Saudi real GDP to return to pre-COVID-19 levels in 2022, says S&P

Ratings on banks to remain stable in next 12 to 24 months

Image used for illustrative purpose. Cars drive along the New Corniche seafront development on June 23, 2018 in Jeddah, Saudi Arabia.

Image used for illustrative purpose. Cars drive along the New Corniche seafront development on June 23, 2018 in Jeddah, Saudi Arabia.

Getty Images/Sean Gallup

Saudi Arabia’s economy will recover from 2021 to 2022 on the back of higher oil demand and private consumption, ratings agency S&P Global said on Tuesday.

However, the real gross domestic product (GDP) will not return to 2019 levels until 2022, as the expiry of OPEC+ quotas and higher oil prices boost economic activity to nearly 3 percent, the agency said in its report, “Saudi Banking Sector 2021 Outlook”.

Credit growth, which picked up in 2020 based on stronger mortgage and lending for small and medium-sized enterprises (SMEs), is set to stay strong in nominal terms but will slow down due to high base effect from 2021 to 202

Corporate credit growth may pick up as public investment fund programs generate business for contractors. However, SME credit could slow, as the central bank’s deferral programs are wound down, the report said.

Cost of risk is also likely to stay elevated in 2021 at about 120 basis points. “This reflects our view that the volatile global health situation and international travel restrictions still weigh on the economy,” cited the report.

Low interest rate

The ratings agency said it expects interest rates to stay low for longer as the United States Federal Reserve maintains low rates, leading to pressure on Saudi banks’ net interest margins. This would result in lower return on assets for the banks.

“Despite the lower profitability, we anticipate that, on average, Saudi banks will outperform their regional peers,” S&P said. This largely reflects the relatively modest impact of the pandemic on the quality of banks’ loan books and stronger growth of mortgage lending.

Saudi banks are well-capitalised by international standards, it added. “We expect rated banks’ capitalisation to stay strong, as measured by our risk-adjusted capital ratio.”

The agency’s outlooks on Saudi banks are mostly stable.

S&P added that the merger between National Commercial Bank (NCB) and Samba Financial Group (SFG) may create a national champion that could focus on financing large strategic projects. The positive outlooks on NCB and SFG signify that the post-merger institution may have a stronger credit profile than the individual banks.

(Reporting by Brinda Darasha; editing by Cleofe Maceda)

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