Kingdom’s credit profile ‘fundamentally solid’

Kingdom’s credit profile ‘fundamentally solid’
Updated 07 March 2016

Kingdom’s credit profile ‘fundamentally solid’

Kingdom’s credit profile ‘fundamentally solid’

JEDDAH: Saudi Arabian Monetary Agency’s (SAMA) foreign exchange reserves are estimate to reach $500 billion (SR1,874 billion) by the end of 2016, compared to $598 (SR2,241 billion) in January 2016, according to Jadwa Investment.

“This is consistent with our view that the Kingdom will run a budget deficit of SR402 billion, a current account deficit of $72 billion, and total new debt issuance of SR120 billion,” Jadwa’s economic research team said in its latest Monetary and Financial Update.
“We also expect a likely continuation of this dual financing strategy in 2017, with a potential for the government to tilt more toward debt issuance,” said the economists.
“We expect the government to continue with its monthly SR20 billion ($5.3 billion) series of development bond issuance to domestic banks and other public institutions, with net bond issuance reaching SR120 billion (14 percent of budgeted spending) during 2016,” said the report.
This will follow similar issuances in 2015, which at the time led to a SR98 billion rise in net bond issues, according to the Jadwa update.
“Despite the prospect of fiscal deficits in coming years, we view the Kingdom’s credit profile as fundamentally solid, and should provide enough room for a gradual fiscal consolidation,” stated the report.
“We mainly view the current and planned initiatives announced in the 2016 budget to be pointing toward more efficient expenditure controls and revenue diversification. This will enable proper utilization of the fiscal buffers built over the previous years,” it added.
“We estimate the availability of excess liquidity in the banking system at SR356 billion as of January 2016, which is lower than the SR448 billion estimated figure for the same period in 2015. We view this excess liquidity as sufficient to finance part of the fiscal deficit in the medium-term if the government continues with its current trajectory of bond issuance and reserve withdrawals,” said the Jadwa report.
“In the event of pressure on liquidity, we expect SAMA to allow other types of investors to participate in bond purchases, such as investment companies, insurance firms, and family offices. This would eventually broaden the fixed income playing field in the Kingdom, and can be looked at as a precursor to establishing a benchmark yield curve for an active and liquid domestic bond market,” said the researchers.
According to the Jadwa report, total claims on the public sector (excluding SAMA bills) makes up only 8.3 percent of total bank claims, which is very small compared to the high point of 45.8 percent reached in 2003.
“Apart from financing the budget deficit, we see this issuance providing an additional source of stable income for banks to diversify their loan portfolios and reduce overall credit risk and exposures in the current period of rising interest rates. Looking ahead, we believe that the government will continue to keep a check on the liquidity in the banking system as it balances between reserve withdrawals and debt issuance to finance the deficit in the coming few years,” it added.
Within SAMA’s foreign exchange reserves, deposits with foreign banks fell by $11 billion in January. This decline was likely due to a transfer of funds to the domestic economy for direct spending. Investments in foreign securities fell by $3.5 billion in January, added the Jadwa report.
These investments recorded a notable fall of $131.4 billion during 2015. This was steeper than the fall in the overall stock of reserves during 2015, meaning that a considerable amount of these investments was reallocated to deposits with foreign banks.
“This reallocation of funds have caused the share of reserves with foreign banks to increase from 25.6 percent during the beginning of 2015 to 32 percent of total reserve assets in January 2016. We view this as SAMA’s preference to hold more liquid assets abroad in order to meet the financing needs of the government,” said the researchers.