As oil revenue shrank on falling oil prices, the Kingdom, among other oil exporting Gulf countries, are increasingly taping capital markets in order to maintain and induce growth. This credit-induced growth comes at a time where widening fiscal deficits is adversely impacting sovereign credit ratings, according to Saudi Economic Review by the National Commercial Bank.
Moreover, with much of Saudi Arabian Monetary Agency’s SAMA’s monetary policy constrained to preserve the long-standing dollar peg, the Kingdom had to balance be- tween repatriating foreign assets and issuing debt.
In the month of April, the NCB report said, Saudi Arabia’s net foreign assets sank for the 15th consecutive month by 15.7 percent Y/Y, standing at a four-year low of SR2.14 trillion.
As for debt issuance, the Kingdom began issuing sovereign development bonds in the second half of 2015 for the first time since 2007. The next move confirmed by the Saudi officials is the debut of the first international bond at about $15 billion possibly in July.
The issuance will include several tenors up to 30 years in maturity and will be followed by an additional bond issuance later this year of a yet unspecified amount.
Lower sovereign credit ratings will likely pressure the Kingdom’s debt pricing and place higher borrowing costs compared to other GCC countries. Early speculation suggests that the Kingdom’s 10-year yield could be around 4 percent which is higher than that of Qatar and Abu Dhabi which were issued earlier this year.
On the other hand, the National Transformation Program which was announced in June is considered to be credit-positive, and could lead to a swift recovery in the Kingdom’s credit rating which in turn would reflect on lower borrowing rates in the future.
As for the local credit market, the consolidated balance sheet of Saudi banks shows that growth in private sector credit remained strong at 10.4 percent Y/Y by the end of April. Bank credit to the private sector fell to single-digit growth rates during the second half of 2015, bottoming out in October of the same year at 5.5 percent Y/Y. However, since February of 2016, SAMA raised the cap on how much more lending banks can extend relative to their deposits. Previously, the loan-to-deposit ratio guidance limit stood at 85% but as banks started to face the prospects of a liquidity squeeze, SAMA allowed them to leverage an additional 5 percent to reach 90 percent which is still below the ceiling other GCC countries impose on their banks. In contrast, deposits marked the third consecutive monthly de- cline, shrinking by 1.7 percent Y/Y.

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