The downgrading of Saudi banks by Moody’s on the 14 May comes as no surprise given the twin stresses of low oil prices and the launch of Vision 2030 by the Deputy Crown Prince Mohammed bin Salman at the end of April. Vision 2030 represents arguably the most radical economic shakeup the kingdom has ever undertaken and it is being led by an impatient young man with a burning thirst for change. Reasons enough then for a cautious Moody’s to lower its rating of Saudi Arabia’s banks to A1 from Aa3 while assigning a stable outlook.
The global ratings agency in a sanguine press release explained their decision thusly: “a combination of lower growth, higher debt levels, and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks. The ‘stable’ outlook indicates that, at this lower rating level, risks are broadly balanced.”
Moody’s noted that the downgrade is chiefly attributable to the collapse of the oil market, which “(has) led to a material deterioration in Saudi Arabia’s credit profile.” It added that while the Kingdom’s government has plans to diversify its economy away from oil, such plans are still at an early stage and their impact remains uncertain. Moody’s also expects a budget deficit of nearly 14.9 per cent of gross domestic product this year — similar to that of 2015.
But should any of us be particularly concerned that the Saudi banking system is under any serious threat of imminent demise? The short answer is no, not in the least.
At a recent Moody’s conference Khalid Howlander, the agency’s senior vice president, GCC Financial Institutions told me “the first thing to highlight is the Saudi banking system is probably one of the strongest in the world. The regulator there is very conservative, very pre-emptive. And when you have a relatively small number of banks it is actually quite easy to supervise and monitor those banks.”
He went on to point out the Saudis have never had a banking default on deposits, the banks have sound solvency and liquidity metrics and are therefore “well positioned to weather the stress at least in the short to medium term.” Ah but there’s the rub. In the longer term the outlook is less certain.
Contributing to the uncertainty are geo-political factors like the ongoing wars in Saudi Arabia’s immediate neighbourhood, in Iraq, Syria and Yemen. There is the threat of extremist attacks from both Al Qaeda and Daesh or the so-called Islamic State within the kingdom itself; the jostling with regional foe Iran, as the two compete for hegemonic influence in the Middle East; and intense anxiety about just how good a friend America really is in spite of recent warm words intended to smooth ruffled feathers.
But the biggest challenge and the one that most analysts are thinking long and hard about is the huge leap into the unknown that Saudi Arabia is about to take with Vision 2030.
Mohammed bin Salman’s blueprint for change calls for swingeing cuts in government spending; the selling off a stake in Saudi Aramco; VAT on some goods by 2018; an end to reliance on oil as the hugely dominant source of wealth by 2020; an expectation that the private sector will shoulder the burden of wealth growth thereafter; and the small matter of the creation of the world’s largest sovereign wealth fund with an aspirational value of $2 trillion.
All in all, it is a very big ask, especially when, with low oil prices, the deficit last year alone was SAR 367bn ($98bn) or 15% of GDP. Unless there is a dramatic upsurge in the price of oil – something most analysts say will not happen, if at all, until 2020 – time would not appear to be on the side of the government. Should the deficit continue to grow while oil prices stagnate and the deputy crown prince implements his changes, which in the short term will be costly, financial markets will undoubtedly start to worry very seriously indeed. And that could set off a chain reaction which would have the potential to damage Saudi financial credibility to the core.
Already, and somewhat ominously, the question being asked is a starkly simple one: will the kingdom raise enough revenues to enable Mohammed bin Salman’s bold reform initiatives to work? As Moody’s notes: “in the absence of further fiscal and economic reform, the pressures on the government’s balance sheet would continue to rise.”
To forestall the worry while at the same time reassuring Saudis, Mohammed bin Salman will need quick wins. One of them, in what is effectively a command economy, can be had almost for the asking.
There is a desperate need for affordable housing to meet the constantly rising demand of the kingdom’s youth population – nearly 70% of Saudis are under the age of 30. Previous attempts to jumpstart the affordable home building market have sunk almost without trace under the weight of bureaucratic inefficiency, elite vested interest resistance and flagrant corruption.
Mohammed bin Salman has gotten off to a strong start, pushing through a tax that will force owners of large tracts of undeveloped urban land to either pay up or open up to residential development. He has made mortgages more accessible. And he has very clearly signalled with his treatment of giant industry players such as Saudi Oger and the BinLaden Group that he has no patience for corrupt practices.
But, as the saying goes, the proof is in the pudding. Satisfy the demand for affordable housing and the deputy crown prince will secure not only crucial support from the citizens in whose name he has undertaken this economic revolution. He will also be making an emphatic statement to the watching world of rating agencies and financial analysts that this time the vision is not a paper project, it is the real thing. Or to use his words it is “a Saudi Arabia that can fulfil the dream of any Saudi, a Saudi Arabia with sustainability.”
Follow Bill Law on Twitter @BillLaw49
