Saudi Wealth Fund’s Spending Programs Will Boost Banks, S&P Says

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Saudi Arabia’s banks are expected to benefit from the sovereign wealth fund’s spending spree this year, although low interest rates and a rollback of central bank support may weigh on profits, S&P Global Ratings said.

“Mortgage origination will remain buoyant and corporate lending is likely to pick up as Public Investment Fund programs create business for contractors,” the ratings agency said in a report.

The sovereign investor is a key lever for the kingdom’s efforts to revive growth after what may be the deepest recession the world’s largest crude exporter has experienced since 1987. Handed $40 billion last year to buy global stocks, the PIF plans to plow the same amount into the domestic economy this year and again in 2022.

The kingdom tripled VAT to 15% in July as it endured twin economic shocks from the spread of the coronavirus pandemic and turmoil in the oil market. Inflation is expected to rise during the first quarter compared to the same period the previous year due to the residual effect of VAT, the central bank said on Monday.

“The Saudi economy will recover in 2021-2022 from the shocks of 2020 as global demand for oil recovers and private consumption increases,” S&P said. “That said, real GDP will not return to 2019 levels until 2022.”

S&P also said:

  • “Cost of risk will remain elevated in 2021, despite stronger-than-expected estimates for 2020, as the Saudi Central Bank lifts its forbearance measures. Combined with very low interest rates, this will weigh on banks’ profitability”
  • Credit growth will likely stabilize or reduce slightly in 2021
  • Expects ratings on banks to remain stable in the next 12-24 months.
  • The merger between National Commercial Bank and Samba may create a national champion that could focus on financing large strategic projects

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