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Wed 15 Mar 2017 10:47 AM

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Moody's raises its Saudi banking system outlook

"Banks' liquidity and funding conditions will improve"

Moody's raises its Saudi banking system outlook
(Fayez Nureldine/AFP/Getty Images)

Credit rating agency Moody's Investors Service has raised its outlook for Saudi Arabia's banking system to "stable" from "negative", in a fresh sign that global investor confidence in the kingdom is recovering after plunging due to low oil prices.

"Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending," Moody's vice-president Olivier Panis said in a statement on Wednesday.

"As a result, Saudi banks' liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss-absorption buffers compared with regional and international peers over the outlook horizon."

Low oil prices have strained Saudi government finances, leading to a $98-billion state budget deficit in 2015. This forced state spending cuts that slowed the economy, worsened loan quality and reduced banks' access to fresh deposits. In the last several months, however, pressures have eased. The government replenished its coffers with a $17.5 billion international bond issue in October and announced progress in cutting its deficit, while Brent crude oil rebounded above $50 a barrel from last year's average of $45.

In December, the government detailed a plan to eliminate the deficit by 2020. Although questions remain over whether that target will be reached, International Monetary Fund officials have said it looks broadly feasible.

Measures of stress in the Saudi financial system have fallen sharply. This month the cost of insuring Saudi sovereign debt against default hit its lowest since September 2015.

One-year currency forwards show pressure for depreciation of the riyal near its lowest since late 2015, while three-month Saudi interbank money rates have dropped to their lowest since March 2016 as the modest improvement in state finances has allowed the government to spend more freely.

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