Saudi Arabia’s banking system has been upgraded from stable to positive by Moody’s Investors Service. This upturn is based on robust oil prices, an ambitious reform agenda and increased economic growth. The organisation also highlighted the Kingdom’s business confidence and government spending as other driving factors for the upgrade.
Furthermore, the non-hydrocarbon sectors of the economy, where Saudi banks primarily operate, are experiencing sustained growth due to this economic momentum. As a result, increased expenditure is expected to drive non-oil gross domestic product growth to an estimated 4.7% in 2023. Overall, the Kingdoms non-oil business activities improved in April, as strong domestic demand triggered an increase in new orders at the fastest rate since September 2014.
Moreover, demand for credit is high and loan performance is improving which is likely to translate into healthy profits for banks. Conversely, it is expected that Saudi banks will experience challenges with higher interest rates enticing depositors to switch to more costly term deposits. Another risk stems from their reliance on large single depositors, namely the government or public entities.
However, lending to the private sector is expected to grow by 10% this year, indicating a positive trajectory. Similarly, residential mortgage growth is predicted to continue, supported by a government initiative to increase home ownership and an optimistic employment outlook.
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