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Finally, some good news for Saudi Arabia broke on Monday when Fitch Ratings said that five Saudi banks stand out, demonstrating particular strengths in the face of the country’s increasingly tough operating environment.
The five banks achieved ‘a-’ standalone Viability Ratings (VR), which is higher than the ‘bbb+’ score Fitch assigns to the country’s operating environment. The remaining six Saudi banks rated by Fitch all have VRs either at or below ‘bbb+’.
The five banks with the higher ratings include: National Commercial Bank (NCB), the country’s leading corporate bank and second largest in retail, Banque Saudi Fransi, Saudi British Bank (SABB), SAMBA Financial Group and Al Rahji Bank.
Fitch said that the 11 rated banks operate almost entirely in the domestic market - the only notable exception being NCB whose Turkish subsidiary represents 11% of consolidated assets - and the lack of geographic diversification means the banks are directly affected by the country's economic slowdown and tougher business conditions.
Growing Saudi economic woes
Saudi Arabia’s economic problems have grown in lockstep with the more than two-year roil in global oil markets. As oil prices toppled from $115/barrel in mid-summer 2014 to plunging into the $20s range in January and now hovering in the high $40s to low $50s range, Saudi Arabia - whose decision to ramp up production in November 2014 instead of playing its historic role of global oil markets swing producer - actually ramped up production as markets were becoming saturated with supply.
The results have contributed to the worst oil market crash in a generation, with oil markets awash in supply amid record high production from Saudi Arabia, the world’s second largest oil producer and leading oil exporter, and Russia – the world’s largest oil producer. Global oil inventory levels also remain at record highs, with little hope that substantial draw downs will be implemented any time soon to help restore market equilibrium.
U.S. shale oil production, though initially hit hard by lower prices, has clawed its way back and is forecasted to increase production by as much as 700,000 barrels per day (bpd), by the end of 2017, according to a September Goldman Sachs forecast.
If so, it would reverse all U.S. shale oil production lost over the past two year period.
However, the impact of low oil prices has been cataclysmic for Saudi Arabia who ran a record high budget deficit of $98 billion last year, with an estimated deficit of $87 billion this year.
Low oil revenue has shaken the kingdom to its financial core, forcing it to raise $17.5 billion from its first international bond sale last week, a record amount for an emerging market, bypassing Argentina’s April international bond offering of $16.5 billion.
Last week, the kingdom’s deputy economy minister, Mohamed Al Tuwaijri, said if Saudi Arabia “didn’t take any reform measures, and if the global economy stays the same, then we’re doomed for bankruptcy in three to four years.”
Fitch, however, added a dismal note to its report, stating “the outlook for Saudi Arabia's sovereign rating is Negative in line with our expectations that the government's balance sheet will weaken further and the general government deficit will remain high during the closing months of 2016 and 2017.”
The ratings agency also forecasted weakened GDP growth. “We forecast a sharp fall in GDP growth to 0.9% in 2016 and 1.1% in 2017, weak compared with 3.5% achieved in 2015. The economy is highly reliant on hydrocarbon revenues, which account for 39% of GDP and 74% of government revenue.”
Fitch added that ‘sustained higher oil prices would boost economic growth but our forecast is for a gradual recovery in oil prices to USD55/barrel by 2018.”
“The economy is still highly reliant on government spending, currently being cut, and efforts to diversify revenues, part of the government's 'Vision 2030' plan, will take time to feed through,” it concluded.
