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The oil price has recovered more than 90 percent from their bottom in February but one of the top three rating agencies Moody’s has warned of the liquidity pressure in Saudi Arabia’s banks. The squeeze is likely to take its toll on commercial sectors too by choking the future loan growth.
Back in 2014, before the oil price crashed in summer, Saudi Arabia’s banks have been seeing 14 percent growth in deposits and 12 percent growth in outstanding claims to private sectors. In Saudi Arabia, the increase in bank deposits is closely linked to the level of oil price. Hence, as oil price declined so did the claims outstanding as well as the deposits. By October 2015, deposits growth dropped below 4 percent on a yearly basis and outstanding loan growth to 6 percent y/y.
While claims on the private sector recovered post-October and reached 10 percent in March-April this year, deposit growth has fallen to negative. As of latest data, in May deposit growth dropped to 3.4 percent in the negative.
With a severe squeeze on deposits, Saudi Arabia’s private sector likely to face trouble in refinancing their loans. Hence, there could be an increase in funding costs for the banks as well as increase in non-performing assets.
Saudi Arabia’s Monetary Authority (SAMA) may ease the market with additional liquidity but that move is likely to add pressure to the country’s dollar peg.
