Low oil price taking its toll on Saudi banks

Constant decline in oil prices since mid-2014 is posing a new wave of challenges for Saudi Arabia’s banking sector which enjoyed, rich liquidity during the years of oil boom between 2003 and 2013.

During this period, the Kingdom was able to build up reserves of around 100 per cent of the 2014 GDP despite spending billions of dollars in education, health care and infrastructure, which helped to double its economy, increase the household income by 75 per cent and create more than 1.7 million jobs.

The biggest advantage of this economic boom was the country’s banking sector which benefited from strong investment-led credit growth. This period also helped the banking sector in improving their balance sheets and funding requirements in the form of deposits from the public sector, and significant growth in earnings to shore up capital ratios.

The current situation is different from the global financial crisis because lower oil prices is putting damage on government revenues, while spending continues to meet the long term objective of the government. Being on the those countries, where once it enjoyed petrodollar driven surpluses until 2014 is now facing the challenges to deal with its rising deficits since 2015. This all is having an impact on the liquidity of the system.

The banking sector is going through a challenging period as the economic slowdown and squeeze in liquidity is impacting the sector’s operational efficiency. However, SAMA (Saudi Arabian Monetary Agency) has taken appropriate measures to undertake the issue and improve liquidity by easing regulatory reserve requirements. 

Further, the government’s plan to raise debt from international bond markets will also reduce the government’s dependence on domestic funds, which will provide stability within the sector.