Middle East: Saudi banks dig deep for debt as liquidity runs dry
A liquidity crunch is affecting banks worldwide and Saudi Arabia is no exception. Deposits are falling as the government pulls out cash to fund the deficit, yet lending continues to grow. Will the banks change their lending models or turn to the capital markets for funding?
Illustration: Kevin February
There is a growing worry in Saudi Arabia that low oil prices are here to stay. But it is not just the government that is having to adapt to a new reality of deficits, trimmed spending and capital market issuance. Banks, too, are feeling their way through a very different environment.
The banks themselves tend to be reluctant to discuss their liquidity, but their annual results have been revealing. According to Moody’s, bank results released so far this year indicate a slowdown in deposit growth from 12% in 2014 to 1% in 2015, and it is likely to get worse.
That said, the figures may represent a slowdown but not yet a contraction, which is perhaps a surprise. After all, by the time of those results, oil prices had declined more than 75% (since June 2014), with a consequent 14% reduction in the 2016 government budget and a 15% fiscal deficit for 2015.
Saudi Arabia, like other Gulf states, has dealt with the pressure on its public finances by pulling out government deposits from its banks. Those government deposits were integral to Saudi banks’ liquidity mix.