How would you assess the health of Saudi's banking sector?
The Saudi banking sector, which is the largest segment of the Saudi financial system, is well capitalized, profitable, and liquid. Contrary to expectations, the market did not foresee the precipitous fall in oil prices in 2015. Saudi Banks have been resilient; however, the continued low oil prices might impact the banking sector indirectly. This can be in the form of banks buying government debts, and, hence, crowding out the private borrowers. Reduced oil prices will also force the government to cut spending and reduce subsidies, which will directly impact the private sector's health, forcing it to look for other costly sources of finance, abandon capital investments, or in the worst case scenario, default on loans. For the private sector, it will be a double hit, first in terms of a shrinking pool of available credit and second from reduced support from the government. During the global financial crisis of 2008, no Saudi bank came close to making a loss; however, the situation is different this time as the government is under pressure due to the huge amount of infrastructure spending currently ongoing, which earlier seemed viable as the country had a large budget surplus due to high oil prices. We expect the banking sector to remain under pressure for the foreseeable future.
What opportunities do you see for the Saudi banking sector, given the government's commitment to continue with infrastructure projects?
Despite reduced prices due to a glut in the oil market, the government is committed to maintaining spending. Indeed, if it decides to run a small deficit, rather than using some of the country's estimated $661 billion reserves, this could lead to some interesting financial opportunities for local banks. Since July, it has started to issue debt for the first time since 2007, with bond sales of $5.3 billion to local banks expected each month into next year. In 2016, there will be many opportunities in infrastructure projects. We can join forces with major players that operate in different industrial and service sectors. The Saudi banking system is a relatively small, concentrated industry, and there are strong barriers to entry including big barriers to getting a license. As such, if the government decides to reduce its reliance on reserves and use banks as the alternate source of finance, then this will be positive for banks especially in an environment where interest rates are expected to go up.
Given the drop in oil prices, Saudi Arabia is trying more than ever to diversify its economy. In which sector do you see opportunities for foreign investors?
Oil prices fell to a more than six-year low near $42 a barrel recently, and the IMF forecasts the Saudi government will run a budget deficit in 2015 of around 19.5% of GDP. Last year's deficit was 3.4% of GDP and followed six years of high surpluses. Saudi non-oil private sector growth is closely tied to oil markets with the government dependent on crude sales for around 85% of its revenue. As long as oil prices remain low, investors will be cautious and wait at least until energy prices start heading back to their previous levels. The same is the case for foreign investors since most of them are interested in petrochemicals. The recent opening of stock market for QFIs shows the commitment by local authorities to welcome foreign investors; however, the inflow has been low as QFIs only hold 0.03% of the market while the target is 5% according to the CEO of Tadawul in a recent interview with Reuters. Efforts are under way to merge the Saudi stock market in MSCI world index and alter the rules for QFIs to make them more flexible. We expect foreign investor inflows to remain low unless Tadawul is included in the MSCI Index and oil prices rise once again.