Moody’s has upgraded the outlook for Saudi Arabia’s banking industry to stable from negative on expectations of a pickup in non-oil economic growth and an improvement in the levels of cash available for lending following a spate of sovereign bond sales.
Shares in the sector rallied after the rating agency released the report on Wednesday morning.
“Despite low oil prices, which we expect to fluctuate between US$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,” said Olivier Panis, a vice-president at Moody’s.
“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 to regional and international peers over the outlook horizon.”
The world’s biggest exporter of crude oil has been taking measures to shore up its finances in the wake of the steepest drop in oil prices since the financial crash of 2008. As part of that effort, the government sold $17.5 billion in bonds in its first international sale last year.
The country’s leaders have also announced an economic transformation plan to reduce the government’s reliance on hydrocarbon revenues.
The state relies on sales of crude to fund more than 75 per cent of the budget, and the drop in oil prices created a shortfall in the budget last year that has been estimated at $100bn.
Shares of the biggest Saudi banks rose on Wednesday after the upgrade in outlook. Al Rajhi Bank, the biggest lender by market value, gained 1 per cent, while National Commercial Bank advanced 2.5 per cent and Samba Financial added 1.4 per cent. All outpaced the day’s 0.7 per cent gain in the Tadawul index.
Moody’s view on the improvement in Saudi economic prospects follows a positive Purchasing Managers’ Index reading for the month of February. The PMI increased at its fastest pace since August 2015 as companies stepped up purchases, gearing up for an improvement in demand from consumers in the months ahead following a tough couple of years.
The Emirates NBD Saudi Arabia PMI rose to 57 in February from 56.7 in January. And while the reading was the highest in one-and-a-half years, it still remained below the long-term average of 58.3.
Follow The National's Business section on Twitter