Strong balance sheet in focus as experts react to IMF's support for Saudi reforms

JEDDAH: The Kingdom’s strong balance sheet means that authorities can afford to ease the pace of austerity, economists commented Thursday as the International Monetary Fund (IMF) welcomed steps taken by Saudi Arabia to ease its reliance on oil.
OPEC’s recent deal to limit production and last week’s international bond sale have thrust spotlight on to Saudi Arabia’s’s adjustment to cheap oil, the economists said.
Oil prices were hovering slightly above $50 per barrel Thursday after hitting a 10-year low of less than $30 in January, down from a peak of more than $100 in mid-2014.
“The government is making good progress in adjusting to low oil prices,” said Jason Tuvey, Middle East Economist at Capital Economics, told Arab News.
“The government has made good strides on fiscal austerity over the past couple of years, which has seen the budget break-even oil price fall from more than $100 per barrel to around $70 per barrel at present,” Tuvey added.
“Indeed, we think the majority of spending cuts have already happened. Given this and our expectation that oil prices will rise, we think the government is likely to announce an easing in the pace of fiscal consolidation in the upcoming budget,” said the economist.
In a statement issued after holding talks with key officials in Riyadh, the IMF Managing Director Christine Lagarde said Wednesday Saudi Arabia’s fiscal adjustment had started with the government containing expenditures and raising additional revenues.
“These efforts should continue over the medium-term including through further increases in energy prices which are still low by international standards, further revenue-raising measures including from the planned introduction of excises and the VAT at the GCC level, and further spending restraint,” she said.
Commenting on Lagarde’s remarks, Steffen Dyck, VP-senior credit officer at Moody’s, commented: “The structural shift in oil prices has led to a material deterioration in Saudi Arabia's credit profile.”
He said: “In the absence of further fiscal and economic reform, the pressures on the government’s balance sheet would continue to rise. However, the government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilize its credit profile and could, if achieved, offer a route back to a higher rating level over time.”
Dyck added: “The economic and fiscal impacts of Vision 2030 will materialize over the medium to longer term. In the near term, we expect growth to remain weak, affected by ongoing fiscal consolidation measures.”
Finance Minister Ibrahim Al-Assaf, who also held talks with Lagarde, reiterated Saudi Arabia’s position of strength in speech this week.
“The financial institutions maintain their flexibility, as our banks enjoy relatively high levels of capital adequacy and liquidity ratios, despite some pressure on liquidity at the system level in general,”he said.
“The level of debt remains low. Our banks are still enjoying strong balance sheets and indicators of solid financial safety and will continue to do so, God willing,” the minister said.
John Sfakianakis, director of Economics Research at the Gulf Research Center in Riyadh, said: “In Saudi Arabia, the approach adopted by Saudi Arabia has resulted in the banks being particularly well positioned with regard to achieving international standards. Saudi banks have maintained capital adequacy ratios well beyond the Basel mandated targets, and the industry average exceeds 15 percent.”
Sfakianakis added: “Similarly, industry averages for the leverage ratio (approximately 13 percent) and liquidity coverage ratio (above 158 percent) are among the highest of the G20 countries, and among other jurisdictions where the Basel-III regime is applicable.”
James Reeve, deputy chief economist and assistant general manager at Samba Financial Group, said: “Banks are well capitalized and liquid. Profitability is high and NPLs are low, for the moment at least.”
Reeve added: “The reform program is what is required: It addresses all the issues that the country faces. The government must push ahead with the most challenging aspects of the program as ‘reform fatigue’ is bound to set in at some point.”
A regional western analyst, who declined to be named, commented: “Saudi banks are indeed healthy with some of the highest capital adequacy ratios and NPLs in the region. Provisioning is strong and return on assets very good by regional standards. The loan-to-deposit ratios are still below several other region economy, which suggests that there is resilience in the system.”
He added: “Overall, the economy has coped reasonably well in the challenging environment. A clear commitment to a strategic direction has likely been critical in supporting confidence. The main near-term challenge and opportunity is reforming the fiscal system in a way that creates a link to the non-oil economy and boosts revenues.”
The analyst said that Saudi Arabia has a significant grace period because of its ability to raise loans with a strong credit rating and a low cost of capital.
“But it is important to minimize the length of this period in view of future demographic challenges. Structured reforms are critical to make the economy more nimble to avoid the build-up of debt that happened before the turn of the century,” he said.