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22 March 2020

Fed rate cuts add pressure on Saudi banks

Saudi banks are projected to see an increase in funding costs and stressed liquidity if the Kingdom withdraws deposits to fund a widening deficit

Certain sectors of the economy are highly sensitive to the present environment such as real estate and hospitality/Bloomberg

by Kudakwashe Muzoriwa

Fitch Ratings said that Saudi Arabia’s banking sector faces extra pressure on margins as a result of the US Federal Reserve’s latest interest rate cuts.

The Fed’s rate cuts in response to the outbreak of COVID-19 exceeded market expectations and the Saudi Arabian Monetary Authority followed by cutting its official repo rate by 50 basis points (bp) on 3 March and by a further 75 bp on 16 March 2020.

Earlier in March, Fitch had placed ten Saudi banks’ viability ratings and four banks’ issuer default ratings on rating watch negative, signalling the risk of severe and prolonged deterioration in the operating environment following the rate cuts and sharp fall in oil prices.

According to Fitch Ratings, “With little visibility on the authorities’ response in terms of government spending, there are uncertainties about the length and impact of a potential shock.”

Lower interest income is expected to affect the banks’ profitability further amid the spread of COVID-19 and credit growth will be challenged by a softening operating environment due to lower oil revenue.

However, while the support package from the Saudi central bank will help ease short-term pressure on asset quality, it does not address the possibility of a prolonged downturn. 

Fitch Ratings said that there is uncertainty over the scale of support that will be needed, as the impact of sustained lower oil prices and the virus outbreak remain unclear. Certain sectors of the economy are highly sensitive to the present environment such as real estate, transport, hospitality and retailers.

RELATED STORIES: US Federal Reserve COVID-19 Fitch Ratings





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