Saudi Arabia’s credit growth is expected to slow next year and in 2015. The rate of commercial bank lending to the private sector, however, has been gathering pace, reflecting a buoyant nonoil economy.
According to a report by a Samba Financial Group, credit growth is likely to slow in 2013-15, though this will be more obvious in the second half of the forecast period. Saudi banks are said to be shifting toward a more conservative stance this year, at least on the corporate side, having booked quite large assets in 2012. Granted, there was a backlog of projects last year, which are likely to be released in 2013, and many of these will require an element of bank finance. But banks appear to be focusing on retail lending, which has been the engine of profit growth recently. Underlying drivers for retail lending are good: Strong demographics and high nominal public sector wage growth have kept retail sales running at 25-30 percent growth for a number of years now. New legislation governing leasing should also be supportive, especially for the auto sector, the bank said.
The bank said it expected moderate drift in oil prices will a) put some pressure on the Saudi fiscal position, leading to some scaling back of public sector project growth, and b) begin to impinge on private sector confidence, which might crimp both private project growth and consumption, particularly as we move into 2014-15. There is therefore a danger that the reverse repo rate will be raised in mid-2015 at a time when demand in the economy is already slackening. An increase in base rates might well exacerbate any slowdown. However, given the number of variables and uncertainties over the period, this represents a risk rather than a likelihood.
The Samba report said despite the constraints, the peg will stay in place for the foreseeable future. Saudi Arabia's export earnings are denominated in dollars and the peg gives a degree of certainty to firms and households, which is important given their dependence on imports. Yet, a further bout of tension similar to that which emerged in 2007-08 cannot be ruled out. Indeed, research by the IMF suggests that the US and Saudi business cycles are likely to become increasingly out of synch as the Kingdom continues to orientate its economy toward the rapidly growing East Asia region, where demand for crude oil is brisk and likely to remain so.
At the risk of oversimplifying its argument, the IMF believes that this process will mean that high real oil prices (driven by the booming Asian economies) will sap consumption in the US through higher gasoline prices. This in turn will likely impel the Federal Reserve to cut short-term interest rates.
SAMA (Saudi Arabian Monetary Agency) would be obliged to follow suit and cut rates at a time when its own economy (presumably) is likely to be booming thanks to high oil prices. This would in turn stoke inflation, the Samba report said.
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