 with large liquidity injections into banks following a $17.5 billion international sovereign bond issuance in October 2016 and the payment of $28 billion of overdue bills to Saudi contractors settled in the fourth quarter of 2016, which led to significant loan repayments to banks. According to the Saudi Arabian Monetary Agency (Sama), banks’ liquidity conditions improved in the last months of 2016. In the last quarter of 2016, the M3 indicator for money supply increased two per cent quarter on quarter, after relatively flat to negative growth since the second quarter of 2015. Likewise, total customer deposits grew by around two per cent quarter on quarter, fuelled by a 4 per cent rise in deposits from the private sector and reversing a declining trend since the start of 2016.
At the same time, loan volumes contracted by 3 per cent in the second half of 2016 after the government resumed settling its bills, which allowed contractors to repay banks loans (see exhibit). The loan repayments to banks were partly reflected in Sama’s balance sheet as a reduction in government deposits allocated for public projects (down 34 per cent in the fourth quarter of 2016). These combined effects led to an improvement in banks’ net loan/deposit ratio to 83 per cent as of December 2016 from a peak of 87 per cent as of June 2016. Also, the stock of core liquid assets (cash, deposits with Sama and Sama bills) rose to around SR272 billion ($72.4 billion) at year-end 2016 (12 per cent of total banking assets) after seven quarters of consecutive declines from the highs of around SR439 billion at year-end 2014 (21 per cent of total banking assets). Although we expect liquidity pressures to remain moderate over the next 12-18 months against the backdrop of low credit growth, which we expect at around 3 per cent, deposit growth will remain challenging.
Corporate profits and savings will remain constrained by subdued economic conditions, with our estimate for non-oil GDP growth at 2 per cent in 2017. In the meantime, the government needs to fund its fiscal deficit either through its reserves and deposits with banks (deposits from the public sector declined by 10 per cent in 2016), or via debt issuance, said the Moodys in its report. However, because domestic debt issuance can crowd out bank liquidity (SR192 billion domestic issuance between 2015 and 2016), we view the government’s decision on January 30 to suspend domestic bond issues for the fourth consecutive month as positive, it added.
