Saudi Banks Can Fund Up to $100 Billion of State Debt, S&P Says

  • Nation turning to the bond market as oil slump hurts finances
  • Country's lenders hold about $106 billion in cash, treasuries

Saudi Arabia’s banks have enough assets to absorb $75 billion to $100 billion of government securities as the kingdom begins selling bonds for the first time in seven years to bridge a budget deficit, Standard and Poor’s said.

The country’s lenders held about $106 billion in cash, central bank deposits and treasury bills and another $13 billion in non-statutory deposits at the end of June, analysts including Timucin Engin and Suha Urgan said in an e-mailed report Wednesday. "They have adequate liquidity to comfortably fund $75 billion-$100 billion or more in sovereign issuance in 2015-2016 without much effect on their overall balance-sheet," they said.

Saudi Arabia, the world’s biggest oil exporter, is turning to the bond markets as a more than 50 percent drop in the oil price pressures the nation’s finances. The budget deficit may widen to 20 percent of gross domestic product this year, the International Monetary Fund estimates, as income from oil exports accounts for more than 90 percent of government revenue.

The country has raised at least 35 billion riyals ($9.3 billion) from local currency bond sales to domestic banks and institutions this year, the first time it has issued securities with a maturity of over 12 months since 2007. The government plans to raise 90 billion riyals to 100 billion riyals before the end of the year as part of the plan.

"The banks will accommodate government issuance through a gradual shift from low-yielding, short-term liquid assets and private sector credits to higher-yielding, longer-term government exposures," S&P said. This will improve the banks’ net interest margin and revenue as well as benefit their capital profiles since government securities carry a zero-risk-weighting under Basel rules.

Saudi Arabia’s banking system had a loans-to-deposit ratio of 81 percent at the end of June, one of the lowest in the Gulf, according to the report. Lending to the government and quasi-government institutions was only $25 billion, or 4 percent of Saudi banks’ assets.

"Further issuance by the sovereign could also be accommodated, but would entail crowding-out of private sector lending and a level of concentration in government lending," S&P said.

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